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:
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.
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.
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.
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:
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…
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.
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.
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:
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.