I have been charting the trajectory of the Treasury Supply Story (TSS) in the media since Paulson nationalised Freddie and Fannie. Understandably, during September and October's cascading failures, the TSS was not really in the MSM, and was largely confined to the macro blogosphere. People like Brad Setser, Paul Kedrosky, James Hamilton at Econbrowser, and Naked Capitalism. I have taken a few shots at it here, and on my own blog, and of course SI posters as usual were on top of the story from the get-go.
Now, what has surprised me is how quickly the story has broken out into the MSM. I was thinking Q1 2009. But no, it looks like people are getting their heads around it already. Forsyth at Barrons just did his second big piece on it, and now WSJ Op-Ed is on it, and I think I saw the WaPo on it.
My view remains the same: massive increases in Treasury supply will be the reflation trigger that finally pushes capital out of Treasuries, and eventually even out of cash. Thursday was a great Tell day, when that 30 yr auction went badly.
Although I mostly do not trade or invest in the gold stocks, I think everyone who is a keen macro watcher should watch the HUI/XAU/GDX like hawks now, as early responders to the return of liquidity (which I define as the massive capital that has been herded into Treasuries and cash starting to get out).
Cash is becoming a bubble, or, if not cash then certainly 90 day bills and the 10 year treasury are bubbles.
I think treasuries and gold/commodities are on a collision course. It should be quite a crack-up, when it unfolds.
Nota bena: the Economist Magazine had a cover story on Inflation in late May. This weekend, while not a cover story, they have a big piece on Deflation. I just cannot get the idea out of my mind that all this capital has been herded into cash (increasing deposits at banks) and Treasuries (providing lots of capital to the govt) as everyone rushes to the other side of the boat and embraces Deflation. Most people who now embrace the Deflation thesis were doing the same on Inflation just 6 months ago, and the embrace actually started 2 months ago.
safehaven.com
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Can Uncle Sam Keep Paying the Piper?
By RANDALL W. FORSYTH
Look out: New handouts will strain Treasury.
WHAT ONCE WAS UNTHINKABLE has happened: massive bailouts by the Treasury and the Federal Reserve, and extension of billions of the taxpayers' and the central bank's credit to a queue of petitioners that grows by the day.
But what happens if the requests begin to strain the credit of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?
Just in the past week, American International Group 's (ticker: AIG) lifeline was increased to $150 billion from the original $85 billion; Freddie Mac (FRE) sought an additional $13.8 billion after having gotten clearance for $100 billion in capital infusion along with Fannie Mae (FNM), which also looks as if it will need more cash; American Express (AXP) converted to a bank holding company so it could get money under the $700 billion Troubled Assets Relief Program; General Electric 's (GE) finance unit will have $139 billion of its debt backed by the Federal Deposit Insurance Corp.
And, of course, Detroit is looking for a credit line from Washington as General Motors (GM) could run out of cash without a bailout.
Then, after having plowed through most of the first $250 billion in TARP dollars in just weeks, Treasury Secretary Paulson last week said that the scheme wouldn't be used for its original purpose -- to buy impaired mortgage assets -- but rather to boost consumer and other credit directly.
It's all adding up. If the late Sen. Everett Dirksen were around today, he might comment that a trillion here, a trillion there, and pretty soon you're talking real money.
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The Treasury is set to borrow $550 billion in the current quarter, and $368 billion in 2009's first quarter. It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. The yield curve is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. If investors expect yields to rise, they'll want a bigger premium to commit to longer maturities, or stay short and wait for more generous yields later on.
[Global Yield Tables]
Hank's Yank: Libor reversed its steady decline after Treasury Secretary Paulson said at midweek that TARP money no longer would be used to buy banks' depressed mortgage assets.
The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is over 250 basis points (2.5 percentage points), a level matched in the past quarter-century only in 2002 and 1992, at the trough of economic cycles.
Such a steep yield curve typically reflects investors' anticipation of economic recovery. Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished.
As with so many other things, something else is happening this year. The yield curve's steepening has been accompanied by an increase in the cost of insuring against default by the Treasury.
It may come as a shock, but yes, there are credit-default swaps on the U.S. government, and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes. (The latter's yield eased five basis points last week, to 3.73%.)
This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.
Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion to $2 trillion. He doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet the government's need for cash. That leaves the Fed to take up the slack.
Backshall's charts of the yield curve and the spread on U.S. Treasury credit-default swaps paint a dramatic picture. Both the yield spread and the cost of insuring debt moved up sharply -- in tandem -- starting in September. That month saw the first Fannie Mae-Freddie Mac and AIG bailouts and the Lehman Brothers failure. The two lines continued their parallel ascent as the TARP was disclosed and approved last month, and evidence mounted of an accelerating slide in global economic growth.
The yield curve and credit-default-swaps prices both indicate that the markets are exacting a greater cost for Uncle Sam to borrow for the long term -- and it's not because of an anticipated economic recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.
All of which suggests that America's credit line has its limits.
At the beginning of the Clinton administration in the early 1990s, adviser James Carville was stunned at the power the bond market had over the government. If he were reincarnated, Carville said, he'd want to come back as the bond market so he could scare everybody. President-elect Barack Obama may come to think Clinton had it easy, in comparison. |
