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Strength - Euro issues, China has to buy US TBonds
Weakness - Bond market supply and risk
Source: www.prudentsquirrel.com
Strength - Euro issues, China has to buy US TBonds
Weakness - Bond market supply and risk
Source: www.prudentsquirrel.com
US T bond situation
As we noted, a critical thing to watch is the health of the US Treasury bond market. Following that will give clues before any serious USD devaluation is imminent.
This year yields have risen a fair amount from their ridiculous lows in Dec 08 amidst the financial panic. The 3 month is about .29%, or practically zero, and the 10 year is 2.89%, which the Fed is trying to lower since that is a mortgage bell weather. However, since December, 10 YTreasury rates have risen considerably.
The US Treasury is issuing so many bonds now with all these bailouts, with another $1 to 2 trillion more to come this year beyond the usual issuance, so that US Treasury bond rates will have to rise. So far, the US has been able to sell pretty much all it wants, but that could be about to change.
China stated last week that they might ask the US to ‘guarantee’ the $680 billion of US treasuries they own. But, the next day, appeared to retract that statement. Nevertheless, that is a serious development in the US treasury market.
“Feb. 11 (Bloomberg) -- China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt. ...”
Bloomberg.com
China and others are continuing to buy US Treasuries, however, with China implementing a roughly $500 billion economic stimulus of their own to combat the world recession, it is not likely they can continue buying as many US Treasuries as before. And, this comes at the same time the US is dramatically increasing new debt. Other usual Treasury bond customers, such as the Mid East or other major trade partners, are also having to spend stimulus too and do bailouts, which again makes the overall market for US Treasuries smaller. And this situation is not going to improve soon.
The point being that the buyer of last resort is the US Fed, which stated this January that they will consider buying longer term US Treasuries to pull down the interest rates and effectively lower US mortgage rates. But, in fact, the real reason may also be that the Fed has to step in now and actually start buying US Treasuries directly to support the auctions.
The last thing the US needs at this point is to start having failed Treasury auctions where the interest rates start spiking up.
But if the Fed actually buys US Treasuries, this is perceived to be literal printing of money to finance the US Government, and that is a big no no in the bond market. In fact, even though the US Fed stated they will consider buying US Treasuries directly to suppress yields, they have yet to publicly do it (although there are stories of anonymous big buyers stepping in at the last moment in some actions recently).
And Pimco’s Bill Gross stated that if the Fed starts buying US Treasuries, then he won’t buy them. Which makes sense. Of course, he is also stating that he likes the yields on corporate bonds and other areas now. But, as a bond manager, he must buy bonds of some type or else he is out of business. I personally would stay away from the bond markets right now.
In fact, I am beginning to get the feeling that the US Treasury market has already peaked, and may be in for a decline, and depending on how this works out, it could hurt the USD quite a bit. It kind of depends on how much appetite there remains for the next $1 or 2 trillion of US Treasuries coming out this year. But this bears close watching.
And, this sovereign bond market is not only a problem for the US. All across the EU there are rumblings of trouble in various bond actions, and the bond markets appear to be getting fatigued with all the gigantic bailouts over the last year and a half.
Also, not good for the Euro, is the critical state of the Eastern European bank crisis spilling over to the EU banks. They have to roll over about $400 billion of debt to the big EU banks who are heavily exposed there, and the markets are not functioning, and there will be defaults that spill to the EU banks.
Next big financial shoe to drop
Which brings up the next question: When will the US Treasury market start to falter, the USD to falter, and then by correlation the rest of the worlds bond markets falter, and then of course their currencies start to really falter??? This is the next big shoe to drop and we are definitely seeing indications (albeit somewhat anecdotal, but some very not anecdotal such as the trouble with the Russian Ruble and a possible default by them, and big trouble with the Korean Won too).
And some major trouble with other currencies, particularly the Eastern European and Baltic countries with unsustainable fiscal deficits – and their currencies getting killed as we speak. There is definitely some big trouble brewing out there in the EU, Russia, Eastern Europe, and the US. Asia is also exposed.
Does China have a choice?
China is in a dilemma with their trade surpluses. They get something like $40 billion US a month they have to put somewhere. They stated this week that they really have no where to put that much money except by buying US Treasuries, and they complained that the US is getting to the point of devaluing the USD with all these $trillions this year of bailouts. For example, ‘where can you put $40 billion, as they say, into gold?’ They would quickly crash the USD if they did, and the value of their $680 billion of US Treasuries would collapse.
So, effectively the Chinese have to play along, but they clearly stated they don’t like it. However, this does give them a lot of leverage to resist any US Trade protectionism – by threatening to sell US Treasuries or just not buying.
However, if the USD already had its days numbered, the new 2 or 3 $trillion of new bonds to finance all the bailouts have certainly shortened them. But, as with China for example, the world does not have any real alternative to the USD at this point, and the Euro, for example, is in its own considerable difficulties…
At any rate, the future of gold and gold stocks (Silver too) is bright. Of course the stock volatility is vexing, but that’s the way things are.
The Euro
As we have discussed before, the Euro and the EU are in a great deal of trouble. In fact, because the ECB cannot do emergency infusions on the scale of the US Fed, they have few alternatives to a pan EU bank crisis. Eventually this is going to occur. In the US and the EU, we have passed stage I of the credit crisis, and with massive government interventions, stemmed a world ‘bank holiday’. However, the EU bank situation is actually worse than the US, if that can be imagined. And, they have less flexibility to intervene because Germany won’t sign on to more massive bailouts of their poorer neighbors.
The Eastern EU economies have borrowed heavily from EU banks and are way overextended. They have to roll over $400 billion worth of credit this year, and that is not going to be successful. We are right on the verge of insolvency across the East EU, and that is already causing riots and demonstrations. Once the actual defaults start to happen, the fiscal emergency will then spread back to the EU banks, already limping. And, maybe we get an EU bank holiday.
In case anyone thinks the EU will get around this with an economic recovery, or ‘be saved by the bell’, consider that Germany’s economy contracted at an amazing 8% rate (annualized) in the end of 2008. And Germany is the economic powerhouse of the EU.
So, since an economic recovery is highly unlikely in 2009, and we already have imminent insolvencies in the Eastern EU, well, you get the idea…They will go insolvent, and a new and deeper bank crisis will engulf the entire EU region by contagion. Needless to say, this is not going to be good for the Euro or EU stability.
As we noted, a critical thing to watch is the health of the US Treasury bond market. Following that will give clues before any serious USD devaluation is imminent.
This year yields have risen a fair amount from their ridiculous lows in Dec 08 amidst the financial panic. The 3 month is about .29%, or practically zero, and the 10 year is 2.89%, which the Fed is trying to lower since that is a mortgage bell weather. However, since December, 10 YTreasury rates have risen considerably.
The US Treasury is issuing so many bonds now with all these bailouts, with another $1 to 2 trillion more to come this year beyond the usual issuance, so that US Treasury bond rates will have to rise. So far, the US has been able to sell pretty much all it wants, but that could be about to change.
China stated last week that they might ask the US to ‘guarantee’ the $680 billion of US treasuries they own. But, the next day, appeared to retract that statement. Nevertheless, that is a serious development in the US treasury market.
“Feb. 11 (Bloomberg) -- China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.
The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt. ...”
Bloomberg.com
China and others are continuing to buy US Treasuries, however, with China implementing a roughly $500 billion economic stimulus of their own to combat the world recession, it is not likely they can continue buying as many US Treasuries as before. And, this comes at the same time the US is dramatically increasing new debt. Other usual Treasury bond customers, such as the Mid East or other major trade partners, are also having to spend stimulus too and do bailouts, which again makes the overall market for US Treasuries smaller. And this situation is not going to improve soon.
The point being that the buyer of last resort is the US Fed, which stated this January that they will consider buying longer term US Treasuries to pull down the interest rates and effectively lower US mortgage rates. But, in fact, the real reason may also be that the Fed has to step in now and actually start buying US Treasuries directly to support the auctions.
The last thing the US needs at this point is to start having failed Treasury auctions where the interest rates start spiking up.
But if the Fed actually buys US Treasuries, this is perceived to be literal printing of money to finance the US Government, and that is a big no no in the bond market. In fact, even though the US Fed stated they will consider buying US Treasuries directly to suppress yields, they have yet to publicly do it (although there are stories of anonymous big buyers stepping in at the last moment in some actions recently).
And Pimco’s Bill Gross stated that if the Fed starts buying US Treasuries, then he won’t buy them. Which makes sense. Of course, he is also stating that he likes the yields on corporate bonds and other areas now. But, as a bond manager, he must buy bonds of some type or else he is out of business. I personally would stay away from the bond markets right now.
In fact, I am beginning to get the feeling that the US Treasury market has already peaked, and may be in for a decline, and depending on how this works out, it could hurt the USD quite a bit. It kind of depends on how much appetite there remains for the next $1 or 2 trillion of US Treasuries coming out this year. But this bears close watching.
And, this sovereign bond market is not only a problem for the US. All across the EU there are rumblings of trouble in various bond actions, and the bond markets appear to be getting fatigued with all the gigantic bailouts over the last year and a half.
Also, not good for the Euro, is the critical state of the Eastern European bank crisis spilling over to the EU banks. They have to roll over about $400 billion of debt to the big EU banks who are heavily exposed there, and the markets are not functioning, and there will be defaults that spill to the EU banks.
Next big financial shoe to drop
Which brings up the next question: When will the US Treasury market start to falter, the USD to falter, and then by correlation the rest of the worlds bond markets falter, and then of course their currencies start to really falter??? This is the next big shoe to drop and we are definitely seeing indications (albeit somewhat anecdotal, but some very not anecdotal such as the trouble with the Russian Ruble and a possible default by them, and big trouble with the Korean Won too).
And some major trouble with other currencies, particularly the Eastern European and Baltic countries with unsustainable fiscal deficits – and their currencies getting killed as we speak. There is definitely some big trouble brewing out there in the EU, Russia, Eastern Europe, and the US. Asia is also exposed.
Does China have a choice?
China is in a dilemma with their trade surpluses. They get something like $40 billion US a month they have to put somewhere. They stated this week that they really have no where to put that much money except by buying US Treasuries, and they complained that the US is getting to the point of devaluing the USD with all these $trillions this year of bailouts. For example, ‘where can you put $40 billion, as they say, into gold?’ They would quickly crash the USD if they did, and the value of their $680 billion of US Treasuries would collapse.
So, effectively the Chinese have to play along, but they clearly stated they don’t like it. However, this does give them a lot of leverage to resist any US Trade protectionism – by threatening to sell US Treasuries or just not buying.
However, if the USD already had its days numbered, the new 2 or 3 $trillion of new bonds to finance all the bailouts have certainly shortened them. But, as with China for example, the world does not have any real alternative to the USD at this point, and the Euro, for example, is in its own considerable difficulties…
At any rate, the future of gold and gold stocks (Silver too) is bright. Of course the stock volatility is vexing, but that’s the way things are.
The Euro
As we have discussed before, the Euro and the EU are in a great deal of trouble. In fact, because the ECB cannot do emergency infusions on the scale of the US Fed, they have few alternatives to a pan EU bank crisis. Eventually this is going to occur. In the US and the EU, we have passed stage I of the credit crisis, and with massive government interventions, stemmed a world ‘bank holiday’. However, the EU bank situation is actually worse than the US, if that can be imagined. And, they have less flexibility to intervene because Germany won’t sign on to more massive bailouts of their poorer neighbors.
The Eastern EU economies have borrowed heavily from EU banks and are way overextended. They have to roll over $400 billion worth of credit this year, and that is not going to be successful. We are right on the verge of insolvency across the East EU, and that is already causing riots and demonstrations. Once the actual defaults start to happen, the fiscal emergency will then spread back to the EU banks, already limping. And, maybe we get an EU bank holiday.
In case anyone thinks the EU will get around this with an economic recovery, or ‘be saved by the bell’, consider that Germany’s economy contracted at an amazing 8% rate (annualized) in the end of 2008. And Germany is the economic powerhouse of the EU.
So, since an economic recovery is highly unlikely in 2009, and we already have imminent insolvencies in the Eastern EU, well, you get the idea…They will go insolvent, and a new and deeper bank crisis will engulf the entire EU region by contagion. Needless to say, this is not going to be good for the Euro or EU stability.
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