Sunday, January 20, 2019

The Treasury Debt Doomsday Scenario

Here are some solid observations from Joe Rennison at the Financial Times on what could really crash the entire bond market:

China’ [of US Treasury securities] fell by $46bn to $1.14tn...Analysts say it is likely that China, at least to some extent, is choosing to sell dollars to prop up its currency, rather than buying US government bonds...

China is not alone; its sales are part of a broader shift in demand for Treasuries. And this is where investors’ attention should really be focused.

Foreign investors’ appetite for US government debt, primarily driven by official institutions such as central banks and sovereign wealth funds, has plateaued. Overall holdings of Treasuries by foreign investors stand at $6.2tn, in line with where it was at the end of 2014...

This structural shift comes at a critical time. The US treasury department is increasing its debt issuance to fund rising government spending — amplified by the Trump administration’s tax cut last year — and to plug the hole left by the Fed as it reduces the size of its balance sheet.

That means foreign demand is dwindling just as supply is rising. Foreign investors now make up 40 per cent of the US Treasury market, their lowest level since 2003. “This is what is more worrying,” said  Torsten Slok, chief international economist at Deutsche Bank...

Demand at auctions of Treasuries has already decreased, judging by a falling bid-to-cover ratio. Primary dealers, typically banks that have to bid on a pro-rata share of each auction to ensure the debt is sold, have seen their holdings of US government debt soar.

This retreat of foreign buyers from the Treasury market could, over time, lead to upward pressure on borrowing costs for the US government. But it could also bring a “crowding out” effect, as big holders of government debt in the US pull back from investing in other asset classes, such as corporate credit. A contraction in domestic demand for credit would, in turn, limit companies’ access to bonds and loans, potentially hurting US growth.

That longer-term risk should not be ignored and it could be exacerbated if the US trade war meets with some success on its own terms, shrinking the country’s trade deficits. That would cause foreign demand for Treasuries to fade, piling pressure on the domestic bond market — at a time when a widening fiscal deficit is forcing debt issuance higher.

That, as Mr Slok put it, is “the doomsday scenario”.

1 comment:

  1. As if there are not other reasons??This is like a blank check....

    Has the Government Legalized Secret Defense Spending?

    While a noisy Supreme Court fight captivated America last fall, an obscure federal accounting body quietly approved a system of classified money-moving

    The only thing that did not make the news was an announcement by a little-known government body called the Federal Accounting Standards Advisory Board — FASAB — that essentially legalized secret national security spending. The new guidance, “SFFAS 56 – CLASSIFIED ACTIVITIES” permits government agencies to “modify” public financial statements and move expenditures from one line item to another. It also expressly allows federal agencies to refrain from telling taxpayers if and when public financial statements have been altered.

    To Michigan State professor Mark Skidmore, who’s been studying discrepancies in defense expenditures for years, the new ruling ­— and the lack of public response to it — was a shock.

    “From this point forward,” he says, “the federal government will keep two sets of books, one modified book for the public and one true book that is hidden.”

    “It diminishes the credibility of all public budget documents,” he says.

    I spent weeks trying to find a more harmless explanation for SFFAS 56, or at least one that did not amount to a rule that allows federal officials to fake public financial reports.