Failed Auctions?

Posted by Ray on March 25, 2010 under Main | Be the First to Comment

The smart money is always in the bond market, mostly because it is institutional money instead of retail investors. Anyone watching the last 2 treasury auctions see something wrong, a major problem in fact. The auctions were duds, dare I say failures? The primary dealers are taking in a large swath of the last 2 auctions, this has actually been a trend over the last few weeks, and the direct bidders are now gone. Yields are perking up to levels not seen in months, something isn’t right.

Whether it is sovereign debt or the markets frothy valuation, the bond market is signaling trouble ahead. Yields are not increasing for any good reason other than there is no demand for the hundreds of billions the U.S. needs to raise to keep the lights on. Perhaps the market has had enough or the Chinese are just not buying because Krugman and Schumer called them currency manipulators, you never make your largest lender mad at you when you need to raise billions of dollars.

Either way you look at this there is a problem and I do not know what it is other than a general buyers strike. However, what scares me is that this is following some historical events. In the late 1970’s there was a huge treasury bubble and rapid inflation, this is no secret, which led to the dollar’s decline in value. This was no big deal until the treasury bubble burst in 1980 and the treasury market imploded. What happened was treasuries sold off and the primary dealers, still in bubble mode and required to suck in supply, began to buy when prices went lower. Their thought was this was a steal, it wasn’t. This happened for a few days and prices continued to decline to the point where the primary dealers were on the verge of failure.

This was a serious situation as the companies that raise money for the government, the primary dealers, were almost all gone because of massive losses, they bought on leverage of course. This led to Volcker doing what he is famous for and Carter issuing credit controls. No one talks about this, and I overly simplified the story, but it was perhaps the days that almost ended America. I am not saying this is happening now, but if the primary dealers have to bring in supply and the prices on treasuries keep dropping, this could be a major problem. Of course, everyone is too big to fail, but still.

While I do not know if this is a short-term problem or the beginning of bond buyers telling the U.S. to get its act together, I believe it is the vigilantes, I do know this has serious potential problems. We need to wait to see what happens over the next few weeks, but more ‘failed’ auctions may be a problem bigger than a worldwide embarrassment, but our lenders cutting up our credit card. This will lead to more quantitative easing and dollar destruction which would mean we would actually begin to see higher prices without money velocity, don’t think that can happen? It can and just might happen.

Most disturbing is that we are talking 5’s and 7’s that could not get placed, that is easy paper. I sure hope Washington is worried enough to take the national debt situation seriously after this week. If they do not we all could be in for a rude awakening very quickly.

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Treasury to Conduct Four Debt Auctions For First Time Next Week

Posted by Ray on July 2, 2009 under Main, Markets, The Federal Reserve | Be the First to Comment

To meet the massive needs of the US the treasury is offering 4 debt auctions next week. Although next weeks auctions are for less than last weeks record of $104 billion it is still sizable at $73 billion. The need for the massive debt offerings is to finance the governments big spending spree which has yet to offer real relief to its citizens.

While the debt is largely for Obama’s spending initiatives, it is also for debt servicing which has grown dramatically. It will be interesting to see the bid-to-cover ration, which we expect to be high as usual, with these auctions. The short-term and TIP’s, treasury inflation protected bonds, will be extremely high I am not so sure about the 30 year. Whoever would buy a 30 year treasury at 4.30-4.50% is crazy, period. I don’t know about anyone else, but I am concerned that we might find out that the Fed is doing more buying than we think.

Regardless, under the new administration the debt market has increased to $6.45 trillion and is poised to go higher. Just think if rates go up to historical levels just the servicing of this debt will cost hundreds of billions a year, perhaps trillions at this rate. The US has never actually ever paid off a bond it has always rolled the money or issued a new bond to pay back maturing treasuries. Eventually that will stop as foreign governments realize we will never pay back what we owe and there is no reward in the risk to carry US debt, especially at 4% or so.

People really see what is going on and that our debt has been, for a very longtime, been out of control. My fear is that by the time everyone figures out what has happen it will be too late. This is a national problem and it shows the fundamental flaw in the “new” US economy, we cannot be the worlds leading economy without producing things within our own borders. A service based economy with GDP largely grown through consumption is a recipe for disaster.

See the chart below of the Fed’s balance sheet, scary isn’t it? I know, people are going to say it is coming down a bit, sure, but not even close to what it needs to do. After all this was a credit problem, never a liquidity problem.

[caption id="" align="alignnone" width="970" caption="Very scary."][/caption] Subscribe to Annuity IQ's Feed

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