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Treasury Demand Enough to Absorb Supply, Goldman Says (Update1)
By Bo Nielsen
Aug. 19 (Bloomberg) -- Demand for Treasuries will be sufficient to absorb the record amount of debt the U.S. is selling amid a $12.8 trillion pledge by policy makers to combat the recession, according to Goldman Sachs Group Inc.
Purchases by foreign investors will be augmented by appetite from U.S.-based buyers looking to add to savings or increase the duration of their assets, Michael Vaknin, an analyst for Goldman Sachs in London, wrote in a note today.
President Barack Obama has pushed U.S. marketable debt to an unprecedented $6.78 trillion as the government seeks to revive the world’s biggest economy. Billionaire investor Warren Buffett said it may pose a threat as ominous as the crisis itself. The Federal Reserve has more than doubled the size of its balance sheet in the past 12 months to $2.02 trillion by buying Treasuries and other securities to unlock credit markets.
“When you add up the picture on Fed buying, foreign participation and domestic savings, you get a fairly supportive picture for Treasuries,” Vaknin said today in an interview. “Over the past year, bond yields have drifted meaningfully higher relative to what could have been justified by macro fundamentals and the decline in yields from the local highs in early June can be partly seen as a valuation correction.”
Gains for Treasuries will push the yield on the benchmark 10-year note to 3.3 percent in three months and 3.0 percent in six months, according to Goldman Sachs. The yield fell 7 basis points to 3.44 percent as of 11:18 a.m. in New York today, according to BGCantor Market Data.
The foreign creditors are moving away from the United States, plain and simple. The big bold red series shows the Grand Net US$-based bond reduction in net flow change from a high around $950 billion in early 2007 to a figure now approaching only $200 billion, thus a severe cut in net inflow. The greater alarm comes from the USCorporate Bonds in the yellow series, whose net flow change is down from a plus $600 billion high at the same time to a slight net outflow negative figure now. The USAgency Mortgage Bonds in chartreuse/mauve/pink have net flow change with peak of plus $300 billion at the same time to a net outflow of a frightening $150 billion now. Since the important peak for mortgage and corporate bonds, the USTreasurys in blue series have recovered from a $200 billion net positive inflow to a $400 billion net inflow. However, one should suspect that the USFed is purchasing the USTreasurys from convenient accounts bearing foreign names, using American funds, and laced with sinister motives founded in deception. Foreigners in all likelihood are not the primary purchasers.
The foreign purchase declines from peak levels two years ago have fallen off a cliff, much like that of Acapulco. The image of a brave diver is also quite vivid, as risk is determined by the shifting water (liquidity) level. The United States credit markets are losing their legitimate liquidity and increasingly are turning to the desperate reckless alternative, namely the dreaded MONETIZATION. Mortgages in the United States must maintain funding from the USFed and USGovt by direct purchase, no longer a market action. There are mainly sellers. The corporations in the US must maintain funding from a more desperate means. See the Samurai Bonds offered in Japanese Yen denomination, the ones growing in popularity. My view is that a good slice of USGovt Treasury Bonds will be denominated in foreign currency routinely within one year, if the US$ system survives in its current form that long. The conclusion is clear from the messages, both graphic and statistical, that THE US$-BASED BONDS OF ALL TYPES WILL RELY ON DIRECT MONETIZATION VERY SOON OR IMMEDIATELY.
How does this report fit into your thesis?
This entire affair is far from settled, in my opinion. So far, we have two bloggers, one of whom, Martenson, makes a living selling analysis of financial data. In my opinion, all he has done is present some interesting facts, which COULD be interpreted as fraud, but could also be just coincidence. Personally, I don't have a dog in this fight, so let's just see where this goes.
Maybe we should all follow the "Breaking News" thread title format when we are opening with an article from another site & keep the original Title. It might cause less confusion.
Figures released by the Treasury Department this week indicated that China reduced its holdings of Treasury securities by $25 billion in June, the most China had ever sold in a month.
China and Hong Kong, which is reported separately but is combined under China in the accompanying graphic, together covered more than half of the increase in the amount of Treasuries sold to the public — that is, to buyers other than United States government agencies like the Federal Reserve or Social Security — in 2006.
That share had fallen to 22 percent last year, when the government increased its public debt by a record $1.2 trillion. In the first half of 2009, China and Hong Kong acquired only 9 percent of the more than $800 billion worth of Treasuries that were sold.
The charts reflect ownership of Treasuries by China and Hong Kong, Japan and four other countries — South Korea, Singapore, Taiwan and Thailand — since 1994. On a dollar basis, the holdings are increasing, but their share of outstanding Treasuries has stopped growing.
China cuts Treasury holding to fund foreign deals
Not all the June sales of U.S. Treasuries were turned into cash. Half the sales of $51.8 billion short-dated debt were rotated into longer-dated maturities, indicating that Beijing now cares more about yield and worries less about the safety of its investment, reversing an earlier trend of reducing the average life of the holdings.
US stops reliance on short-term debt
Indirect bidders bought 45.7 per cent of the US$23 billion in 10-year notes sold just before the conclusion of the Fed's policy meeting. They bought 48.1 per cent of the record US$15 billion in 30-year bonds sold the next day, higher than the average of 32.8 per cent at the past 10 auctions.