Wednesday, November 12, 2008

US Treasury Bonds to be Hit by $500 Billion Quarterly Flood

Monday, November 10, 2008
US Treasury Bonds to be Hit by $500 Billion Quarterly Flood
by Eric deCarbonnel

The Market Oracle is reporting that US Treasury Bonds are bout to be Hit by $500 Billion Quarterly Flood

(emphasis mine)

US Treasury Bonds to be Hit by $500 Billion Quarterly Flood

Nov 07, 2008 - 06:25 AM
By: Money_Morning

Martin Hutchinson writes: The U.S. Treasury Department announced Nov. 3 that it intended to borrow a record $550 billion in the fourth quarter. That represents a staggering $408 billion increase over Treasury's borrowing estimate from early August and includes $260 billion for the recapitalization of U.S. banks.

Make no mistake about it: There will be enough U.S. Treasury bonds to choke on, as the government tries to finance this debt.

In the three months to Sept. 30, the Treasury Department borrowed $530 billion; in the first quarter of the New Year – which ends March 31 – it expects to borrow $368 billion. The March figure looks thoroughly optimistic; the monthly Treasury Statement of Receipts and Outlays shows that the first calendar quarter of the year is generally about $80 billion to $100 billion worse than the preceding fourth quarter. Thus a borrowing figure as low as $368 billion would seem to include no bailout costs and no additional recessionary costs from the current quarter.

If I had to guess, I'd assume borrowing would be about $500 billion in the first quarter, even if the U.S. banking system manages to stay upright for the entire quarter – something that's by no means certain.

Interestingly, Goldman Sachs Group Inc. ( GS ) appears to agree with this. Goldman –formerly the country's largest investment banker – said last week that in the year to September 2009 the Treasury would have to borrow about $2 trillion. That would suggest a rate of about $500 billion per quarter. That figure, too, is based on a belief that the recession remains fairly shallow, and that the new administration doesn't have to add any major new stimulus programs – both pretty optimistic assumptions.

Goldman estimates that the Treasury Department will resurrect its three-year T-note issues , will speed up the issuance of two-year notes and 10-year bonds, and will "reopen" past Treasury issues that are now "off the run" (i.e. have maturities that aren't a round number of years), thus adding to the supply of nine-year Treasuries, for example.

While the gross issuance of Treasury securities has to be netted against redemptions to calculate the net increase in Treasury borrowing, $2 trillion is a lot, and net of redemptions represents about $1.4 trillion in new money. That is unlikely to come from foreign central banks, the principal source of Treasury funding in the last few years. Net foreign purchases of U.S. securities in the 12 months to August 2008 totaled $543 billion, and it was about the same in the previous year. That means $800 billion to $900 billion of new money for Treasury purchases has to come from domestic sources.

Inevitably $800 billion to $900 billion of additional money flowing from domestic investors into Treasury bonds will do three things:

1) It will drive up interest rates on Treasury bonds.
2) It will tend to " crowd out " other financings, making finance difficult to obtain for medium-sized and smaller companies and more expensive even for the behemoths.
3) And finally, it will increase inflation, as the Fed is forced to expand money supply to give investors enough money to buy all the Treasuries.

That suggests one overpowering conclusion: Don't eat the food that Uncle Sam is trying to stuff you with in such vast quantities, except the short-term maturities if you are very hungry (have cash burning a hole in your bank account). If Treasury yields are going up, prices will drop, particularly at the long end of the maturity spectrum. Furthermore, rising inflation makes fixed-interest-rate bonds a poor bet.

My reaction: Reading this article should give you a good idea why interests rates are headed up. I advise staying away from all treasuries, even the short-term maturities, and locking in a fixed rate on mortgages if possible.

I leave you with this quote from

"The move is caused by global investment deleveraging, in which major financial players are reversing (unwinding) risky trades and piling into what is erroneously perceived as the safest haven they can find," such as U.S. Treasury bonds, wrote Peter Schiff, the president of Euro Pacific Capital in Darien, Conn., in emailed comments.

"The main lesson our creditors will learn from this crisis is not to lend American consumers any more money," he said. "While the rest of the world absorbs their losses and moves on, we will be digging our way out of the rubble for years to come."

Posted by Eric deCarbonnel at 8:20 PM Delicious 0
Labels: Currency_Collapse Wall_Street_Meltdown

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