Robin Harding

The favourite counterparty of the US Federal Reserve is everybody’s favourite vampire squid: Goldman Sachs. Today saw the release of transaction level data for the Fed’s Treasury dealings in the third quarter of 2010 – including the names of all of its counterparties. This is who got the business:

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James Politi

The US is little more than $200bn away – or about 2 months – away from reaching its congressionally mandated national debt limit of $14,300bn.

The need to increase it to avoid a potentially disastrous US default is the next fiscal battleground in Washington, after the lawmakers stop squabbling over a government shutdown.

Republicans want to use the opportunity to push for more spending cuts, while Democrats say this is not the place to negotiate.

On Thursday, Moody’s Investors Service offered its analysis of the likelihood that a major crisis will ensue, threatening America’s triple-A credit rating much earlier than even the most ardent fiscal hawks would imagine. Read more

China and Russia sold off substantial amounts of US debt during December – a month that saw the biggest treasuries sell-off since the collapse of Lehman’s. Market commentators entered denial mode: this was “not necessarily the start of any particular trend,” said one. “It’s too early to infer that China is shifting its diversification stance,” said another.

All this denial suggests the market is waiting for bad news – a theory backed up by volatility futures, which suggest a great deal of volatility is constantly expected roughly two months away. Whatever the date, Bad News is due in roughly two months’ time (these are VIX futures, and yes, you can buy a future on just about anything). Are these connected? Here’s one theory.

US borrowing costs have been kept artificially low for years, thanks to demand for US treasuries by world investors. The fact that the dollar is a reserve currency, and is considered safe, has kept demand for the debt high even when it is not a profitable investment. The normal laws of supply and demand are distorted. The people buying and the people selling are doing so for different reasons.

This asymmetry should be a cause for concern. Read more

Robin Harding

The NY Fed has announced its tentative schedule for bond purchases through to mid-January. The Desk plans to buy $105bn in Treasury securities. Two observations:

(1) It’s a little less than expected. The $75bn related to QE2 is unchanged, but the schedule includes only $30bn for reinvestment of mortgage prepayments, less than the $35bn a month predicted as of the beginning of November. That suggests the rise in 10-year rates is already affecting the NY Fed’s forecast of mortgage prepayments. I’m trying to find out a bit more about this but with an FOMC meeting next week I doubt the FRBNY will be especially forthcoming. Read more

Details are out for the Fed’s bond purchase plan for the rest of the year. $105bn, split into $75bn as part of the $600bn stimulus, and $30bn of ongoing reinvestment of principal payments.

The bond purchase plan is spread across 2012-2040 maturities, though it is front loaded with far more bonds to be bought with 2013-2020 maturities (as the chart shows). Almost all of the purchases will be purchases of regular Treasuries, with just (just!) $2-4bn of TIPS on the menu.

Full details in table below the jump: Read more

It is good news that the New York Fed is engaged in a campaign to get key staffers to finally think about asset prices.The Alan Greenspan mantra that the market is always right has – mercifully – been cast aside… Still, there is one sphere where the central banks are unlikely to sound the alarm.

In both Japan and the US, sovereign debt trades at ever lower yields as a result of purchases of government bonds by the central banks themselves… [T]he largest part of the buying comes from the central banks themselves. With massive purchases of Treasuries, the distinction between fiscal policy and monetary policy is becoming blurred. Central banks become ever more complicit in politics… Read more

It must be painful viewing for Ireland and Portugal. Whether it’s risk aversion or a straight out bond bubble, yields are still falling on US treasuries – meaning the US government can borrow ever more cheaply.

One-year bonds (or to be exact, 52-week bills) have risen slightly to 0.265 per cent, from September’s record low of 0.26 per cent. But the other maturities are at or approaching record lows. Read more

Five-year Treasuries can be added to the growing list of US government debt being auctioned at record low yields. They join two- and three-year Treasuries in this unusual attribute.

The auction was agreed at a high yield of 1.374 per cent – a staggering 42bp drop from last month’s yield of 1.796 per cent. That’s a fall of 23 per cent. Read more

Freddie Mac 30-year mortgage rates just fell to a fresh all-time low of 4.54 per cent (see chart, right). But it’s not just homeowners who can borrow more cheaply than ever.

The US government’s cost of debt is at, or approaching, its lowest ever levels in the medium-term (<10 years). Yields on Treasury auctions have been falling gently and consistently as demand has risen.

Rising demand for US debt is usually taken as an indicator of risk aversion in the markets. But should US bonds be seen as a safe haven with so much strength in east Asia and Australasia, and such ‘unusual uncertainty’ facing the West?

Auction results of US government bonds are shown below from 2008, or as far back as the data go, for you to puzzle over: Read more

Foreign holdings of US debt rose during May, but only by $0.6bn, the slowest increase since September 2009. Tic data show the UK remains the major buyer of treasuries, with $142bn additional value since the start of the year, nearly five times the purchases of the next biggest buyer, Canada. The rest of the world, in net terms, bought $100bn in that same time period.

A few noteworthy trends reversed in May. China and Japan, between them holding 42 per cent of US treasuries, sold off after months of net purchases. Russia, which had been selling, bought. Read more

Might the Fed cap long-dated Treasury yields? This suggestion, made by Bernanke himself in 2002, has resurfaced in the blogosphere amid rising fears of deflation.

In recent days, the Washington Post’s Neil Irwin and the New York Times’ Paul Krugman have both asked what the Fed can usefully do if there is another slowdown. The meticulous Bill McBride, the man behind Calculated Risk blog, offers an insight into Bernanke’s ‘roadmap’. The speech might be old, but the thinking seems more relevant than ever.

Over to Bernanke:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities.

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination.

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Auction results imply falling 10-year inflation, down from 2.2 per cent in April to about 1.65 per cent now. Market inflation expectations can be worked out by subtracting the inflation-protected yield from the regular yield, since this is the only variable between the two bonds.

Today’s 10-year TIPS auction had a median yield of 1.25 per cent, 1.9 percentage points lower than the last regular 10-year yield of 3.2 per cent in June. The next regular 10-year auction is in a few days, on July 13. Assuming yields continue to fall as they have done in the past two auctions, the difference between the yields would be 1.65pp. So the market’s inflation expectations are probably somewhere around 1.65 per cent. Read more

We might not consider the US, UK or Japanese economies as safe havens at the moment, but for bond investors they represent an oasis of calm in a troubled world. US treasury yields – formerly on the rise – have been dropping substantially in the wake of eurozone woes. The 52-week yield auctioned yesterday had an investment rate of 4.27 per cent, compared with 4.94 per cent in the April auction.

Falling yields are also seen in longer-dated issues, such as 5- and 7-year bonds auctioned recently.

After recent rises in US bond yields, recent auctions in the 5-year and 7-year bond markets show yields falling to to 2.54 and 3.21 per cent, respectively. We would expect this, to some extent, as demand increases for investments perceived as safe, while the eurozone is in turmoil. The question is: is this as much a reduction as we would have thought? If not, expect the US cost of debt to resume its previous upward trend when Europe has calmed down a bit.