This week has seen the largest weekly issuance of Treasuries on record. There was $104 billion of new debt in 2, 5 and 7 yr tranches.
Now, the market has been weak in recent weeks, with the 10 yr yield moving back to the 4% level, but then on the back of a downbeat economic forecast from the World Banks, reiteration of no inflation in the immediate future and various well timed factors, and plenty of unwinding of shorts prior to FOMC, the yield came in again. One of the things that has given a great deal of comfort to the markets has been the high proportion of foreign buyers in the auctions. But, as I have said before, I have been suspicious of the description, of "indirect bidders, the group that includes foreign central banks", which seemed a bit, well, vague shall we say. So here is this from the WSJ.
"But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.
The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher."
http://online.wsj.com/article/SB124588934703850877.html
So, let me say plainly what I think is happening - the Fed is buying larger amounts than officially stated.
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We know they would like to do more QE, but the Chinese are threatening to dump their holdings and the markets assume QE = inflation, so it has the reverse effect intended and causes yields to go up. So, I suspect they have found some clever ruse to stabilise prices, and get those inflationary juices flowing before the bond market wises up.
What is the consequence for the market? Well, in my view this should logically cause Treasuries to sell off and more so the Dollar, suggesting upside for precious metals. The trouble is, the Pavlovian reaction of the market making traders is to run for both of these assets at the first sign of trouble, so it would be more negative for stocks, and the market manipulation going on would probably show a decline in gold and silver, but as I have said before, silver at $14 an ounce just feels cheap to me.
Remember, the main problem we have is too much debt and central bank orchestrated inflation is a form of debt forgiveness by proxy.
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Ok, so it seems the buyers of US government debt are the trust funds that manage Social Security and Medicare. Looks like they are robbing Peter to pay Paul... not sure if they are using cash, or just selling existing debt back to the Fed and then replacing with new.
As an aside, the ADP Employment Report was surprisingly bad today and the Dollar fell against the Euro. I am looking for signs of US Dollar or Treasuries falling on the back of bad US data, to suggest the reserve status is at risk.
Apparently, the Chinese want to discuss alternatives for the reserve currency at the G8 meeting next week. Expect something weird to scare people back to the safety of dollars..
http://www.claridenleu.com/research/index.cfm?fuseaction=market.reutnews&MarketID=123&detailType=newsDetail&nid=1246463880nLAG003567&lang=en&cfid=350910&cftoken=23607227
This is a very good piece. I think it explains why the policy of the Fed may not lead to inflation, according to the economic theory (basically because the expansionary monetary policy is not that expansionary as it simply gets deposited back with the Fed, i.e. borrow for free then earn interest on the deposit, yes it's that wacky), but the risk is not that but rather a crisis of confidence in the Dollar and Treasuries.
http://www.econbrowser.com/archives/2009/07/looking_for_an.html
The other issue is called the Triffin Dilemma
http://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm
I don't think the US congress quite realise it isn't really their currency any more...
In reply to Gradders73 (post #2)
If one parses the monetarist dogma: "too much money chasing too few goods and services", then it isn't actually the supply of money that causes inflation. That money has to "chase" too. Back in the day, this "velocity of money" used to be incredibly able so monetarists were able to infer (ultimate - it takes a decade plus to actually work) money supply = inflation. With the velocity jammed today (because much of the QE is staying within the banking system and not making it out into the real economy via loans etc.), that assumption no longer automatically holds. It will if the velocity turns around, but for that to happen all the accommodation will have to start unequivocably working!
A crisis of confidence in USD & Tsys? Maybe. Trouble is, it is equally possible to spin a weaker dollar and higher bond yields as the very bullish "normal cyclical recovery" where safe-haven dollar cash gets reinvested in real and risk assets, while bond yields normalise (back up) in the same flight to quality to a price consistent with normal nominal GDP.
best,
DEM
thought this was interesting
http://globaleconomicanalysis.blogspot.com/2009/07/real-treasury-yields-highest-in-history.html