The US Treasury is now facing a debt spiral; a situation where it needs to issue roughly $150 billion of new debt per month while rolling over trillions in existing debt at a time when investors are willing to lend to it for shorter and shorter periods of time. The big question now is… who’s going to be buying this stuff? Words: 789
In further edited excerpts from the original article* Graham Summers (www.gainspainscapital.com) goes on to say:
Historically, foreign investors and foreign governments were the biggest buyers of US debt. Indeed, they were the largest in 2009, buying up roughly $700 billion worth of Treasury securities, representing a 23% increase from their purchases of 2008. On the surface, this data makes it look like foreign governments haven’t lost their appetite for US debt… until you look at the data on a month-by-month basis and see that they actually became sellers of long-term US debt by October of 2009. Suffice it to say, foreign governments likely will not be stepping in to pick up the slack in the Treasury market.
The Federal Reserve?
The next biggest purchaser of US debt behind Foreign Governments in 2009 was the Federal Reserve itself via its Quantitative Easing Program. Given that unpopularity of this policy it is unlikely to be repeated (at least not in a form large enough to pick up any slack in the Treasury markets).
State/Local Governments; Pension Funds/Insurance Companies; Other Investors?
So what about state or local governments, pension funds, or insurance companies (historically decent sized buyers of US debt)? Eric Sprott of Sprott Asset Management points out that according to Treasury data these groups were either net sellers or small buyers of Treasury debt in 2009. The likelihood that these groups suddenly buy hundreds of billions of dollars of Treasuries in 2010 is minimal… the same goes for “other investors” (the third largest group of US debt buyers in 2009, buying nearly $700 billion in US debt and comprised of “Individuals, Government-Sponsored Enterprises (GSE), Brokers and Dealers, Bank Personal Trusts and Estates, Corporate and Non-Corporate Businesses, Individuals and Other Investors)… unless, of course, we have another crash in the stock market.
Buyers Have Lost Interest
Think about it. The US, if it were treated like a corporation, is effectively bankrupt. It has to issue a massive amount of new debt while rolling over trillion in old debt at the very time that most historic buyers of US debt are losing interest in lending to the US for any period longer than a few years.
How to Create Interest
So how do you create interest from historic buyers of US debt? Simple, you let the stock market collapse. The “flight to safety” that would follow would push billions if not hundreds of billions of dollars into Treasuries, soaking up the debt issuance and roll-over with little difficulty. After all, stocks have added $6 trillion to the US household “budget” and if a third of that slid into Treasuries and you would be able to cover the current US deficit for 2010 and the S&P 500 would still be at 950 or so.
Please bear in mind that I am not saying the Fed and friends will do this but given that the Fed is coming under increased scrutiny as public outrage rises, letting stocks come unhinged it perhaps the least politically controversial move the Fed could make as opposed to another Quantitative Easing Program which would really get the public upset. It would do the following:
1) End the liquidity fueled rally while bringing stocks closer to reality (the higher the rally goes the more painful the subsequent correction will be)
2) Create great demand for Treasuries (something the US desperately needs in 2010)
3) Have relatively minor political ramifications compared to another Quantitative Easing Program or more Bailouts (the public is pissed, Democrats have begun jumping ship, and we are in an election year)
Could the Fed be preparing another stock crash to flood the bond market with demand? Who knows but it would make plenty of sense to me.
*http://seekingalpha.com/article/181428-what-is-the-fed-planning-for-the-bond-market (www.GainsPainsCapital.com provides a free daily newsletter dedicated to providing daily insights to the stock, commodity, currency, and bond markets and telling investors the REAL story behind the moves in the financial markets.)
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