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May 26th, 2009

Treasury finding resistance to US debt

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We’ve written about this before, but this is one trend that you would do well to monitor, because odds are it will get worse:

The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September. [emphasis added]

“The dynamic is just getting overwhelming,” said RBC Capital Markets.

The US Treasury is selling $40bn of two-year notes on Tuesday, $35bn of five-year bonds on Wednesday, and $25bn of seven-year debt on Thursday. While the US has not yet suffered the indignity of a failed auction – unlike Britain and Germany – traders are watching closely to see what share is being purchased by US government itself in pure “monetisation” of the deficit. …

The US is not alone in facing a deficit crisis. Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe. Kyle Bass from the US fund Hayman Advisors said the markets were choking on debt. …

As we noted in our most recent post, investors — knowing full well that US inflation will rise — will want a better return. With such a huge and growing global supply, they can get it, especially when you own so much of it already. The stark truth is that the US has to have that investment cash.

The inevitable result? Higher interest rates — good for savers; for borrowers, not so much.

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One Response to “Treasury finding resistance to US debt”

  1. Stevie Nichts Says: May 26th, 2009 at 10:46 pm

    I like the explanation at http://rsmccain.blogspot.com/2009/05/what-did-i-tell-you-about-bonds.html … and he poses a very good question:

    I’m not an economist, of course, but you don’t have to be an economist to understand (a) bonds are sold in a market, (b) the pace of deficit spending means a huge increase in the supply of debt, and (c) the loss of capital in the meltdown means weak demand for securities.

    OK, so even if there were enough demand to buy up all these bonds (i.e., the Treasury notes issued to pay for the deficit spending), if the Treasury sucks up that much capital, what will be the impact on the stock market? And what will this mean for the amount of capital available to private borrowers including businesses?

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