Now that the Fed has stopped its quantitative easing who does the Fed expect (hope) will buy US Treasury debt?
The above introductory comments are edited excerpts from an article* by Chris Hamilton as posted on srsroccoreport.com under the title The Heart Of The Ponzi?!?
Hamilton goes on to say in further edited excerpts:
The 1st chart below shows the four distinct classes of US Treasury buyers showing who purchased and how much in each time period since ’00 cross referencing the blended interest rates on the Treasury curve.
As yields have collapsed and the alternative markets (stocks, RE, corporate or junk bonds) have improved or offered more attractive returns…only the Fed and “Foreigners” have continued to seriously accumulate Treasury’s. (BTW – I included the Fed’s $667 Billion in Operation Twist long bond purchases – paid for from selling all their short paper – to show the power and magnitude of the Fed’s purchases on the Note and Bond “markets” since 2011)…
The next chart shows holdings of Treasury’s…[since] ’00 by each group…Notice the Fed and Foreigners coming to the fore.
The chart below, showing U.S. Treasury purchases by period as a % of total purchases by classification, reveals that the Federal Reserve and Foreigners bought 83% of all US Treasury debt from ’11 – present, double the % they purchased in ’00-‘07. This transfer of responsibility from US Public and Intra-Government buying is unprecedented.
OK, let’s follow CBO assumptions that debt creation will continue at present levels or slightly higher ‘til say, infinity. Who will buy the new and rollover debt?
- Since the yields are too low for most public pensions or insurers or institutional buyers and without a major market downturn; they are not likely to step forward.
- The Intra-Government purchases will be limited by slowing or negative Social Security surplus’ so no buyer there, and…
- the Fed says it will be looking to “normalize” their balance sheet by directly selling or slowly rolling off their holdings.
This leaves only “Foreigners” to maintain the Treasury bid for the vast majority of new issuance plus pick-up the Fed’s “roll-off” while simultaneously maintaining the foreign held $6+ Trillion in Treasury holdings. Ok, got it, “foreigners” have to buy the bulk of all Treasury debt to ensure America feels no pain.
The chart below shows which “Foreigners” have been buying since 2011.
What is noteworthy about the above list is that almost none of them have excess Foreign Exchange Reserves with which to purchase the US Treasury’s.
The chart below notes that those running surpluses are net sellers (UK is typically a false front for Chinese purchasing or selling).
[The chart below shows collapsing yields] since the Fed’s December ’13 taper announcement.
The chart below shows the notable foreign Treasury holding changes since the Fed’s Dec. ’13 taper announcement shows that Belgium and the Cayman Islands became our 3rd and 4th largest creditors…two nations without any foreign exchange reserves in need of recycling while those with reserves and continuing surplus’ (China & Russia) are selling. Curious.
The above would seem to imply that the U.S. has 3 basic options to avoid an interest rate shock on its $17.8 Trillion in debt and more broadly continue its low-interest rates supporting its interest sensitive economy (housing market, stock buybacks, car loans, etc., etc.).
- Belgium, the Cayman Islands, Luxembourg, Ireland, and the like nations continue to “buy” US Treasury’s with dollar reserves they don’t have?!? If nobody has questioned this one so far, maybe they never will?
- The Fed backtracks on its taper and re-initiates the printing presses. Seems Fed has carte blanche to monetize as they see fit?
- Markets collapse making Treasury’s once again the “safety” bid. This seems the likeliest scenario if neither of the two above options are employed to maintain the Treasury market from ’15-’18.
Let’s take a quick look at what the #3 scenario above looks like just to play out the Federal Reserves thinking:
- Let’s assume debt creation continues at current levels.
- Intra-government and Foreigners continues buying at current levels.
- If we take the Federal Reserve and chairperson Janet at their word, the Fed will complete its taper in ‘14 and roll off up to 1/3 ($800 B) of its Treasury holdings over the ’15-’18 period in a process of balance sheet “normalization”.
As can be seen in the chart below, the above leaves the domestic “Public” (pensions, insurers, institutional buyers) in need of increasing their purchases by a factor of 10x or finding an extra $2.2 trillion over their ’11-’14 purchases to make up for the shortfall. Heck, even if the Fed continues to roll all its Treasury holdings, the Public still has to come up with $1.6 trillion over the ’15-‘18 period.
The scenario of Public domestic buyers purchasing massive Treasury holdings would mean equal massive selling of existing assets on hand…i.e., stocks and non-sovereign bonds. Not exactly a pretty picture for financial asset prices which the Fed worked so hard to boost.
Bottom line, the Federal Reserve created false demand for real debt created by the Treasury…and now the Federal Reserve wants to pretend it can step aside for a real buyer somewhere out there for all this debt. Got Gold?
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://srsroccoreport.com/the-heart-of-the-ponzi/the-heart-of-the-ponzi/ (© 2014 SRSrocco Report. All rights reserved.)
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