For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment.  Today, rather than engage in "we told you so" gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we'll just quote Bloomberg quoting other fixed income observers on today's auction of two years, in an article "ambiguously" titled "U.S. 2-Year Yields Highest Since October After $44 Billion Sale."

Treasury two-year note yields reached the highest levels since October as an investor class that includes foreign central banks bought the least of the debt in five months at today’s record-tying $44 billion auction.

 

Indirect bidders purchased 34.8 percent of the notes, the lowest amount since July, and below the average for the past 10 sales of 45 percent. Treasuries of all maturities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data.

We aren't really sure how this will be spun into a "good thing,"™ but we are sure that someone will find a way.  Back to you, CNBC.

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

As we pointed, the number one reason why 2010 is set to be a truly "interesting" year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was  $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline... to $1.9 trillion.

And while things are hair-raising in "gross" country (not Bill...at least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).

Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends "to focus on increasing the average maturity" of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.

Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam's - at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.

As for Japan - the country has plunged into its n^th consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.

Lastly, the UK - well, with the country set to have zero bankers left in a few months, we don't think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.

None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.

How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.

Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of th e equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Merry Christmas and Happy Holidays to all readers.

Of course, we do not intend that Zero Hedge should become a center of excellence for the review of obscure Senate rules, but, as a consequence of the full-court-press-rush to pass the health care bill, this was too interesting not to reprint:

Under Senate Rule XXII, "a measure or motion to amend the Senate rules... the necessary affirmative vote shall be two-thirds of the Senators present and voting" to end debate. Yet there were only 60 votes for cloture on the Reid bill. So unless there is some basis for giving special treatment to rules changes that are buried into other legislation, it would seem that either a) cloture was not achieved, or b) the entrenchment provisions do not actually alter the Senate rules.

Woops.

I'm told that a fine point of distinction means that Reid's entrenchment clauses were blessed by a Senate parliamentarian with respect to the 60 needed.  I suppose one needs to be far more versed in the minutia of Senate procedure than an honest citizen could claim to be.

UPDATE:

Here was DeMint on the topic yesterday:

The entire thing is worth watching, but here is our favorite part:

DEMINT: and so the language you see in this bill that specifically refers to a change in a rule is not a rule change, it’s a procedure change?

 

THE PRESIDING OFFICER: that is correct.

Either way the process continues:

Senate Democrats cleared the last 60-vote hurdle on U.S. President Barack Obama's healthcare overhaul on Wednesday, virtually ensuring final passage of its version of the biggest health policy changes in four decades.

Could the next black/green/dark gray swan be so obvious that it has avoided everyone? Well, except for the deputy governor of the Bank of China, who just gave the world a startling reminder of economics 101, when he said that it is "getting harder for governments to buy United States Treasuries because the US's shrinking current-account gap is reducing the supply of dollars overseas." Oops.

The funny thing about natural (and economic) systems: they can only be pushed so far before they snap back to default state. With the entire world embarking on an unprecedented spree of domestic bubble blowing to mask the collapse in global GDP, everyone forgot to trade. Zero Hedge has long emphasized that the drop in world trade can only sustain for so long before it brings the current destabilized system back to some form of equilibrium. Because with every country intent on merely printing more of its own currency, whether it is to build bridges or to make the stock of electronic book fads trade at 100x earnings, said countries ran out of non-domestic cash. Alas, this is most critical for the United States, now that Treasury monetization is over, as the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits. Foreign buyers who have US dollars. And according to Shanghai Daily, this could be a big, big problem.

Here is what the BOC's Zhu Min said earlier:

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."

"The US current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the US is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more US Treasuries."

In a nutshell, in printing trillions of assorted securities, the Treasury has soaked up the world's dollars, which due to US banks not lending, is sitting and collecting dust in the form of bank excess reserves. These excess reserves can not be used to buy Treasuries and MBS as that would be literal monetization (as opposed to the figurative one which is what QE has been). And the world is running out of dollars with which to buy Treasuries.

Does this mean that the "world" will be forced to buy dollars, and thus spike the value of the greenback? Not necessarily:

In a discussion on the global role of the dollar, Zhu told an academic audience that it was inevitable that the dollar would continue to fall in value because Washington continued to issue more Treasuries to finance its deficit spending.

Tomorrow's Bernanke reconfirmation hearing just got more interesting, courtesy of Vermont Senator Bernie Sanders who has stated he will put a "hold" on the Bernanke confirmation process, meaning the Senate will need to amass 60 votes in order to override and proceed with the confirmation process. Yet as the NYT notes: "though the Senate has been paralyzed by similar blocking tactics on countless other issues, Mr. Bernanke probably has enough support in both parties to clear the 60-vote hurdle." It is time to call your Senators and remind them that at best only 21% of Americans favor Bernanke's reappointment.

More from the NYT:

Senator Bernard Sanders of Vermont, said Wednesday that he would try to block the Senate from confirming Ben S. Bernanke to a second term as chairman of the Federal Reserve.

The move is unlikely to derail Mr. Bernanke’s reappointment, but it could slow the confirmation process and give the Fed’s critics additional opportunity to press their case. As a practical matter, it means Senate Democratic leaders will have to line up 60 votes in favor of Mr. Bernanke rather than a simple majority at a time when the Federal Reserve is under increasing populist attacks from lawmakers on both the right and the left.

Mr. Sanders, an independent, is not a member of the Senate Banking Committee, but he has frequently accused the Federal Reserve of bailing out Wall Street firms and the banking industry at the expense of ordinary citizens.

“In this country, there is profound disgust at what happened on Wall Street,” Mr. Sanders said in a telephone interview. “People want a new direction and people are asking, where was the Fed? How did the Fed allow this to happen, when one of their mandates to oversee the safety and soundness of the banking system?”

Mr. Sanders said he would place a “hold” on Mr. Bernanke’s nomination when it reaches the Senate floor. Under Senate rules, lawmakers would need to amass 60 votes to override Mr. Sanders and proceed with a vote on the nomination.

As pointed out previously, Bernanke is a Bush legacy, yet is somehow supposed to represent Obama's "change" agenda:

The Fed chairman was originally appointed by President George W. Bush and took over the central bank in February 2006. Despite his Republican ties, Mr. Bernanke forged a close working relationship with President Obama and his top economic advisers during the financial crisis.

And some more potential wild cards in tomorrow's historing hearing:

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, has said Mr. Bernanke was “probably” the best person to lead the Fed because he responded valiantly to the financial crisis when it began two years ago.

But Mr. Dodd has also proposed stripping the Federal Reserve of virtually all its powers as a banking regulator, and consolidating all the federal government’s bank regulatory efforts in a new agency. In an Op-Ed article last Sunday in The Washington Post, Mr. Bernanke sharply criticized Mr. Dodd’s proposal.

Senator Richard C. Shelby of Alabama, the top Republican on the Senate Banking Committee, has also been sharply critical of the Federal Reserve but has not yet said how he would vote on Mr. Bernanke’s nomination.

Even with Zero Hedge polling indicates a mere 11% of our readers would support Bernanke's reconfirmation, a different poll by Rasmussen finds a comparable result: only 21% favor Bernanke as Chairman.

And here is a reminder of the confirmation whip count in the Senate Banking Committee:

Definite no: 2
Lean no: 3
No indication: 6
Lean yes: 7
Definite yes: 5

Definite no: 2
Bernie Sanders (I-VT):

Senator Bernard Sanders, a Vermont independent who isn't on the banking committee, said Nov. 29 on ABC television's "This Week" that he will "absolutely not vote for Mr. Bernanke" and that the Fed chief is "part of the problem."

Jim Bunning (R-KY):

Jim Bunning, the Kentucky Republican who was the only senator to oppose Bernanke's first nomination in 2005, hasn't changed his views.

'His job rating would be zero minus F,' Bunning said in an interview yesterday. 'He has catered to the big banks, to the Wall Street elitists, to every major money concern in the country and in the world.'

It is possible that one or both of these Senators will place a "hold" on the nomination.  Such a procedural move would at least delay a vote on Bernake, which would provide opponents of his reconfirmation time to organize.  For more details on what a "hold" is, check Tom Coburn's website (no one places more holds than Coburn).

Lean no: 3
Jim DeMint (R-SC):

"He's [Bernanke's] going to face some tough questions because he's got a lot to answer for," leading Fed critic Sen. Jim DeMint said through a spokesman. "The Fed's mission is to guard the value of the dollar and to focus on employment, and right now their track record is looking very poor."

Richard Shelby (R-AL):

Sen. Richard Shelby (R-Ala.), the top Republican on the Banking committee, would not say how he would vote on Bernanke's nomination, only encouraging reporters to stay tuned for the chairman's hearing this week.

"I used to be a big defender of the Fed," he said, adding he believes the institution has "utterly failed" in its role for regulating financial institutions."

David Vitter (R-LA): As a support of auditing the Fed, everything I have heard is that Vitter is a no--and is even possibly willing to put a hold on Bernake.  Still, lacking a public statement to that effect, I won't put him in the "definite no" category.

No indication:  6
Michael Bennet (D-CO):  No word for Bennet one way or the other.  His primary challenger, Andrew Romanoff, might be an interesting way to move Bennet on this one.

Mike Crapo (R-ID): Praised Bernanke's nomination in 2005, but no word on where he stands now.

Herb Kohl (D-WI)

Three said they're undecided, including Wisconsin's Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

Kay Baily Hutchinson (R-TX): I can't find any indication on Hutchison, one way or the other.

Jeff Merkley:

Three said they're undecided, including Wisconsin's Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

Jon Tester:

Three said they're undecided, including Wisconsin's Herb Kohl, Jon Tester of Montana and Jeff Merkley of Oregon.

Lean Yes:  7
Robert Bennett (R-UT)

Utah's Robert Bennett said he'll probably vote in favor

Sherrod Brown (D-OH):

"He's been far from perfect," Senator Sherrod Brown, an Ohio Democrat, said in an interview yesterday. "He was not quick enough responding last year to many of these issues that we care about, particularly in housing. I want him to focus on jobs. But I think he's generally done a decent job."

Tom Carper (D-DE):

"Sens. Charles Schumer (D-N.Y.), Tom Carper (D-Del.) and Mark Warner (D-Va.) all said they'd wait until hearing from Bernanke."

Bob Corker (R-TN)

Corker noted that he leans toward supporting a second term for the Fed chairman, who was nominated in August to a second term by President Barack Obama, but acknowledged gripes toward the Fed chairman on the left and the right."

Chris Dodd (D-CT, chair):

T'm inclined to be supportive. I think he's done a far better job in the last couple of years than he did initially.

Charles Schumer (D-NY):

Sens. Charles Schumer (D-N.Y.), Tom Carper (D-Del.) and Mark Warner (D-Va.) all said they'd wait until hearing from Bernanke.

Mark Warner (D-VA): Over email, a spokesman for Mark Warner told me "Senator Warner is inclined to be supportive of Bernanke's reappointment, but he's certainly not a fan of expanding the role or the power of the Fed as part of financial re-reg."

Definite Yes: 5
Daniel Akaka (D-HI):  Bloomberg reports Akaka is a yes.

Evan Bayh (D-IN):  Bayh was the first prominent Democrat to support Bernanke in 2005.  According to Bloomberg, also support him in 2009.

Judd Gregg (R-NH):

Judd Gregg, a New Hampshire Republican, said Nov. 20 he will "absolutely" vote for Bernanke.

Mike Johanns (R-NE):

Among Republicans, Nebraska's Mike Johanns said Bernanke "will have my support.

Tim Johnson (D-SD):

Sen. Tim Johnson (D-S.D.) -- a favorite of Wall Street -- told HuffPost that he has decided to vote to confirm Bernanke.

As Zero Hedge presented previously, the sharp divergence between the Nikkei and the S&P indexed in gold continues. The two reindexed indexes, which have correlated 0.91 since March, have diverged sharply in the past three weeks, and now stand at an over 11% divergence in performance since the year lows. Whether this is due to the "shocking" recent realization that Japan is caught in an ever increasing deflationary vortex (which the US likely will not avoid, at least not in the near term), or simply due to momo quants deciding that the Nikkei is no longer fun to chase, a convergence trade on the two broad indexes (long Nikkei, short S&P) seems like a rather painless way to pick 10%. Then again, ask Boaz Weinstein about "surething" convergence trades.

US consumers keeps on purchasing Kindles on credit cards which they apparently have no intention of every paying off.  The most recent Fitch report disclosed that October delinquencies have continued their steady climb, and together with charge-offs, are at near record highs: "Consumer credit quality remains under significant strain as a result of the  persistent weakness in the labor markets," noted managing director Michael Dean. The Labor Department will report unemployment data Friday; the jobless rate is expected to hold steady at 10.2%, the highest level in decades, while the decline in payrolls is seen mitigating from the previous month.

Dow Jones reports:

All types of consumer lending have worsened the past several years, with borrowers falling increasingly behind and lenders writing off many billions of dollars of owed loans.

Fitch's credit-card performance indexes show late payments rising to their highest levels in five months and indicate higher charge-offs in the months to come.

Fitch's index on delinquencies of at least 60 days rose to 4.41% from 4.22% in September. Late-stage delinquencies are now 31% higher than year-earlier levels and just below the record high of 4.45% in June. Delinquencies of at least 30 days rose as well.

As Zero Hedge pointed out, and as Meredith Whitney has voiced her concernes about, the biggest threat to the economic going into 2010 may be that not only are banks dropping reducing overall credit availability, but that ongoing credit contraction to the tune of almost $2 trillion over the next several years will mean existing credit limits are tapped out as existing ones become increasingly maxed out.

This will likely further entrench the consumer into an accelerated deleveraging mindset, and no matter what the incremental liquidity from the Fed is, the deflationary pressures will likely continue. Which means that markets will continue in full melt-up mode to compensate for real economic losses, which benefit exlusively the top percentile of the US population as the middle and lower classes continue experiencing the brunt of the credit contraction. At some point the economic reality is sure to catch up with the market surreality. That will be the point when all the flawed market policies by the Administration and Bernanke become exposed for the clothesless emperors they are.