Monday, June 14, 2004

The Great American debt machine completes another turn of the screw.
Demand for US government bonds at foreign central banks has for the first time lifted overseas holdings to more than half the paper in circulation.

Figures from the Federal Reserve reveal that $1,653bn, or 50.6 per cent of liquid Treasuries, were held by foreign investors at the end of the first quarter. . . .

The surge in foreign central bank holdings has defied a sharp fall in Treasury prices, and a concomitant rise in yields, raising fears the market could fall if buying by the small number of official sector buyers slows.

Ian Douglas, fixed income analyst at UBS, said: "If they weren't there, yields would be a lot higher."

Ten-year Treasury bond yields have jumped 1 percentage point since the beginning of May to 4.81 per cent on Friday. But yields remain low compared with US economic growth, driving expectations of more losses. A further threat to the Treasury market comes from the surge in oil prices, which puts upward pressure on inflation and interest rates. Tuesday's US consumer price data for May are expected to show the annual inflation rate rising towards 3 per cent.

Such an outcome would increase the likelihood of a sharp rise in US interest rates. The Fed is expected to begin tightening monetary policy at its next meeting on June 30. Interest rate futures last week implied a significant chance that the Fed will raise US rates by 50 basis points to 1.5 per cent this month.
According to the 2004:I Flow of Funds report, net purchases of US treasury securities in the first three months of this year totaled $465bn; non-US purchasers bought net 146% of them! The US household sector has been sloughing off treasuries like there's no tomorrow, down from $798.7bn outstanding in 1999 to $446.4bn outstanding in 2004:I (annualized). While the US commercial banking sector is still buying, they only purchased net 6.5% of issues in the quarter.

We in the US desperately depend on foreigners buying our t-bills, and our debt requirements are going through the roof, up already 17% this year over last. We don't want the damned things, but we're hoping you will!

Say, come on over here, I've got a great 2004 security I think you're gonna like. Automatic transmission, low mileage, roomy . . . did I mention insulated cup holders?


At 6:48 PM, Anonymous Anonymous said...

Interesting the demand is still high. But in rethinking, if gas prices continue to go down, albeit slowly, that would take inflationary pressures off the economy, thereby denying a rational for the Fed to raise rates.

The housing sector has kept the economy afloat for the past 2 years. IMHO, a medium to substantial rate increase would cause the economy to go into depression rather than a recession this time, and bondholders would be really screwed. If rates go up at all, I, swami, predict it will be no greater than 1/2 a point and after November.

This and $1.05 will get you coffee.


At 9:21 PM, Blogger Gen. Glut said...

Interestingly, Japan is now growing *faster* than the US, but the US trade deficit keeps rising and rising and foreign central banks continue to buy up Treasury securities like there's no tomorrow. One would think that a Japanese recovery would reduce interest in propping up the US, unless the recovery is premised mainly on exports -- both to the US and to China, whose currency is pegged to the USD.


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