Skip to comments.Countries' Debt Is Hot & Cold (Germany couldn't sell all it's debt this week. Unprecedented?)
Posted on 01/11/2009 11:46:18 AM PST by Golddigger3
On both sides of the Atlantic, investors are finding very different experiences when buying country-specific debt. Wednesday, Germany sold 4 billion ($5.49 billion) of debt, but low demand forced the Bundesbank, Germany's central bank, to retain about one-third of the issue.
That fueled concerns that subsequent auctions from Spain, France and the U.S. also would fall short of expectations and be a sign that the global market was starting to balk at government-bond issuance. It would be especially troubling for the U.S. The vast lending and spending undertaken by the U.S. Treasury Department and the incoming Obama administration will have to be financed through the sale of more debt.
Bank of America estimates a $2.14 trillion financing need for fiscal 2009 and $1.02 trillion for 2010. And investors have been fearful that other countries will tire of being U.S. benefactors and will demand higher yields or sell Treasurys en masse, weakening the U.S. dollar.
But Spain and France held successful auctions, and the U.S. Treasury's sale Thursday of $16 billion in 10-year notes was marked by stronger-than-expected demand. "The strong across-the-board performance for this reopening should in the near term provide some solace that 10-year Treasury paper in the U.S. still has a strong following," wrote George Goncalves, Treasury and agency strategist at Morgan Stanley.
Jessica Hoversen, . . . analyst at MF Global, doesn't expect China or Japan to sell off their holdings of U.S. Treasurys, "If China decreases dollar holdings, they're putting dollars in the market and taking back yuan," she said,"which their economy cannot handle right now."
(Excerpt) Read more at online.wsj.com ...
Can anybody tell me whether this has happened before to Europe’s biggest economy?
Peter Schiff says the Treasury bubble is collapsing as we speak. He says it’s like the condo bubble. Nobody is buying Treasuries to live in them, there just buying them so they can flip them to the government which guarantees them.
Here’s Peter Schiff’s column from Friday explaining how the Treasury bubble is collapsing:
THE FED’S BUBBLE TROUBLE
A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoffs social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of buy the rumor and sell the fact.
If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.
The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.
This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.
However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Feds bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board.
In order to save the economy from these high rates the Fed will then have to expand its purchases to include all forms of debt. If that happens, run-away inflation will quickly turn into hyper-inflation, and our currency will be worthless and our economy left in ruins.
To avoid this nightmare scenario, the Fed should pull out of the bond market before its too late and let prices fall to where real buyers, those willing to hold to maturity, re-enter the market. Given how high inflation will likely be by the time this happens, my guess is that long-term Treasury yields will have to rise well into the double digits to clear the market.
But we should know that the bursting of the bond market bubble will have even more dire consequences than the bursting of prior bubbles in stocks and real estate. Significantly higher interest rates and inflation that will result will severely compound the current problems. Imagine how much worse our economy would be if we faced double digit interest rates? In addition, not only will homeowners be confronted with record high mortgage rates, but the Government will be staring at trillion dollar annual interest payments on the national debt, making interest by far the single largest line item in the Federal budget. Just like homeowners who relied on teaser rates, the Government will face a similar problem when all its low-yielding short-term debt matures.
The grim reality of course is that when the real estate bubble burst the Government was able to bail-out private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoffs clients might finally find some comfort.
Mr. Schiff is president of Euro Pacific Capital and author of “The Little Book of Bull Moves in Bear Markets”
This may be good news. If Obama can’t sell Treasuries to finance his expansion of govt., he may be forced to raise taxes. Then, he will come under the scrutiny of the people. Then also, we will see how much those who voted for him will really love him after he does that.
Here’s Peter Schiff on TV explaining the collapsing Treasury bubble:
The difference is that Germany doesn’t have a print-happy central bank promising (in so many words) to print money to buy bonds if need be like Bernanke is doing. So Germany’s bond market is actually a competitive marketplace instead of a rigged, central bank-created, bubble marketplace like we have.
Beat us to it.
The only thing he will be able to sell is empty talk to the MSM. Let’s see how long that keeps people satisfied.
Until the public discovers how much worse off (relatively) big EuroZone banks are than are US banks, Bunds, BOBLs, and Schatzes don't really have a problem other than that Eurocurrency is going to take a hit this year.
I thought I read weeks ago that no one wanted to buy germany’s bonds anymore. I think this has been going on for a couple of months.
Another article from same issue of WSJ suggesting that the dollar may collapse:
This article has a misleading healine since the dollar fell against the yen and the experts they quote say the dollars is weak and that the advance agaist other currencies is not to be trusted:
Dollar Advances Against Euro
The dollar stengthened against the euro after the U.S. December employment report wasn’t as bad as some had feared.
The dollar broke through a series of session highs against the euro as buying momentum built during the session.
The greenback briefly erased losses versus the yen before resuming its downward move as U.S. stocks declined.
“It is a short-term relief for the dollar,” said Sebastien Galy, senior currency strategist at BP Paribas Securities SA in New York. “People have positioned for a worse number. But it didn’t change the fact of a deteriorating labor market.”
The selling of the euor against the dollar also pushed the common currency down against the yen and the pound.
In late Friday afternoon trading in New York, the euor was at $1.3431, compared with $1.3726 late Thursday, and the dollar moved to 90.24 yen from 91.17 yen. . . .
Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto, said the dollar’s rally Friday was more of a “relif trade” than an outright vote of confidence.
Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp. in New York, said that deteriorating economic dundamenals in the U.S. and overseas added to risk aversion, thereby benefiting the yen and the dollar as haven currencies.
Strength isn’t necessaryily a good thing for the yen or its regional counterparts. Asia’s central banks are currently accepting a decline in the value of their currencies in an effort to support exports, the latest foreign-exchange reserves data suggest.
At least among the subset of his voters who actually pay taxes, as opposed to those who are subsidized by taxpayers.
Yes. There were seven bond auction failures for German sovereign paper last year.
This one, however, was the largest shortfall in bidders in about eight years.
There have been other sovereign paper auction failures in Europe — the Netherlands, for example.
It isn’t the end of the world, but it does predict that nations issuing debt will need to start increasing yields on their paper in order to attract buyers of bonds. 3.19% in German paper isn’t enough to take on the risk of the Euro and EU-wide machinations. The US has no trouble selling short-term debt for lower yields, probably because our paper is perceived as safer.
I'm new to following national debt. Would you mind elaborating:
1) on why a country not be able to sell 1/3 of it's debt offering is no big deal;
2) on how dangerous the U.S. treasury situation is. Thanks
Option 3 (taking a chainsaw to the Welfare State) is not considered to be on the table, but is the only thing that would work.
True that. I have yet to see a Congressman seriously suggest cutting our bloated socialist system and take the axe to medicare, medicaid, social security, etc. Instead they talk of reforming the social programs that are destroying us. How do you reform cancer?
Sometimes the central bank simply gets its timing wrong and the usual buyers have just purchased a slug of debt. Sometimes they misprice the offering (Spain and Italy used to be renowned for doing exactly this, btw). In any case there's obviously no immediate problem, as shown by Bund and BOBL futures this week. If there were any sort of serious problem, Bunds would've been down at least 2 handles and likely more. Later on, if the situation persists, who knows?
Your second question:
Be careful of reasoning, esp. about bonds, from ONE data point, as you appear to be doing in the current instance. One-off events occur in debt mkts with surprising frequency.
Right you are, Dave. No new news here — remember some of Ita;y’s auctions in the ‘90s? (chortle!!)
The things that frustrates me about currency discussions is how deceptively insular they are.
Political reactionaries consistently predict the demise of the Dollar.
What economy is a better investment than the US economy?
I really cannot fathom it.
The US economy is in decline. But which global economy is in ascendancy?
Ironically, economic decline does cause investors to flee to safe havens such as the US economy.
China, India, Spain, I dont know what country people might be thinking do not have better safer economies.
Truthfully, all these reactionaries do this stuff deliberately because they hold Gold and want to artfully twist more money out of people’s hands.
How? See the ending to the old Clancy novel ‘’Debt of Honor’’ for one method.
I do not know about the author’s motivations. Perhaps your suspicions are well founded.
However your argument for the strength of the US economy compared to other economies is weak. Recovery will take bitter medicine that no one wants to swallow. I am convinced that the stimulus will not bring recovery. It will just kick the can down the road. However, the stimulus will balloon budget deficits at a time deficits should be shrinking or at least stable. In addition, the rats have a multitude of programs aimed to lower economic growth over the long run (CO2 taxes, much more employment regulation, labor union coddling, nationalized health care, renewable energy mandates, looser litigation laws, much higher taxes on producers, ...). These programs combined with the very large deficits indicate serious long-term problems. Other countries that swallow the bitter medicine now will have a big advantage in the next decade. Other countries have moved in more conservative directions. The US is moving to big-time socialism with wealth and power concentrated in the enemies of economic freedom (labor unions, environmentalists, trial lawyers, and politicians).
Did you get "true that" from "The Wire" TV show? I love "true that" and the first season of "The Wire".
Nope. Just some local slang. :)
EVERYBODY will be affected when he raises taxes. Even those who don’t pay tax because their bosses will have less income after their higher taxes to retain all the existing employees or even hire new ones.
The significance I take away from this is the trend - the seven failures of Bund auctions started in the latter half of the year. Before that, we have to go back to 2000 for a failure of the Germans to auction off their paper at the rates they’re trying to achieve. Now we see the Bundesbank taking back about one-third of the auction, rather than allowing the rates to rise. They can’t do that for very long in their situation - they no longer mint their own currency.
They were peddling Bunds at something like 4.68% in June and as rates have come down, they’re having bigger shortfalls and auction failures. What I take away from that is the market is telling them that they’re going to have to expect higher interest rates if they want to peddle their paper - probably signifying that the market perceives more risk in the German banking system than in the US, where we’re able to have over-subscribed auctions at much lower rates.
Since the Germans are the lynchpin of the Euro, this now becomes more complicated. They can’t follow the model of Bernanke. They don’t own their own currency, and there are political implications in the rest of Europe that constrain what the Germans can do.
People are finding out in a hurry that the Euro has a problem and it is this: it is a fiat currency with no clear, single decision making sovereign behind it. Instead, it is backed by this confederation of people who like to talk, talk and talk some more about their problems.
I'm new to economy watching. Would you mind elaborating on:
1) What are your worries/predictions for the economy?
2) Do you think we have a treasury bubble that could send us reeling to a Great Depression II?
3) What do you think about the governments approach to the crisis?
4) Are you worried that we seem to do nothing but consume rather than save and make things, and how can we keep that up?
2) Ironically, economic decline does cause investors to flee to safe havens such as the US economy.
1) Isn't the rate of growth of China and India, and the continued stength of Japan and S. Korea compared to our decline huge?
2) If we can only pay back the holders of our debt by printing money with increasingly worthless dollars, won't there come a point soon where the other countries say it isn't worth it?
The Euro must unravel at some point, there's no help for it. One cannot possibly (see the US Confederation and ERM for historical details) have a ''unified'' currency wherein the participants all play by different sets of rules.
Italy goes out first, say I, followed by (in no particular order) Spain, Greece, Hungary, and sundry other of the smaller Eastern members. Cyprus have no business being in EMU, but doubtless find it convenient and will almost surely stay. Time frame: 5 years or less, bar some cataclysmic economic upheavel in the interim that effectively coerces the weak/uncooperative EMU members to stay in the Euro.
Note this doesn't mean that there will be no Euro any longer, merely that the number of nations in EMU will decrease unless the EC starts cutting yet more deals for backsliding nations to evade/avoid/ignore Maastricht...in which latter case, which is likely enough, the Euro will be at 85 vs JPY and under 100 vs USD.
This study by two UCLA economists says that The Great Depression was created by FDR's economic regulations: http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx
Won't huge inflation brought on by printing money be a bigger burden on the voters, and isn't this, afterall, a kind of tax, only without representation?
I have a brother with big bets in ETFs sponsored by Deutsche Bank and another one of the German banks. Do you think the German bank risk is high enough to warrant getting out of those ETFs for that reason alone?
It won’t be long before there’s limited demand for US 10 and 30 year Bonds...offered at 10% rates.
Another point to add re the risk of ETFs sponsored by German banks: The German government has guaranteed Deutche Bank and just Friday said it would guarantee another.
I have no idea. I’m guessing that the ETF’s are reflecting a basket of underlying issues, and those are the issues I’d look at first in any ETF.
Great video. The largest Ponzi Government in world history is about to collapse. The leaders we will have in a few weeks will be remembered for centuries as the absolute worse leaders ever to run a government.
Peter Schiff predicted the crash years out and is on many YouTube videos arguing with the status quo sages. The most famous of these videos is at:
On my last post the hyperlink didn’t show up. Doesn’t anybody know what I might be doing wrong?
Here I am trying to give you that famous Peter Schiff video again: http://www.youtube.com/watch?v=2I0QN-FYkpw
Hope it takes this time.
I don’t get why the yen is advancing. They have more debt than anyone, except Zimbabwe. Japan is in debt 170% of their GDP.
That *can't* be - the ShamWow guy says they make good stuff in Germany!
Every public housing complex I've seen since the Clinton administration has been surrounded by serious security fencing. You can bet that fencing is not there to stop Bill Gates from coming in to steal their stuff.
Those fences are to keep people *in*, and they were erected by Democrats.
Maybe there's more "on the table" than you can I can imagine(?) Soylent Green, anyone?
I do have relatively optimistic views about the economy. As ludicrous as it sounds, I am still one that does believe the fundamentals are sound. I think many of the suffering banks and mortgage holders and car companies are getting their just desserts in present economic conditions. I recently moved from Ohio to Texas and I can see rather vividly that most of the economic downturn is Blue State induced. Blue states deserve their high unemployment rates. Their economic policies have been junk for quite some time and they have survived via the larger prosperity of the more functional policies of red states.
I also think low gas prices are a huge windfall to our economy. Oil prices were jacked in an international effort to trash our economy for the election. I think that worked pretty well but now the petro states are feeling the burn of low oil prices. This breaks the global conspiracy against the US economy.
This leads me back to my original argument. The world cannot pass us by as various Doomsday analysts keep trying to assert. The US economy must lead the recovery just as it lead the downfall. Therefore, the world will invest in US treasury notes and other investments because everyone knows that the brigher future begins in the US prior to any other nation.
Pretending that China, India or Russia could surpass us is absolute folly. China may be subject to its worst year of civil unrest and reduced american consumerism is devastating to them.
I am a big believer in perception shaping reality. I do think that with a diminished drumbeat to kill our economy from the Media worshipping Obama, the economy will improve by the second half of this year. I don’t relish that fact since I don’t want Obama to get credit for this. Nonetheless, I think a 40 trillion dollar economy does not hang on the same threads that the tiny American economy of the 1930s held on.
I still think the economy of the late 1970s was far worse than today.
I still do not see how all the America bashers imagine the global economy restoring itself without America. I also don’t see how Americans would just willingly resign themselves to being permanently unemployed. Honestly, we all know there are jobs out there. They are not the jobs we are willing to accept because the benefits and wages are too low. That is completely different than a structurally deficient economy where one can literally not find work.
The automakers are a microcosm of the larger probelm. You actually cannot and should not pay a person 80-100 dollars an hour to build a car when someone could make it for half of that wage. Cars could still be made in America— which they are— but not at that wage. The completely restructuring of housing prices, gas prices, wages and other skewed values will yield a more productive an efficient American economy than any other economy of the world. We can only delay the inevitable with government spending. These inefficiencies will be resolved.