US Treasuries Record Sell Off Breaking the Debt Trendline?

5 posts / 0 new
Last post
sackings_98's picture
sackings_98
Status: Member (Offline)
Joined: Sep 19 2008
Posts: 3
US Treasuries Record Sell Off Breaking the Debt Trendline?

Just as Chris' chart of debt in his recent presentation in Spain demonstrates that debt has broken the near perfect correlation with exponential growth (around minute 7 of this: http://www.peakprosperity.com/blog/unfixable/65829), today's news article is:

Foreigners Sell Second Largest Amount Of US Bonds Ever In Past Week, Record $93 Billion In US Paper Sold In Past 2 Months

http://www.zerohedge.com/news/foreigners-sell-second-largest-amount-us-bonds-ever-past-week-record-93bn-us-paper-sale-past-2-

Check out the Treasury charts.  Yikes!  

If this trend continues (due to European liquidity issues), wouldn't the US have to raise interest rates to prevent a continued sell off?  But we can't do that without causing a complete crash in housing/economy etc.  

My question is, if the trend continues, what does this mean in terms of the timeline for a bank holiday (instant devaluation), and the near term expectations for holding cash, gold, and silver?

I downloaded the dataset from the Federal Reserve's website: http://www.federalreserve.gov/releases/h41/hist/h41hist9.txt and plotted the longer term data from 2002 to present in excel:

Notice that we appear to have hit the debt expansion ceiling and that in recent months, treasury holdings of foreigners are declining for potentially the first time ever.

I suppose the most likely scenario is for the Fed to buy the Treasuries as foreigners dump them, which would lead to the inflation that Chris has been expecting.  Tough choice.  Do nothing OR raise interest rates and our government is forced into austerity/deflation/depression.  Do something/print money and rampant inflation results which impoverishes the people who most vulnerable, leading to more riots and social instability.

For comparison, here are U.S. Securities held over the same time period.  A similar ceiling seems to have been reached.

Comments anyone?

sackings_98's picture
sackings_98
Status: Member (Offline)
Joined: Sep 19 2008
Posts: 3
One of the attachments is incorrectly labeled

The attachment titled  FederalReserve_MarketableSecurities_2002-Dec2011_Annotation.jpg is a plot of the U.S. Treasury Securities (not foreign securities), but it is labeled as foreign securities in the attachment, which is incorrect.  The pictures in the forum posting are 100% correct.  Sorry, long time reader, first time poster, so didn't get everything right on the first try :) I also attached the excel spreadsheet of the data, which took a little while to put together.  It contains the data from the Fed's website http://www.federalreserve.gov/releases/h41/hist/h41hist9.txt, but with formatting of the date information to make excel read it correctly.

Robbrian's picture
Robbrian
Status: Member (Offline)
Joined: May 21 2009
Posts: 22
US Treasuries Record Sell Off Breaking the Debt Trendline?

Sack, you wrote, "I suppose the most likely scenario is for the Fed to buy the Treasuries as foreigners dump them, which would lead to the inflation that Chris has been expecting. Tough choice. Do nothing OR raise interest rates and our government is forced into austerity/deflation/depression. Do something/print money and rampant inflation results which impoverishes the people who most vulnerable, leading to more riots and social instability."

Please put the above scenario in the context of a sovereign currency nation no longer bound by fixed exchange rates. Spain is not a currency issuer.  Also, I don't understand how inflation would be a serious issue in an economy with even a low positive growth rate, massive unemployment and real debt service at a manageable level. The latter is all creditors really care about.

The U.S. government no longer prints money.  It creates deposits through electronic spending.  The Fed can  make electronic credit and debit entries to foreign and domestic checking and savings accounts without generating inflation. In a foreign sell off the Fed debits a savings account and credits a checking account. The account holder can either withdraw funds to find a safer haven than U.S. Treasuries or leave funds in their checking account.  There's been no net addition to the money supply. 

Similarly, if the Fed buys the Treasury paper it simply credits its reserves and could, in fact, zero out new redemptions rather than roll them over. The Fed doesn't need to raise revenue or increase its balance sheet through the aquisition of funds from any source. it's the source of money.

 

sackings_98's picture
sackings_98
Status: Member (Offline)
Joined: Sep 19 2008
Posts: 3
Robbrian,  Thank you for

Robbrian, 

Thank you for your reply.  I am not an exchange rates student, so I may not have what you are looking for in response to:

"Please put the above scenario in the context of a sovereign currency nation no longer bound by fixed exchange rates."  

However, the way I understand exchange rates is that they depend on the relative strength/weakness of a nation's economic stewardship.  Yes, the U.S. is still the world's reserve currency, which affords it the advantage of creating money at will and exporting the inflation to everyone who is willing to hold U.S. dollars or U.S. debt (Treasuries).  However, now that foreigners are turning into consistent sellers of our Treasuries (debt) for the first time, the price of U.S. debt, and by direct connection, the U.S. dollar, would logically decline. 

I've subsequently stumbled across the below article, in which Chris has astutely addressed the same Fed Custody Account chart.

http://seekingalpha.com/article/197609-the-fed-s-shell-game-continues

He states:

----------------
What I Am Always Looking Out For

Long-time readers know that I am constantly on the lookout for a specific pair of market signals above all others, because its arrival will signal that a new game has begun. That pair comprises a simultaneously falling US dollar index and rising Treasury interest rates (signaling falling Treasury bond prices).

In essence, this pair will signal to me that some major player, perhaps China, has decided to sell its Treasuries and take its money home, thereby driving down the dollar. This is critical to me, because it will mean that the US will have begun its long date with funding difficulties. Either interest rates will have to rise dramatically to attract new lenders (thereby killing the nascent recovery of the housing market and our entire credit-fueled economy), or the Fed will have to begin monetizing at an even faster rate than before.

In short, we'll be facing a period of profound austerity, raging inflation brought about by currency devaluation, or both. In truth, I cannot imagine any possible way for the U.S. to pay off its current official debts in current dollars, so I feel this outcome is merely a matter of time. However, it could be a long time, and we must also be prepared for that."

---------------

That pretty much sums it up.

Except that the ten year treasury yield ($TNX) is not rising.  In fact, it is at three year lows: http://stockcharts.com/h-sc/ui (you have to type in $TNX for the symbol)

And the dollar is not falling: http://www.marketwatch.com/investing/index/dxy

So somehow the the foreign sell-off of treasuries is not affecting the primary indicators that we would expect.  Chris' article also addresses the unexpected calm in the face of systemic stress.  He uses an educated guess at the question of who is floating the government debt with a lack of foreign buyers.  Here is another of Chris' quotes from the seekingalpha article:

-------------------

"My concern is that the mysterious indirect and direct buyers that have been showing up at Treasury auctions lately may be none other than the Fed itself or its proxies, hidden by some slight shell game or another.

There simply seems to be no other explanation, given the perilous state of the global economy. Where is all this capital coming from, if not central banks? From earnings? From exports? From legitimate economic savings? From private individuals (during a major stock bull run)? None of these explanations matches the volume of borrowing that we are seeing in the U.S. Treasury market, let alone worldwide.

The simplest explanation is that central banks are somehow providing the necessary liquidity to support the various governmental bond auctions that are happening around the world. The U.S. story does not add up and provides enough of a smoking gun to suggest that there are (at the very least) non-transparent buyers for the massive, record-breaking Treasury issuances we've been seeing lately.

If, or when, these deceptions are revealed, I predict that we will experience a pretty significant market dislocation that will take the form of a chaotic bond market, with yields that rapidly gyrate higher, currency perturbations that will shake markets, and an extended banking holiday, with capital controls imposed until a nightmarish derivative mess is unsorted."

----------------

However his comments were stated when the above charts just began flatting, not when they were demonstrating decline.  I'd be interested to hear his latest take, but I think a hunch of increasing likelihood of a bank holiday isn't a bad guess. 

Regarding your comment, "Also, I don't understand how inflation would be a serious issue in an economy with even a low positive growth rate, massive unemployment and real debt service at a manageable level. The latter is all creditors really care about."

???"real debt service at a manageable level"???  We've raised the debt ceiling by many trillions of dollars over the last few years and states, municipalities, and pension plans are flat broke.  Homeowners are more under water than ever in history.  Sovereign defaults are in the news every day.  Not sure how debt could be claimed to be at a managable level.

I get that if the Fed is buying its own paper, it could concievably zero it out it that paper was held at the Fed.  There would not be inflation if the Fed was holding paper anyway.  However, what would be the point of holding Treasury auctions if the "money" isn't given out?  I'm not being a smart alec with this question.  Really, I don't know to whom those funds are being distributed, and how to find out?  I'm guessing this is secret?  If so, that would explain why the movements to audit and END THE FED are gaining steam.

sackings_98

P.S. Inflation is an issue because the quickly expanding lower class cannot afford basic necessities.  GDP, CPI, and most other government numbers related to growth and inflation are laughably poor representations of the quantities they claim to quantify.  You can be certain that actual productivity/growth is less than stated GDP, and price inflation (including food, energy, health care costs, etc.) is much higher than stated in the CPI.  

elvinsalex's picture
elvinsalex
Status: Member (Offline)
Joined: May 1 2012
Posts: 1
I just wonder If these

I just wonder If these charts hold and the hypothesis being floated here. The US is due to sell 1.3 trillion in additional debt through 2012 and I have not seen the number on what we need to roll over, and the EU needs to roll over above three trillion euro at nearly triple interest rates then it was sold at. it seems that this year will be the year of the bond vigilantes between Europe and the US.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments