By Daniel Kruger and Susanne Walker
June 1 – Bloomberg
The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show. The Treasury said bidding from foreigners was above average at its $101 billion of note auctions last week.
The long bond yields were on a tear last week. If that is what happens when China is buying, what the heck is gonna happen when China sells?
U.S. government securities have tumbled 4.3 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion. The purchases by foreigners show that, at least for now, there’s little chance of buyers abandoning the U.S. or threatening the dollar’s status as the world’s reserve currency.
Now one week’s worth of buying makes a trend? Didn’t a few of the last auctions show that China was not buying and the only buyer was Caribbean offshore, and who knows who that is? Do the writers of this article understand that China has entered into agreements with Argentina, Russia, Indonesia, and other countries to settle in yuan and not dollars?
“The U.S. Treasury market is the widest, deepest, most actively traded market in the world,” said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. “There’s really no other game in town.”
No other game in town? Well heck, then just go ahead and print baby, print. This must be one of the guys who along with Greenspan, Paulson, Cramer, and Bernanke said the subprime problem is contained.
Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at the Treasury’s debt auctions, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008.
“There’s an awful lot of Treasury issuance going on,” said Michael Moran, the chief economist at Daiwa Securities America Inc. in New York. “In the back of everyone’s mind there’s a realization that although the short-term fiscal situation is difficult, so too is the long-term situation. People are looking down the road, seeing budget deficits remaining wide and they are thinking the U.S. possibly can lose its AAA rating.”
Realization? How about a realization of reality?
Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget deficit to 3 percent of gross domestic product or smaller. That would be down from a projected 12.9 percent this year.
Okay, maybe I am just not all that bright, but I am having a difficult time figuring how borrowing a record $3.25 trillion is cutting the budget deficit. How does Geithner talk like this without making himself sick?
Geithner arrived in Beijing yesterday with a pledge to control borrowing as he sought to reassure China its holdings of U.S. government debt are safe. “No one is going to be more concerned about future deficits than we are,” he told reporters on the way to two days of meetings in China’s capital.
Chinese Premier Wen Jiabao said in March that the country was “worried” about its investment and wanted assurances the value of its holdings would be protected.
“I hope Geithner’s visit can soothe our nerves,” said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “The Chinese public is worried about the safety of its foreign- exchange reserves,” Yu said in an e-mail.
Seventeen of 23 Chinese economists surveyed in connection with Geithner’s visit said Treasuries are a “great risk” for the economy, according to a Chinese state media report yesterday. Still, the majority argued against quickly cutting them, the Beijing-based Global Times reported.
Huh? They want assurances? Like Geithner telling them no one is more concerned than the US? Isn’t that like asking a used car salesman to tell you that you are getting a good deal on the used car he is selling you? I don’t care how politically incorrect I am about to sound. The Chinese are stupid.
The bond vigilantes are gonna short every bond they can borrow. And then some.
edit: Please see the comments section for a moderation of my politically incorrect statement.
