China Pushes US To Issue More TIPS...
I heard this rumor when the Chinese were in Washington
last week. Now it's confirmed...
The Chinese pushed the U.S. to issue more TIPS.
online.wsj.com
August 5, 2009
The Treasury Department, seeking new ways to help fund its
budget deficit, is likely to announce on Wednesday a plan to
ramp up sales of inflation-protected bonds, according to
people familiar with the matter.
China, the largest holder of U.S. government debt, is among
investors that have indicated to the Treasury that they want
to buy more of the securities, which offer protection against
rising inflation, the people said.
Officials from the U.S. and China discussed TIPS issuance at
high-level talks in Washington last week. U.S. officials
assured their Chinese counterparts that they remained
committed to TIPS sales, according to a person with knowledge
of the discussions. China has accumulated more than $2 trillion
in foreign-exchange reserves and has invested about $800 billion
in Treasurys.
Boosting issuance of TIPS would be one tool the Treasury could
use as part of its broader debt-sales program. The government
will have issued a record $1.8 trillion of debt in the 12
months through September, most of which was debt that pays a
fixed interest rate, unlike TIPS, which pay out more as
inflation accelerates. Auctions last week of two-year and five
year fixed-rate securities were surprisingly weak, a reminder
that robust demand for such unprecedented bond issuance is far
from guaranteed.
The TIPS announcement will likely come as part of Treasury's
scheduled announcement on funding for the third quarter, the
people said. A Treasury spokesman declined to comment.
"The Treasury has recently strengthened its communication
around its commitment to the TIPS program, and we expect that
to show through in Wednesday's refunding announcement," said
Michael Pond, an interest-rate strategist in New York at
primary dealer Barclays Capital Inc., one of the world's
biggest traders of inflation-linked bonds.
TIPS, which were first sold in 1997, pay out a fixed amount
over the consumer-price index, making them a popular choice
for investors who anticipate that inflation will rise. Demand
for the securities is likely to increase as the economy
improves and heavy federal spending on priorities such as
health care push prices higher. It also would leave taxpayers
on the hook for elevated interest payments if inflation
remains high.
Right now, TIPS represent just a fraction of the overall
market for Treasurys. Of $6.66 trillion of government bonds
issued between Oct. 1 2008 and June 30 of this year, just $44
billion were inflation-adjusted.
After the tepid response to auctions of fixed-rate bonds last
week, Treasury officials asked some primary dealers whether
they would be amenable to a new issue of 30-year TIPS -- which
haven't been sold since October 2001 -- instead of five-year
or 20-year TIPS, according to people familiar with the matter.
Demand for TIPS auctions this year has been robust, with last
week's $6 billion reopening of 20-year TIPS garnering the
highest demand in two years. The TIPS didn't entice only
traditional Treasurys investors, but also those investing in
stocks and commodities.
"There is growing demand for TIPS among investors who see them
as an important asset class to diversify their portfolio,"
said Donald Ellenberger, who helps oversee $8 billion in
assets as co-head of government and mortgage-backed bonds in
Pittsburgh at Federated Investors Inc.
The growing attention lavished on TIPS is turning what used to
be a steady hedge into a more volatile bet. The gap between
TIPS and a comparable nominal note has seen unprecedented
swings that are three times as extreme as in years past,
according to Jefferies & Co. The current 1.88 percentage-point
gap means that investors expect annualized inflation of 1.88%
over the next decade.
In the past three weeks, the gap has climbed from 1.52
percentage points to as high as 1.90 percentage points,
with swings of 0.10 percentage point each day common.
Yield on 10-Year Note Increases to 3.680%
Treasurys
ground steadily lower Tuesday, weighed down by a mixed bag of
economic data, coming debt supply, and caution ahead of Friday's
data on nonfarm payrolls.
The benchmark 10-year note was down 10/32 point, or $3.125 per
$1,000 face value, at 95 15/32. Its yield rose to 3.680% from
3.641% Monday, as yields move inversely to prices. The 30-year
bond was down 20/32 point to yield 4.461%.
—Michael S. Derby and Deborah Lynn Blumberg
--------------
How to play it?
The Chinese want inflation protection.
Probably ahead of Stimulus II.
However, I still believe we are in the midst of an epic battle
between deflation and inflation.
We are still undergoing massive debt deleveraging which
will continue for years, not months.
While the Fed is printing, it's only allowing banks to
park the money to shore up their balance sheets. If banks
are not lending, or creating credit... how inflationary is
that really?
Especially with a consumer who is still deleveraging, with
still ramping (real) unemployment, and falling wages.
While the possibility of hyper-inflation and the US turning
into Argentina exists, the ultimate wealth and power grab
occurs after a final deflationary collapse, when those
with all those freshly printed dollars they've been holding
outside the real economy, can walk in and snap up all that
prime commercial real estate, the major manufacturing plants
and infrastructure...along with stocks at pennies on the dollar,
before reigniting real inflation.
...and that final deflationary collapse has always been the tool
of choice for the final transfer of wealth and political power
by Central Bankers ever since Nathan Rothschild gamed the
London markets on the false news of Napoleon's victory at
Waterloo in 1815.
This remains a battle to be fought with periscopes and binoculars,
not crystal balls.
SOTB |
