Wednesday, December 29, 2004

"I'm President of the United States and I'm not going to eat any more broccoli."

It's one of my favorite George H. W. Bush (aka Bush 41) quotes. Just as Poppy reserved the right not to eat what he didn't like because of his august position, one wonders if the central banks of the world might be brewing the same attitude regarding US Treasury debt.
U.S. Treasuries fell as a group of investors that includes foreign central banks bought the smallest amount of two-year notes at a government auction in a year.

Traders pushed government debt prices lower three of the past four days on speculation a falling dollar would deter international investors from buying U.S. debt. Indirect bidders bought 34 percent of the $24 billion of securities sold today, compared with 43.5 percent last month. . . .

Since the Treasury began publishing the data in May 2003, indirect bidder awards in two-year note auctions have ranged from 27.6 percent to 61.4 percent, and averaged 42.4 percent.

For every $1 sold, there was $2 worth of bids, compared with $2.61 at the Nov. 23 two-year note auction. For the past 12 sales, the bid-to-cover ratio, which gauges demand by comparing the volume of bids with the amount of securities offered for sale, averaged $2.21.
So what do we have here? Low interest by central banks, low bidding overall by private capital and foreign central banks, and the highest interest rate on a two-year Treasury in two-and-a-half years.

And to make things even more interesting, Bloomberg points out that in 2004 the only government bond performing worse than US Treasuries were Japanese government bonds. No wonder foreign capital is losing interest and losing it fast. That being said, the Bank of Japan might still have a robust appetite for these clunkers. The rumor mill is spitting out tales of big-time Japanese selling of the yen next month. And we all know what they'll buy.

Now the question becomes whether the BOJ and the ECB get together and coordinate things, or whether the yen stabilizes at around 105 to the dollar while the Europeans try desperately to avoid a continental wedgie as the euro yanks their collective waistband to $1.40 and beyond.

At least with the demise of the Multi Fibre Agreement on January 1, they'll be able to replace that Mongolian underwear with new stuff from China at around half the price.

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