Wednesday, March 24, 2010

Zero Hedge Echoes Our Call that "The UST Is Likely Considering An Orchestrated Move Of Risky Asset Into Bills"

Credit Bubble Stocks has been saying for a while that the U.S. Treasury has gotten itself into a jam with too much of the national debt now financed with short term paper.

This is a problem for two reasons. First, it creates rollover risk. Second, you can't "inflate away" debts of very short tenor, for the simple reason that your creditors will have the opportunity to demand higher coupons at frequent intervals. They see you inflating and you end up digging a deeper hole because you are rolling over debt so often!

So from their (Geithner and Bernanke) perspective, it must seem imperative to lengthen the average maturity of the national debt. But what the consensus doesn't appreciate is how easily this could be accomplished.

An equities crash. Remember when the 30-year Treasury rate hit 2.5%? If we start having a sickening crash again, they can sell as many T bonds as they want.
The latest post from Zero Hedge shows they are thinking the same thing we are: "the UST Is Likely Considering An Orchestrated Move Of Risky Asset Into Bills."
In summary: the Treasury is running out of time in which to orchestrate a massive rush away from risky assets into the sweet spot for UST interest rates: risk-free Bill holdings. In other words, a stock market crash is long-overdue if the Treasury does not want to face a major spike in rates and drop in Treasury demand in the immediate future.

Alas, the Treasury will need to generate wholesale  interest for Bills in some way in the near future, or else it will drown itself in the vicious cycle combination of increasing interest payments pushing rates higher, etc. And what creates a scramble for Bills better than anything?
Why a massive market crash of course.
Look how the long bond got smashed today!
 Today there was an auction of 5 year notes that did not go very well. Hence the long bond selloff.

Watch the auction schedule of U.S. Treasury Securities. Tomorrow they are going to try to move some 7 year notes. We will see!


Anonymous said...

So... if I'm already invested in bonds as a long term investment, should I stay there, or move to another strategy?

Mike Barton said...

The next step after this is to nationalized IRAs and 401Ks, making all those funds available to purchase Treasuries. It'll be sold as safe investments to the suckers . . . err people.

Add to that your typical 3%-5% Fed-sponsored inflation rate and we'll have the worst of all worlds: bloated, undisciplined government, broker-dealers getting richer at our expense thanks to a completely captured market and retirement plans that give us negative real returns.

That's the setup. Government and private-sector managers working hand in hand to suck every last penny into their control.

CP said...

1. It depends on what kind of bonds. Be more specific.

2. I think that stampeding investors from equities into government debt will be highly successful, and will make confiscations unnecessary at least for a while.

Anonymous said...

Moved some of my 401K into PIMCO to weather the storm. Didn't have much for choices because of who manages the company's accounts.

CP said...

401(k)'s are tough - it's usually a matter of choosing the least worst investment option.