Saturday, March 27, 2010

Last week, while everyone else was talking about health-care reform...

The following WSJ article and CNBC video are a perfect prelude to my upcoming treatise on debt and taxation.

I guess the indigestion that was destined to come at the debt buffet is starting sooner than most people thought. [The emphasis is on the words "most people"--not all people, and certainly not this person or his consultancy.] With a reading of this article from Friday's Journal, and with an objective understanding of the facts about the U.S. debt situation, few people, even the least informed observer, can deny what's going on here: our credit line is maxed out, and if our so-called leaders do not begin to take corrective actions now, history will be deemed this only one of the first major rumblings ahead of a "debt quake" that will scar our nation for generations. The unfortunate thing about it is, neither the Fed nor this fiscally-aloof administration--to say nothing of a hyper-partisan Congress--seems to not understand this, or they are all too eager to ignore it in the short term. Either way, as they push forward with agendas that do not address America's single, greatest threat, their actions set our nation on the course toward ruination.

I strongly encourage you to share this post with your friends. It is time that a real conversation begins... --gh

MARCH 26, 2010
Debt Fears Send Rates Up

Unease at Deficit Hurts Demand for Treasurys; Mortgage Costs on the Rise


A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market.

For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit.

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year-note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year-note sale Thursday.

The poor demand, especially from foreign investors, sent the bonds’ prices sharply lower and yields higher. It lifted the yield on the 10-year note to 3.9%—its highest since last June, and approaching the psychologically important 4% mark. That mark has been pierced only briefly since the financial crisis in 2008.

Investors’ response marked a big shift from auctions in recent months in which major foreign buyers, such as central banks, had snapped up Treasurys. It could spell trouble for the U.S. housing market; the rates on many mortgages are linked to the yield on the 10-year note.

The move up in its yield coincides with the impending end of the Federal Reserve’s program to support the mortgage market. The Fed has bought $1.25 trillion of mortgage-backed securities, bolstering their prices and thus holding down their yields.

In just the past two days, the rate on 30-year Fannie Mae mortgage securities has risen to 4.5% from 4.3%. Once fees by lenders are tacked on, this means mortgage rates above 5%. Thomas Lawler, a housing economist, says some bigger lenders have already raised rates. Some were quoting 30-year mortgages at 5.125% Thursday morning, up from 4.875% earlier in the week, he said in a note to clients.

Concerns about the U.S. budget deficit are beginning to hurt the Treasury market, said Steve Rodosky, head of Treasury and derivatives trading at bond giant Pacific Investment Management Co. He said he is increasingly worried about the U.S. fiscal outlook.

In all, the U.S. government is expected to sell $1.6 trillion in debt this year, including the $118 billion sold this week.
There are some temporary factors behind the week’s lackluster demand, such as a reluctance by Japanese investors to make new investments ahead of their fiscal year-end March 31.

While this could be just “noise” in the markets, “I think it involves a greater, long-term concern about deficits in the U.S., about Social Security being in a deficit,” said Brian Fabbri, chief economist North America at BNP Paribas. “And all of the concerns about the U.S. have been heightened by concerns about Greece.”

The jitters in Treasurys haven’t spread to other markets. Stocks remain near 18-month highs. The Dow Jones Industrial Average came within 45 points of the 11000 mark on Thursday before falling back. It closed up 5.06 points at 10841.21.

Bruce Bittles, a strategist at R.W. Baird & Co., said he remains bullish on stocks for now. But he said if the yield on 10-year Treasurys creeps above 4%, that would be a signal to start dialing back his clients’ stock holdings.

“In a debt-based economy like we have in the U.S., it doesn’t take much of a hit from bond yields to cause some real pain,” by raising costs to finance economic activity, he said.

The dollar has rallied, even as Treasurys have sold off. Usually, concerns about budget deficits send a currency lower. But investors appear to be betting on better prospects for a recovery in the U.S. than in Europe.

Adding to the focus on the Treasurys’ woes has been an unusual development in an important, but usually ignored, market: interest-rate swaps. These common derivatives entail contracts that typically involve trading one stream of interest income for another. And in the past week, investors are being paid more to own U.S. Treasurys than U.S. corporate bonds.

This development “is causing a lot of people to start scratching their heads, trying to understand what’s going on,” said BNP’s Mr. Fabbri. One explanation, he said, may be investors are more comfortable with the risks of owning bonds backed by U.S. corporations than the government. The big question is whether this slippage in demand for Treasurys will prove temporary or is the start of a trend.

For the most part, investors have taken at face value statements from Federal Reserve officials, including Chairman Ben Bernanke on Thursday, that the Fed isn’t about to start raising the short-term rate it controls. But a growing number of investors expect that at its next policy-making meeting in late April, the Fed may step back from its pledge to keep short-term rates low for an “extended period.”

Longer-term interest rates aren’t set by the Fed but move on their own, in response to supply and demand. And some argue that the bond market has been too confident about these longer-term rates remaining low, at a time when the economy is slowly improving and the government is running huge budget deficits.



mike carson said...

Thanks for sharing this news. With all the fighting over health-care reform, you'd think nothing else was going on in the world. Cannot wait to read your treatise.

Tyler L. said...

You will find a way to turn this on Obama as just a problem he created, no doubt.

Anonymous said...

Can't we just buy our own debt if foreigners stopped buying so much of it? Maybe I am not understanding something here.

Mario (Texas) said...

Once again, I see your focus on Numbers, the focus should be on people. Think about your life and what would have been had we made a wrong turn. Would that mean your life has less value than others. The book "Lord Of The Flies" reminds me of the republican party. Once thing break down they become like everybody elae. The thing you guys always profess during time when you are in charge is the respect of the system and the system has spoken. But when the systems speaks in the other direction is the end of the world. End of the day I still can't get past 240 months to 116..Thats Twice the time and none of the blame. I remember the father of an ex girlfriend saying 'some people can be too smart for their own good. They can build a Rocket to the moon but get lost going to the mall..Republicans are looking for the mall...The only difference is with people like Palin, McCain they weren't smart enough to build a rocket..Look at the resume of the last two Rupublican candidates mr 899 out of 903 and mrs " I can see Russia from Alaska" ....You got to be kidding me..Forget the numbers, your party is a party of fools in your leadership. Thats why "most" people not listening...

I'm not denying your numbers. I'm denying "your" solutions or the ability of "your" Party to correct a situation "they" are as much to blame for as Democrats. You want to blame me cause unlike Republicans I will not blindly follow foolish people just cause they share the same rhetoric. Is President Obama correct, let's say he's 100% wrong. The conclusion you are trying to draw is if somehow McCain/Palin won we would be on our way to better times. That's Republican arrogance as usual, Richard Steele a fool, Mitt Romney a fool, Sarah Palin a fool... Not because I disagree with them but cause they are fools. I graduated from college and have a degree in finance just as u might. I understand numbers. But I also been in situations where I know its not what gets you out but who. The same people with all the answers now are the same people with no answer for 20 yrs. How long has McCain been in Congress.. What did he do for health care when Barack Obama was still just 22 yrs old and in college.. Nothing, that's what. You keep it to numbers as your default cause you know end of the day numbers don't lie. I agree but Republicans do... That's why I'm not listening. And just because I'm smart enough to see B.S. When I see it you want to say I'm not listening. What you don't grasp is that I did listen. And after listening I voted for Obama. ....not McCain, not Palin, not Bush, not Cheney but Obama....get out the penthouse and hit the streets. That's why y'all lost. People don't give a damn bout numbers when gas is $5 a gallon looking out their window. Stop worrying bout 5 trillion ten years from now and start worrying bout the 30 million today.

Warren said...

Nice! Now I think that there is proof that Democrats are missing marbles. Even when the facts are plan and the solution clear, they want to clinge to their dead politics and pretend they don't know what is right.

Hey, buddy, newsflash: those 30 million will not matter when this country won't even be able to borrow to keep the government going or when the other 270 million people in this country will be poorer because of the bullshit these liberal want to ramp into law.

But you don't see that do you? It's okay that we keep taking from some to give to others, isn't it? It's okay for government to keep getting involved more and more in the free market, isn't it? Who cares how wee pay for it, huh? So long as we help pay the way for more people who don't pay taxes thanks to the EIC and who aren't giving shit to this country. Sorry but fuck that. I am tired of it.

We need to take this country back before you people take this too far.

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