Monday, February 22, 2010

CNBC: State and Federal Borrowing Is Crowding Out Everyone Else

Told you so.

Here's CNBC's take on it:

As if the credit markets aren’t already under enough pressure, the mass intrusion of state and federal debt will only make matters worse.

At a time when credit availability is at a premium, the federal government has launched its biggest series of Treasury auctions yet while more states are issuing debt in order to support their spending needs.

Consumers and businesses looking to borrow and investors trying to find a way to navigate a marketplace heading toward higher interest rates will find the conditions daunting, experts say.

“Clearly the government is not the 800-pound gorilla—it’s the 8,000-pound gorilla in the credit markets nowadays,” says Mike Larson, analyst at Weiss Research in Jupiter, Fla. “These numbers are just so mind-boggling. Really what’s going on is you have intractable debt and deficit problems in the country that neither side wants to tackle in a meaningful way, so the market is doing it for them.”

The phenomenon in which public entities push private borrowers out of the market is often referred to as “crowding out.” The result usually is higher borrowing rates and more difficult choices for investors who have to make sure they’re not putting their money in assets that are sensitive to interest rate moves.

While that problem specifically has not hit the market full bore yet, the signs for intense credit pressure are there.

“You are crowding out a lot of other borrowing from the private sector and are at the very least pushing up interest rates,” says Michael Pento, chief economist at Delta Global Advisors. “We have this huge system of artificially low interest rates and that is in the process of reversing.”

Early signs of crowding-out pressure in the credit markets have come from the latest Treasury auctions.

While 2009 saw demand for Treasurys fairly strong, the early signs in 2010 aren’t as good.

Longer-dated securities have faced weak demand so far, and the small auction Monday of 30-year inflation-protected debt that kicks off a record $126 billion debt sale this week followed the trend.

At the same time, banks have been loathe to put money on the streets as long as they can borrow at historically low levels and use Treasurys to protect capital while still seeing considerable yield.

“Instead of making loans, banks are just playing the yield curve,” Larson says. “We have such a tasty-looking spread between short-term and long-term rates, some money that otherwise would go toward lending is rebuilding balance sheets."

Next stop, much higher rates.

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