My understanding is most of the U.S. debt purchased through the Japanese currency intervention process is no sovereign U.S. debt, but the CMO's put out by Fannie Mae
there used to be a lot of buying of GSEs, but i believe foreign ownership has declined, or at least not increased at nearly the rate of USTs. the big gain has been in Treasurys. for Japan, the big gain is definitely in the Treasurys--they added $167 billion last year, which is i believe the bulk of their 2003 currency intervention. this is the most liquid market, probably the only market they could operate in given their massive interventions.
(China "only" added $30 billion of USTs last year--they don't have the ammo the BOJ has.)
and within the sphere of Treasurys, clearly the Japanese are operating on the short end. why? because US is net-reducing the long end. outstanding long Ts have been cut nearly in half over the last five years. there's no net new issuance, so no room for a buyer of Japan's size.
consider that Japan's purchases of USTs in 2003 and the first two months of 2004 are greater than the entire outstanding UST marketable debt maturing in 20yrs and later. and these net outstanding securities declined last year, while new issuances were close-in. thus Japan is forced close-in due to their size.
keep in mind that long rates right now are actually VERY HIGH, relative to short rates. on a percentage basis, this is probably the steepest yield curve in postwar US history. a yield curve normalized to the 1% policy rate would put the 10yr at 2% and the 30yr at 3%--about a 200bp drop for each of them.
the extremely steep curve accounts for the preference of borrowers to swap close-in, be they consumers getting ARMs (while Greenspan pats their back), the UST issuing bills and notes, or corporations using credit swaps to lower interest costs.
as a consequence, US govermnet interest payment as a percentage of GDP is now an extremely low 1.4% or so (that's what the dollar bears never mention when they go on about the UST debt explosion). i think this might be a record of some sort.
Greenspan's recent comments suggesting Americans would be better served with ARMs as opposed to fixed rate mortgages suggests to me the possibility that Japan and China are unwilling to accept less yield on CMO debt than they are already
i don't think the Asian CBs care about yield--they are not rational investors. they mostly care about currency impact.
but Greenspan's comment that homeowners should follow the lead of the US govt and US corporations by swapping into short-term debt is an indication of how unlikely he is to raise short rates. just imagine if he turned around and followed Stephen Roach's plan of jacking the policy rate immediately to 3%. if he did that right after advising consumers to get ARMs, he'd be in a very tight spot. |
