Dec. 1 (Bloomberg) -- Treasuries rose, pushing yields to record lows, as Federal Reserve Chairman Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.
...and the monetizing of debt begins. I've talked extensively in several issues of Bourbon and Bayonets about the coming turmoil in long dates U.S. treasuries.
Many markets'(gold, oil, and forex) fundamentals have been identified and long term trends have been secured as an inevitability. The problem with these markets is timing out entry points. The government bond bubble is no different, and probably even more difficult in figuring just when to short these securities.
Although this is a difficult question, it's not impossible. I've been saying for some time now in B&B that when the Federal Reserve and U.S. Treasury begin to monetize the debt we will know the bond bubble is near its bursting point.
First of all, monetizing debt is when the U.S. Treasury creates the government bonds and the Fed simply prints money to buy them. The destruction of the domestic currency that ensues is obvious, and in this case would be astronomical considering the amount of debt that would need to be monetized in order to sustain the U.S.' massive budget deficit.
There was a time when anyone would be able to look at aggregate money supply statistics (M3) and Treasury note data in order to recognize when our glorious leaders were monetizing the debt. Unfortunately, the U.S. no longer keeps M3, making us the only industrialized nation that no longer keeps that particular form of money supply data. Given that, it becomes much more difficult to identify when the government and Federal Reserve are actually monetizing the debt.
It sure helps when Bernanke and company drop hints.
Monetary Monkey Wrench
We've learned many things about the U.S. leaders over the past several decades, least of which is their ability to continually fail making a nasty situation worse.
In the accumulation of a four day rally in bonds, the two year, 10 year, and 30 year notes have marked all time lows since the Treasury began regularly selling the debt. One might think it an odd time to push Treasury note yields lower, but looking at it from the "other side" one can make a little sense of the bit.
With all of the recent bailouts, and more to come, the government has gone further into the red than it ever has (understatement). It is going to have to finance a massive amount of new debt as well as roll over old debt. Obviously the government would like to finance that debt at the lowest possible rate of interest; enter Federal Reserve stage to add artificial demand to these markets resulting in lower interest rates.
The above mentioned scenario has one large assumption. What if there isn't large enough demand to finance all of the U.S.' liabilities? The pressure could obviously be relieved by monetizing the debt. This situation is more prominent than most think.
Nov. 13 (Bloomberg) -- Treasuries fell as investors shunned the government's $10 billion sale of 30-year bonds in favor of shorter-term debt amid concern that U.S. debt sales will grow.
The most interesting thing about this recent sale of long dated notes is that is was only $10 billion worth. Please take note that there's approximately $200 billion of debt that will need to be financed in the coming months and $1 trillion of debt (some newly issued some rolled over) that will need to be financed in the next 10 months. All of that to finance and refinance, and the government is having issues selling $10 billion of securities.
Chicken or the Egg?
Considering the circumstances, let's fast forward just a little bit and say the Federal Reserve is in the process of monetizing the debt in order to relieve some of the pressures of financing our fiscal deficit.
In the very short term, this is successful. The government is able to finance its debt at desirable interest rates with the help of the Federal Reserve. Everything seems okay for now.
Then the consequences of monetizing debt begins to show up. First and foremost, inflation starts to ramp us as the money supply is grown in order to pay for the Treasury notes, but let's pause for a second and take a step back.
Why do we need to monetize our debt in the first place? The answer is simply because there is less demand for our debt at a time when we need it most. There is less demand because the value of the dollar has been declining against the domestic currencies of the countries that were buying our debt.
The rate of change in the exchange rates has been greater than the yield on the treasury notes making them losing investments. That problem going forward is that the exchange rate discrepancies are only going to increase going forward. So why would these nations continue to buy our debt?...exactly.
That is why that $10 billion Treasury note sale had weak demand, and that is why the government is going to have a hard time financing their debts going forward, therefore they must monetize.
The problem is that while monetizing the debt is a short term fix, it only increases the inability of the U.S. to finance via foreign entities going forward. What I'm saying is monetizing only increases the problems that force us to monetize in the first place. Eventually we will completely cut off our credit lines. As the old saying goes, don't bite the hand that feeds you.
There's no real moral to this story. This is like Custer's last stand. It's a futile attempt that will only end in destruction. More importantly for you and me, it's a sign that the long dated U.S. Treasury note bubble is nearing collapse. I recommend taking financial action as this is one of the greatest financial opportunities that we will ever see.
Nicholas Jones
Analyst, Oxbury Research
...and the monetizing of debt begins. I've talked extensively in several issues of Bourbon and Bayonets about the coming turmoil in long dates U.S. treasuries.
Many markets'(gold, oil, and forex) fundamentals have been identified and long term trends have been secured as an inevitability. The problem with these markets is timing out entry points. The government bond bubble is no different, and probably even more difficult in figuring just when to short these securities.
Although this is a difficult question, it's not impossible. I've been saying for some time now in B&B that when the Federal Reserve and U.S. Treasury begin to monetize the debt we will know the bond bubble is near its bursting point.
First of all, monetizing debt is when the U.S. Treasury creates the government bonds and the Fed simply prints money to buy them. The destruction of the domestic currency that ensues is obvious, and in this case would be astronomical considering the amount of debt that would need to be monetized in order to sustain the U.S.' massive budget deficit.
There was a time when anyone would be able to look at aggregate money supply statistics (M3) and Treasury note data in order to recognize when our glorious leaders were monetizing the debt. Unfortunately, the U.S. no longer keeps M3, making us the only industrialized nation that no longer keeps that particular form of money supply data. Given that, it becomes much more difficult to identify when the government and Federal Reserve are actually monetizing the debt.
It sure helps when Bernanke and company drop hints.
Monetary Monkey Wrench
We've learned many things about the U.S. leaders over the past several decades, least of which is their ability to continually fail making a nasty situation worse.
In the accumulation of a four day rally in bonds, the two year, 10 year, and 30 year notes have marked all time lows since the Treasury began regularly selling the debt. One might think it an odd time to push Treasury note yields lower, but looking at it from the "other side" one can make a little sense of the bit.
With all of the recent bailouts, and more to come, the government has gone further into the red than it ever has (understatement). It is going to have to finance a massive amount of new debt as well as roll over old debt. Obviously the government would like to finance that debt at the lowest possible rate of interest; enter Federal Reserve stage to add artificial demand to these markets resulting in lower interest rates.
The above mentioned scenario has one large assumption. What if there isn't large enough demand to finance all of the U.S.' liabilities? The pressure could obviously be relieved by monetizing the debt. This situation is more prominent than most think.
Nov. 13 (Bloomberg) -- Treasuries fell as investors shunned the government's $10 billion sale of 30-year bonds in favor of shorter-term debt amid concern that U.S. debt sales will grow.
The most interesting thing about this recent sale of long dated notes is that is was only $10 billion worth. Please take note that there's approximately $200 billion of debt that will need to be financed in the coming months and $1 trillion of debt (some newly issued some rolled over) that will need to be financed in the next 10 months. All of that to finance and refinance, and the government is having issues selling $10 billion of securities.
Chicken or the Egg?
Considering the circumstances, let's fast forward just a little bit and say the Federal Reserve is in the process of monetizing the debt in order to relieve some of the pressures of financing our fiscal deficit.
In the very short term, this is successful. The government is able to finance its debt at desirable interest rates with the help of the Federal Reserve. Everything seems okay for now.
Then the consequences of monetizing debt begins to show up. First and foremost, inflation starts to ramp us as the money supply is grown in order to pay for the Treasury notes, but let's pause for a second and take a step back.
Why do we need to monetize our debt in the first place? The answer is simply because there is less demand for our debt at a time when we need it most. There is less demand because the value of the dollar has been declining against the domestic currencies of the countries that were buying our debt.
The rate of change in the exchange rates has been greater than the yield on the treasury notes making them losing investments. That problem going forward is that the exchange rate discrepancies are only going to increase going forward. So why would these nations continue to buy our debt?...exactly.
That is why that $10 billion Treasury note sale had weak demand, and that is why the government is going to have a hard time financing their debts going forward, therefore they must monetize.
The problem is that while monetizing the debt is a short term fix, it only increases the inability of the U.S. to finance via foreign entities going forward. What I'm saying is monetizing only increases the problems that force us to monetize in the first place. Eventually we will completely cut off our credit lines. As the old saying goes, don't bite the hand that feeds you.
There's no real moral to this story. This is like Custer's last stand. It's a futile attempt that will only end in destruction. More importantly for you and me, it's a sign that the long dated U.S. Treasury note bubble is nearing collapse. I recommend taking financial action as this is one of the greatest financial opportunities that we will ever see.
Nicholas Jones
Analyst, Oxbury Research
