Sell-Off in U.S. Treasuries Raises Sovereign Debt Fears
March 29th, 2010Via: Telegraph:
Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets.
The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be “the canary in the coal mine”, a warning to Washington that it can no longer borrow with impunity. He said there is a “huge overhang of federal debt, which we have never seen before”.
David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a “destabilising fashion”, for the wrong reasons. Growth has not been strong enough to revive fears of inflation. Commodity prices peaked in January and US home sales have fallen for the last three months, pointing to a double-dip in the housing market.
Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel. “The question is how the equity market is going to handle this back-up in rates,” he said.
The trigger for last week’s sell-off was poor demand at Treasury auctions, linked to the passage of the Obama health care reform. Critics say it will add $1 trillion (£670bn) to America’s debt over the next decade, a claim disputed fiercely by Democrats.
It is unclear whether China is selling US Treasuries after cutting its holdings for three months in a row, or what its motive may be. There are concerns that Beijing may be sending a coded message before the US Treasury rules next month on whether China is a “currency manipulator”, though experts say China is clearly still buying dollar assets because it is holding down the yuan against the greenback. Some investors may be selling Treasuries as a precaution against a trade spat.
Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.
For sure, I am not rational. But the other night I was thinking of writing a big check to friends who make furniture just to get out of US dollars and into something productive. Then buy gold or silver with the rest of it.
I have to wonder why these journalists go back to Greenspan for comment. There is something sick about the cause of death being the funeral director. Why didn’t they go to Volker?
Anyways, methinks the days of the dollar are like those of a ship sinking at sea with a leak in the hull. Exxon Valdez comes to mind.
There is going to be a large stink of this one.
I don’t like that China may hold the key to my financial future. Its like a game of poker at a casino. This is no way to run a world financial system.