Astounding Facts About Fed Treasury Purchases

The risk assets are still getting taken to the woodshed this morning, and once again, even stocks are getting sold. So there’s nowhere to hide these days from the dollar. Even Treasuries aren’t seeing a steady flow to them these days. So David Freese isn’t the only one swinging a big stick these days; the dollar has one, too!

Speaking of Treasuries, I read a story the other day (Thanks, Dennis!) from last week, which detailed the Fed’s shenanigans in the Treasury auctions. I suggest you sit down for this one. Did you know that the in 2011, The Fed purchased 61% of the total net Treasury obligations that were issued? Prior to 2008, the amounts that the Fed would purchase were negligible at best!

So remember when people that should know better would spout off about how the rest of the world doesn’t care how much debt the US builds, because they buy all our debt? Shoot, even former Fed Vice Chairman Alan Blinder said, “If you look at the markets, they’re practically falling over themselves to lend money to the federal government.”

And don’t think for a minute that the foreign buyers/holders of Treasuries aren’t noticing what the Fed is doing. Foreign purchases of US Treasury debt fell to 1.9% of GDP in 2011, from 6% of GDP in 2009. And it’s not just foreign purchasers of Treasuries that are taking notice. Here in the US, the private sector (banks, mutual funds, corporations and individuals) has reduced their purchases of US Treasury debt to 0.9% of GDP in 2011, plunging from 6% of GDP in 2009.

And that brings me to this conclusion, folks. US Treasury yields have been pretty constant during all this. But so too was Greek debt, for 10 years, while the Greeks failed to get spending under control, and then the Minsky moment came for the Greeks when the markets realized the size of the debt in Greece, and we all know what happened to Greek government bonds then.

Don’t think for a moment that it can’t happen here. And everyone, needs to repeat after me: “The market demand for US Treasury debt is NOT limitless!”

That goes for any country, too! Which is why Spain had a problem with their auction the other day, and why yields in the peripheral countries are much higher than in Germany.

So how does Japan get away with their soaring debt? Well, for the most part, the debt issuance in Japan is funded by the Japanese — not the Japanese government, but the Japanese private sector (see above for description). But how much longer can that go on? Remember, that demand for debt issuance is NOT limitless!

And that brings me something I read yesterday, from one of my favorite people to read, David Rosenberg: “One should be screening for currencies that are represented by pro-business governments, are backed by responsible central banks, proven and probable reserves in the ground and have AAA national balance sheets.”

I don’t see that as any different than what I’ve preached for years. Surplus countries, countries that have “something” that other countries want, responsible central banks and the ability to attract investors — these are the things I use to value a currency. So as you can see, great minds think alike! HA! Chuck, you don’t have the gray matter that David Rosenberg has, so don’t even go there! Sorry, self, I didn’t mean to upset you!

Well, with the weakness in the euro (EUR) this week and the relative steadiness of the Swiss franc (CHF), the “floor” that the Swiss National Bank (SNB) put in place back in September, in which the euro/franc cross could not trade through 1.20, is really beginning to see some pressure. In fact, for a minute or two this morning, the cross did trade through the 1.20 level, but sits now within spittin’ distance at 1.2025.

What will the SNB do should this cross really, truly breach the floor level of 1.20? That’s a good question, kids, but for all of you at home keeping score, you might want to take a note here, because Chuck thinks that should 1.20 be really, truly breached, the SNB will intervene, and sell francs and buy euros. That is if they have a strong backbone. If they don’t have a strong backbone, the markets will drive the franc higher once again.

In the old days of the Pfennig, I would have called what the SNB needs something other than a strong backbone. But with everything I write being scrutinized now, it has squashed a lot of my style in writing. I bet you were wondering what happened to the “old Chuck,” the one that would call a dolt a dolt, and not bat an eye. Well, out back on my patio, you’ll still hear the “old Chuck”; but in writing, it’s the new me!

OK, remember the “Olympics factor”? When we first began doing currencies at the old Mark Twain Bank here in St. Louis, we began to notice how currencies from countries would see a bump in value — and sometimes, meaningful bumps — whenever a country was about to be the host country for the Olympics.

So if that were to remain true to form, the British pound sterling (GBP) should see a bump, as the 2012 Summer Olympics will be held in London. Is that a reason to buy sterling? Probably not, given all the problems in the land of the Beatles. But it’s an interesting thing to keep a watch on, eh?

I don’t know if you keep track of this or not, but the Chinese renminbi (CNY) has really backed off the accelerator this past week. The renminbi has lost some ground to the dollar, and since the currency’s value is directed by the Chinese government, you have to think that the Chinese government wanted to take the foot off the accelerator. But why? Exports, China’s bread and butter for the economy as the domestic demand-driven economy builds steam, have really slowed lately. So to keep exports flying high, the renminbi is pushed lower. This reduces the cost of the goods China exports.

Is this something we should be concerned about as renminbi holders? We’ve seen this all before, folks. I would think, given the info I gave you yesterday about how China has doubled the amount foreigners can invest in Chinese stocks, bonds and bank deposits, that these moves by the Chinese government would be limited. But then it’s the Chinese government. I don’t know any more than anyone else about what they are going to do!

China is China and still a communist country that can do whatever it wishes. But with that in mind, let me remind you that I still, in my heart of hearts, believe that China doesn’t not want the dollar standard to be in place in the coming years and is doing what it can to push its agenda of removing the dollar as the reserve currency of the world, which means opening their economy and markets, gaining a wider distribution of their currency and allowing the currency to float.

This morning, it’s France’s turn to auction some debt, and they too have found things to be a bit difficult, thus causing a rise in yields. Next week, I see that Italy will have a debt auction. Now that should be quite interesting, eh?

But for today, the problems with the French auction have caused further slippage in the euro. Now the single unit has fallen to 1.3075. On Monday, before the FOMC meeting minutes reflected a different light on further stimulus than Big Ben had given us, the euro was trading around 1.3325. So that’s about 2% lost this week.

I didn’t talk about gold and silver yesterday, because I’m really at a loss for words as to what’s happening here. This is beyond price manipulation, folks. But I was encouraged a bit yesterday when I saw some comments by Jim Rogers.

Longtime readers know that I hold what my longtime friend Jim Rogers has to say in high regard. He doesn’t beat around the bush, and calls a dolt a dolt.

In speaking at a conference in Bucharest yesterday, Jim Rogers said that he will buy more silver and gold because he expects the prices of the two metals to decline in the near term. So he’s looking for cheaper prices in gold and silver in the near term as buying opportunities. Good thoughts from Jim Rogers.

Tomorrow is Good Friday. The markets will be thinned out, and we’ll have a Jobs Jamboree to sift through. This could be something that triggers a huge swing in the risk assets, given the lack of participants in the markets. I’ll remind you again tomorrow morning, but for now, keep in mind that you may want to batten down the hatches and ride out tomorrow, because it could get wild and crazy. Like those two wild and crazy Americans!

Then, from Reuters this morning:

“Half a decade into the deepest US housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.

“But a painful part two of the slump looks set to unfold: Many more US homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.

“‘We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,’ said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.”

Yes, this is what I’ve feared was coming for some time now: the second round of foreclosures now that the “robo-signing” stuff has been put to bed has been hanging over the housing recovery like the sword of Damocles.

To recap: The selling of the risk assets continued yesterday and through the overnight sessions, with no risk assets willing to stand up and fight the dollar right now. The Fed has become the home of a majority of Treasury issuance, with not only foreigners but the US private sector holding of Treasuries falling off a cliff. The euro/franc “floor” of 1.20 was breached overnight, and now we wait to see what the SNB is made of.

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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