TIC Data Confirms: Foreign Appetite Gone

Posted by Karl Denninger

So the Obama Administration thinks it can issue $150 billion in new debt a month eh?

Here’s the question: Who is going to buy?

I can tell you who isn’t buying – foreigners:

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $8.3 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $43.9 billion. Foreign holdings of Treasury bills decreased $38.3 billion.

This is a nasty box Ben and Timmy have painted themselves into.

$150 billion of net new issue a month – a run rate of $1.8 trillion annualized thus far – while foreigners are net sellers of Treasury instruments.

This leaves Ben and Timmy with an interesting proposition: to reverse this pattern they must improve the dollar balance and float rates higher, so that foreigners do not immediately suffer capital losses due to currency depreciation that wipes out their coupon earnings (and in many cases worse.)

Yet to strengthen the dollar the basics of supply and demand assert: you must limit the supply of dollars, or increase demand for dollars.

The former requires pulling liquidity.

The latter requires a cycle of debt repatriation or default.

Which will Timmy and Ben choose?  If they choose neither then the the market will force the decision for them, as rates will inexorably back up, especially on the long end, until it becomes impossible to finance budget deficits.

The TNX blew a pennant channel this morning that targets around 4.5% on the 10 year bond.  If that plays out things get very interesting very fast.

What’s even more interesting is the inverted head-and-shoulders that validated this morning on the TYX – the 30 year bond.  That targets around 5.1%:

These are not small changes.  A 15-20% increase in funding costs at this end of the curve is going to create a very interesting dynamic for home mortgages and other long-term debt instruments.  It will also drag up the belly of the curve, where the percentage changes are likely to be even more dramatic.

This of course hits Treasury interest expense which in turn puts pressure on The Federal Government and its spending.

The above chart looks bad.  But this one is far worse, and if we hit that initial target we will confirm the larger H&S pattern:

This larger pattern targets 6.9% on the 30 year (long) bond, which will put 30 year conforming mortgage rates somewhere around 8% – and increase government long-end funding costs by some 53%.

I wish the best of luck to President Obama, Timmy and Bendover Bernanke. 

The technicals on these charts, along with the evaporation of foreign Treasury Bond interest, strongly suggest all three of them are going to need it.