Monday may be a holiday but it looks as if the action in the bond market might be fast and furious for the rest of the week. The Treasury has a lot to auction but before we get to that let’s take a quick look at a couple other factors that might impinge on the success of the auctions.
First, from the Telegraph comes news that the Chinese are griping again about us printing money and this time they’re taking their case straight to a member of the Fed. Dallas Fed President Richard Fisher just returned from China and said he was constantly besieged on the issue by the Chinese.
Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”
“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.
His recent trip to the Far East appears to have been a stark reminder that Asia’s “Confucian” culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.
This is the umpteenth time that we’ve heard Chinese officialdom whining about this, so you would expect to see some tangible evidence that they are indeed pulling out of treasuries. Problem is, it looks as if central banks in general and that includes the Chinese haven’t lost their appetite at all.
This from Brad Stetser:
There has been a lot of talk about the dollar. And about the shift in China’s rhetoric; China no longer seems all that happy to continue to add to its already considerable dollar reserves. But, well, there isn’t much — I would even say not any — evidence that central banks have really lost their appetite for dollar reserves. The rise in foreign central banks’ custodial holdings at the Fed over the last 13 weeks has been rather impressive.
It is back at peak or near peak levels.
In essence they’re still buying, but Setser notes a change in their buying habits:
Clearly, though, something has changed.
And I suspect the main change is that almost all the dollars that central banks are buying are getting channeled into shorter-term Treasury bills, not longer-term notes. That is quite different than in the past. In 2003 and 2004 — and again in 2007 and early 2008 — a spike in central bank intervention would lead to a rise in central bank demand for longer-term bonds.
As the yields on longer-term Treasuries rise, though, the opportunity cost — or at least the foregone interest income — of staying in bills rises … at some point, I would guess that some reserve managers will need a bit of income, and become convinced that yields on longer-dated Treasuries have risen by as much as they are going to rise.
That’s an important caveat to keep in mind as we look at this weeks issuance.
Another article in the Telegraph points out that the Treasury plans to raise $100 billion this week. They’re selling $40 billion of two-year notes, $35 billion of five-year bonds and $25 billion of seven-year notes. That’s a big slug for a market that has been less than robust over the past few weeks.
It’s no secret that interest rates have been rising. The 10-year was up 33 basis points to 3.45%. Some of the increase was due to the talk about the U.K. possibly losing its AAA rating and the implications for the U.S. but by the same token, buyers have not been particularly aggressive and some private money has disappeared as investors seem more willing to take on risk in equities and the corporate bond market.
There’s little doubt that all of the debt will be sold, the question is at what price. If the auctions prove to be sketchy and rates continue to rise then it could be cause for some concern. The deficit financed at near no cost is one thing, if it has to be financed at higher rates, that becomes another issue entirely. Any serious uptick in rates could also spell trouble for the recovery such as it is. The only real bright spot seems to be housing where there appears to be some serious demand building for lower priced homes. Throw higher mortgage rates at this market and it will wilt quickly.
No doubt the Fed is watching or will be watching rates closely. They haven’t announced any target rate for the 10-year but that doesn’t mean they don’t have one. If it does appear to be getting out of control, I think that you can expect them to be in buying aggressively regardless of whether that displeases the Chinese or any other critics.
So keep an eye on the bond markets this week. There will probably be some pretty good indications of just how much trouble or maybe lack thereof we’re going to have financing this deficit and recovery effort. It won’t be definitive but it will provide some good information.
I think you can discount a lot of the talk about the prolifigate spending of the U.S. for the time being. I don’t mean this as a boast, just a simple statement of reality. The rest of the world is not going to get moving forward unless the U.S. is pulling them along. They have a vested interest in our recovery and will continue to support it out of that self-interest. They will continue to buy our debt though they may gag when they do so.
Now in the longer term … well let’s just say that there are probably going to be some serious changes.