Tuesday, July 6, 2010

The Risk of Regional Defaults in the U.S. and the Crash of the U.S. Bond Market

FT has a feature on the possibility of higher rates in the second half of  2010 for municipalities in the U.S. The analysis is dead on.

The feature states that local municipalities can file bankruptcy (whereas states technically can not). FT also points out that the Federal government is likely to step in to bailout municipalities on the brink.

The big kicker to all this is that Social Security has gone cash flow negative which means that they are starting to sell their Treasury securities in competition with the Treasury, at a time when the Treasury will be facing its own huge deficits--aside from any state and local bailouts they may have to be a part of. This means huge money raises by the Treasury.

At some point this all has to blow up with either skyrocketing interest rates, or the Fed stepping in to buy the Treasury paper.Under either option, it is a death sentence for the U.S. bond market. This not the time to be buying long-term dollar denominated debt.

1 comment:

  1. Wenzel, if social security funds were not used by the federal government to pay for the federal budget, would social security still be operating in the red? Why or why not?