Thursday, May 21, 2009

Crowding Out the Future. Bond-Style.

I am not any less short on time than I have been recently, but I was compelled to discuss an issue which I believe could be profoundly disturbing.

I have discussed the "crowding out" effect before as the government and/or Fed (who can tell where one stops and the other starts nowadays?) tries intervening in a multitude of markets. For ease of reference, let's just say that here it means that vested parties (investors) take their ball and go home when both their resources and demand have been diminished by government actions creating competing objectives.

And, of course, in this instance we're talking about that tiny little immaterial market known as Treasuries. You know, the one where we rely on investors - mostly foreign - to give us money for what everyone surely knows are worthless IOUs down the road. You know, the one that keeps our currency, and economy, from collapsing.

I have long wondered how the strategy can keep from crowding out demand from investors, when artificial Fed demand that will dissipate down the road will shred Bond investors by backing that demand out, flipping prices on their head and driving yields through the roof. I wondered how it would prevent compelling Treasury buyers from becoming sellers to the Fed itself. In this instance, the US authorities would eventually "crowd out" everyone but themselves as both buyer and seller (seller when the Fed eventually held most, if not all, Bonds).

Um, yeah, well, good news!

CBs And Other "Real Money" Had Enough?

"21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning's coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs -- in the higher coupons -- also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street."

"Whether influenced or not by the much higher tenders coming in on the Fed Passes ($45 bln tendered for $7.4 bln bought in today's pass for a 16.2% hit rate), fast money has been tattooing the bid and especially so in the belly with the 10-year most leaned on. Note as well, earlier this week the Bank of England (BoE) gilt pass too saw a need to offer paper at or below the market's bid side in order to get sales off."

"If Foreign Central Banks are selling into Ben's bid then the game is literally weeks or even days away from being over."

"I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse."

"We are following the precise same path we went down in the 1930s."

And more good news that seems to be trashing the long end of Treasuries today:

Britain no longer a AAA nation? It could happen, S&P warns


"Britain was put on notice today that it could lose its AAA credit rating because of massive government borrowing, a warning that ought to at least prick up the ears of U.S. policymakers."

"Standard & Poor’s cut its credit outlook for the United Kingdom to "negative" from "stable" and said there was a one in three chance that the country’s AAA rating could be reduced."

From Bloomberg News:

"We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of gross domestic product and remain near that level in the medium term," S&P analysts led by David Beers in London said in the report.

"The downgrade highlights the precarious fiscal outlook the U.K. economy faces," said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets. "The huge amount of issuance to face the [bond] market in the coming months will push yields to the upside. We’re bearish."

Like the U.S., Britain is borrowing heavily to rescue its economy from a deep recession. Britain’s debt load next year will be 66.9% of gross domestic product, Bloomberg said, citing forecasts from the International Monetary Fund. That would exceed Canada’s 29.1% and Germany’s 58.1%. The U.S. will be at 70.4%, and the 16-nation euro area at 69%, according to the IMF.

In case you missed the hidden subtlety, America will have a debt-to-GDP ratio that is 3.5 points higher than the UK. Not to harp on the obvious, but this seems to be strategic maneuvering by S&P to give the US a signal as to the guillotine that they may be soon to drop.

Something very telling happened today. The dollar has been getting absolutely blown apart lately, but the story today wasn't the Pound taking the greenback's place. It was...the dollar getting blown apart again.

The cynical part of me reads this with a single-minded vacuum: Traders know what is coming for the US is much worse than the rest of the world.

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