FedUpUSA

Archive for the ‘Treasury bond sales’ Category

“Stimulus only adds more DEBT and none of it is helping poor people or people on the edge.”

“The bond market is totally manipulated by the Fed and it is saying the country is broke.  All it reflects now is people speculating on the Fed.”

“Some day the real two traders are going to wake up…”

“We’ve gone through a 30 year bubble period that is now coming home to roost.  It was created by the massive leverage built up by the 1980s.”

“There has been a $32 TRILLION net gain in the top 5%; they had $8 Trillion of net worth in 1985 and now they have $40 TRILLION….and I blame the Fed for turning our financial system into a massive speculative bubble built on debt leverage.”

Is the U.S. government on the verge of a massive debt problem?  For years, the U.S. government has been able to borrow all the money that it has wanted to at extremely low interest rates.  But now many of the lending sources that the U.S. government has been depending on are drying up.  Even before this recent crisis in Japan, a number of big players were moving away from U.S. Treasuries and the U.S. Federal Reserve was having to step in to pick up the slack.  But now this debt crunch is about to get a whole lot worse.  For years, many had feared that it would be China that would start dumping U.S. government debt, but now it turns out that Japan is going to be the real problem.  Right now, Japan is the second largest foreign holder of U.S. government debt.  Japan currently holds about $882 billion in U.S. Treasury bonds and they are likely going to have to liquidate much of that in order to fund the rebuilding of their nation.  So needless to say they won’t be accumulating any more U.S. government debt.  But the U.S. government still needs to borrow a trillion and a half dollars from someone every single year.  So where in the world are they going to get it?

This is called a debt problem.  Have you ever gotten to the point where you are in debt up to your eyeballs and nobody wants to lend you any more money?

Well, the U.S. government is rapidly reaching that point.

Even before the crisis in Japan, several of the big boys had starting moving away from U.S. government debt.

PIMCO, the biggest bond fund on the entire globe, recently acknowledged that they are dumping all of their U.S. Treasuries.

So if foreign nations like Japan are not gobbling up U.S. government debt and big bond funds like PIMCO are not buying any of it, then who in the world is going to be purchasing the massive amounts of debt that the U.S. government is constantly pumping out?

Well, many of you already know that answer.

The Federal Reserve is going to step in of course.  The Federal Reserve knows that if the U.S. government cannot borrow gigantic quantities of money at super low interest rates it will go broke.  So the Federal Reserve is just going to keep buying up most new U.S. government debt.  It is just that simple.

But isn’t that a Ponzi scheme?

Of course it is.  Let’s not mince words here.  It is a total scam.

And it is a scam that cannot go on indefinitely.

The truth is that the Ponzi Scheme of the U.S. Treasury issuing bonds and the Federal Reserve buying them up cannot last forever as PIMCO’s Bill Gross noted in his March newsletter….

“Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t.”

Gross also noted in his recent newsletter that the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt.

So now that Japan is out of the picture, how high will that figure go now?

80 percent?

90 percent?

Over the past several weeks there has been all kinds of speculation about whether “quantitative easing” will be extended past June or not.

Well, whether they call it “quantitative easing” or not, the truth is that the Federal Reserve is going to have to continue to “buy” most new U.S. government debt or the system will crash.

We have gotten to the point where the U.S. federal government cannot continue to function without Federal Reserve monetization of the debt.

This is a sign that we are rapidly approaching the financial endgame.

So why doesn’t the U.S. government just stop spending so much stinking money and stop getting us all into so much debt?

Well, because there isn’t enough political will in Washington D.C. to do any real budget cuts, and if our politicians did balance the budget at this point it would crash the economy.

Just the other day, the U.S. House of Representatives passed a continuing resolution to fund the federal government that would cut 6 billion dollars from U.S. government spending.

On that exact same day, the official U.S. national debt figure rose by 72 billion dollars.

Now the debt normally does not go up that much on a typical day.  But what this example does show is the losing battle that our politicians are fighting.

On Wednesday, U.S. Treasury Secretary Timothy Geithner warned a House of Representatives appropriations subcommittee that they should not even think about not raising the debt ceiling….

“Congress has to do it. There’s no alternative.”

The truth is that the U.S. government has to keep going into more debt.  Under the current system the alternative would be to collapse the economy.

But the debt that we have already piled on to the backs of future generations is absolutely criminal.

How mad do you think future generations are going to be with us for heaping 14 trillion dollars of debt on to their shoulders?

Talk about a debt problem!

But this is what we get for allowing a private central bank to run our financial system.  This debt-based system was designed to fail from its very inception.

The man supposedly “in charge” over at the Federal Reserve, Ben Bernanke, has a track of record of incompetence that is absolutely staggering.  It is a mystery why our representatives in Washington D.C. are not howling for his resignation.

Instead, most of our politicians continue to express blind faith in our current financial system and they continue to insist that everything is going to be okay.

Well, everything is not going to be okay.  The Obama administration is projecting that the federal budget deficit for this fiscal year will be an all-time record 1.65 trillion dollars.

Of course they are also trying to convince us that budget deficits will go down in future years, but by now we should all know not to trust the rosy future projections of government officials.

After all, it was only a few short years ago that Bush administration officials were promising that we would be swimming in huge budget surpluses by now.

The truth is that the government has been lying about all of this for a long time.  For now, the Federal Reserve is just going to keep monetizing U.S. government debt for as long as it can.

This Ponzi scheme will keep on working and working and working until someday it simply doesn’t anymore.

When that day arrives, the U.S. government debt problem is going to unleash hell on world financial markets.

The Economic Collapse

Ten Year Bond Breakout!

Posted by Karl Denninger

Borrowing costs are going up, and this chart says they’re going up a lot – like 200 basis points within the next year or so on mortgages and 10yr Treasuries.

Key to the thesis of Bernanke (and essentially everyone else) that this “V-shaped” recovery could take hold and be sustainable – instead of being a false dawn – is the premise that mortgage rates would behave.

Bernanke’s thesis, in fact was that he could cap 30 year money at 4% or less to prevent home price devaluation.

Well, now the 10 year bond is back where it was before the collapse.  That’s good, right?  Well, not really – because it means that 30 year money (mortgages) will start backing up shortly and prices on existing Fannie and Freddie (along with other long-duration) paper will start falling.

The target on this breakout of the inverted head-and-shoulders is 6% on the ten year treasury, and approximately 7% on 30 year mortgages.  As of today’s pricing (about 5% on that same money) we can back into the home price impact quite simply; the hypothetical $200,000 house will be devalued to $161,644.55.

That is, the same payment that today pays down a $200,000 mortgage will only pay down a $161,644.55 one.

The time on the full expression of this target is one to two years hence, although it can occur sooner.  The reliability of this sort of pattern is extremely high, and remains valid conditionally even with a drop back to 3%, and is not invalidated unless the ten year were to get down to 2.03%.  Neither is likely.

The entire premise of the so-called “recovery” not only requires stabilization of the housing market but a resumption in home price appreciation.  With the cost of mortgage money nearly-certain to rise toward the 7% range over the next year this is simply impossible.

The market will not ignore this for long, once it begins to express itself in actual rates and prices – and it will. 

If you’re one of the trapped underwater homeowners who as of today has an opportunity to short-sale your house, take it – while it still is available. 

Consider that The Fed is holding a literal trillion of this paper which is likely to come under extreme valuation pressures as rates back up.

Additionally, the sentiment in the market today is positively giddy – those who claim that retail is “not in” need to look at the ISE index, which hit an all time high today.  That’s all retail call buyers – they sure are “in”, and now the shears can come out of the drawer.

Parabolic moves like this always go further than you’d expect or believe possible.  But the math always wins, and the sort of rate environment we’re seeing now is quite similar to what happened in 1987.

No, this is not predicting a 1987-style crash – at least not today or tomorrow.  But with both rates and oil headed up hard the effective tax this presents to the economy is going to hit home immediately and hard, with no evidence that this very same backup in oil is in commodities generally (look at wheat lately?)

That’s not inflation, it’s financial speculation in a blow-off top.

Real job creation and a healthier economy?  We’ll see.

What’s On The Worry List?

Today’s Breakfast with Dave is a long one, easily packing three days of work in a 19 page PDF as Rosenberg will not be writing the next two days. Here is a snip from Rosenberg called What’s On The Worry List?

• Last week’s bond auctions did not go well. It seems that Japan and China did not show much interest. The lack of bids was no better underscored than in the 7-year Treasury note auction where the median yield was 3.29% versus 3.05% a month earlier. April is a cruel month for the U.S. Treasury market, with 10-year yields rising in each of the past 4 Aprils and in 6 of the past 7, and by an average of 25 basis points.

• That, in turn, could spook the equity market since another 25bps of upside pressure could then generate a fund-flow spiral as was the case in the summer of 2007 — 3.85% (where we are now) ostensibly is a trigger point for selling of mortgage bonds. As rates rise, homeowners are less likely to pay their mortgages early, which extends the life of the mortgage and that in turn encourages mortgage investors to neutralize the duration of their portfolios by selling T-bonds and notes. We have seen this happen before and while it will likely provide a nice buying opportunity given the deflationary headwinds the economy now faces, the prospect of a spasm in the Treasury market is worth considering. Every equity market correction in the past — 1987, 1994, 1998, 2000, and 2007 — was preceded by what turned out to be a brief but significant runup in yields. See Stock Rally at Mercy of Rising Rates on page C1 of today’s WSJ). And, the more overvalued the equity market is, the more the downside risks if bonds begin to provide greater yield competition in the near-term. Jeffery Hirsch over at the Stock Trader’s Almanac is in today’s NYT predicting a 20-30% correction ahead (see Stocks Soar, But Many Ask Why on page B1) — he notes the modest number of stocks hitting new 52-week highs with every new interim peak being reached by the overall market.

• The leading indicators are all pointing to a slowdown, and this could show up in a critical data-release week in mid-April with retail sales on the 14th, industrial production on the 15th, and housing starts, as well as consumer sentiment, on the 16th. The broad money supply measures are contracting again as the Fed is no longer boosting its balance sheet at a time when both the money multiplier and money velocity are showing no signs of turning higher.

• Greece will be put to the test in April when €15 billion of bonds have to be rolled over (through the end of May).

• The Fed ceases to buy mortgage securities on Wednesday and this is happening at a time when mortgage rates have already climbed back above 5% and the housing market is showing signs of rolling over again. See Spike in Treasury Yields Jolts Mortgages on page C2 of today’s WSJ. There is also pressure from within the Fed (Plosser the latest) to soon begin to sell securities outright. One thing that is very likely on its way again is another 50bps hike on the discount rate — has anyone noticed the TED spread beginning to widen ahead of this? The banks, going forward, will not have easy access to the window and will have to rely on each other for funding.

• April 15 looms as a critical day from a geopolitical standpoint. It is the day that the Treasury Department will issue its report concluding whether or not China is a currency manipulator. If it is viewed as such then trade sanctions are likely to ensue and very likely some bilateral tensions. This could be very good news for the bullion market (as well as the Bloomberg News report today stating that gold imports in India are surging right now — up six-fold from a year ago — as there are an expected 1 million marriages planned for April and May). Sentiment is so negative on the U.S. Treasury market it’s not even funny. Everyone seems to focus strictly on supply without realizing that the only way to predict a price is by forecasting both supply and demand

• Speaking of geopolitical risks, President Obama has allowed U.S. relations with Israel to deteriorate to such an extent, and is handling the Iran nuclear situation with such a kid-gloves approach, that disturbing columns like this are now popping up in newspapers like the NYT (Rift Exposes Larger Split In Views On Mideast — page A4), the National Post (Iran Preparing to Build Two More Secret Nuclear Sites in Mountains, Experts Say — page A8), and the WSJ (How the Next Middle East War Could Start — page A23). Even the prospect is enough to underpin the energy stocks, which are currently priced for $69/bbl on WTI.

Fear Of Missing More Rally

Although that is an impressive looking worry list, it is important to understand those are things that very few are really worried about.

For example, with mutual fund cash levels at all time record lows, it is difficult to place any credence in the widespread thesis “the market is climbing a wall of worry”.

Indeed, there is no general worry, unless you mean fear of missing more of the rally in equities. The only other widespread worry is fear of massive inflation or fear the dollar will collapse. From where I sit, neither seems very likely.

For all this talk about worries, the one thing not on anyone’s worry list is a huge market decline and the distinct possibility the market bottom is not even in. No one is worried about that. However, they should be.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

30 Year Auction: A Solid “F”

Posted by Karl Denninger

There’s no other way to describe this:

Bad.  Actually, let’s go worse than bad and call it what it is – by any definition this is just one step off from “Failed.”

Yield was way over where it was trading at the time, as you can see here:

The more-worrying factor here is that we’ve got this “mystery” direct buyers out here again taking nearly 25% of the offered amount (who is bidding for that undisclosed?) and another 11% taken down by The Fed for the SOMA account.

Yet even with this Treasury had to pay up to get it to go and the bid-to-cover was anemic at best.

Given the Primary Dealer system we have in this country, any BTC under 2.0 is an effective fail.  To get an auction that behaves in this sort of fashion, complete with mystery direct bidders and heavy SOMA (Fed) participation, yet Treasury has to pay up in the form of a significantly higher coupon is not a good sign at all.

Remember folks, this sort of issuance isn’t a local event.  It will continue through the year, as we are on track to run record budget deficits, so the premise that “it will all be ok and this won’t start a ratchet up of rates on the long end” is perhaps more than a bit fanciful.

Rick Santelli gave the auction an “F” and I agree – there’s simply no possible way to read this as anything positive at all, and that the equity market is ignoring it (other than a quick, small spike downward on the release) likely has more to do with how tightly equities have become coupled to the dollar in the last couple of weeks than anything else.

Foreign Central Bank Treasury Holdings At The Fed Decline In January For The First Time In Years

Submitted by Tyler Durden

The last thing that the fixed income market needs now, with ever greater uncertainty out of European bond land,  is weakness where it hurts the most: the US balance sheet. Yet last Thursday’s H.4.1 report indicated something which could be more troubling than even Greece’s credit crisis morphing into a liquidity one, namely, that foreign central banks’ UST holdings at the Fed declined for the first time in over two years.

What could be precipitating this? Quite a few factors have emerged recently:

1) A seemingly endless supply of Treasuries (especially the 2,5, and 7 Y) for which the indirect take down continues to be over 50%. This alone is confusing in light of the custody decline.

2) Concerns over developed country sovereign risk: last week S&P downgraded it Japan outlook and issued a scathing report on UK sovereign and financial risk.

3) Kansas Fed’s Hoenig dissent on tightening monetary policy. This is the proverbial first shot across the Fed’s bow. Hoenig’s “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”

4) Economic conditions have taken a decidedly bearish tone. JPM’s EASI index of economic surprises (lower means greater amount of negative surprises) just took a dramatic turn lower.

5) Flattening and outright inversion in a variety of financial corp spreads in the 5s10s bracket.

6) AAA CMBS spreads widened by 30 bps. If sovereign risk is in question, why should insolvent REITs be any better?

Regardless of which specific set of news may have precipitated the January Treasury effect, this is truly a scary observation, which however does not jive with the indirect take down continuing to be as strong as ever: if indeed the custody data is correct, then all the indirect bid data has to be taken with not just a dash of salt, but as Rosenberg says, an entire salt shaker.