– James Saft is a Reuters columnist. The opinions expressed are his own –
Efforts to reflate the economies of the U.S. and Britain are running into one potentially major problem; the bond market.
Appetite for government debt in recent sales has been very poor, raising the cost to the two governments of borrowing and blunting their efforts to bring down market interest rates by buying back their debt.
This is a big risk for British and U.S. efforts to rescue their economies, and could be yet another self reinforcing downward force if holders of government debt get the frights.
Both countries are running hugely expansionary fiscal stimulus programs that will need to be paid for by gargantuan sales of government debt. At the same time both have such low official interest rates, 0 to 25 basis points for the U.S. and
50 basis points in Britain, that they are engaging in purchases of their own debt, or quantitative easing, in the hope that this lowers rates for consumers and businesses and encourages money to be spent or invested.
It is impossible to know exactly how effective the policy is, after all we don’t know what rates would be without it. We can though see two things clearly; there are lots of sellers when the U.S. and Britain seek to buy their own bonds, but when it comes to the far larger operation of issuing bonds to fund ongoing needs, investors are markedly less enthusiastic. The U.S. Treasury got a very poor response on Tuesday when it auctioned $6 billion of 9-year, 9-month inflation-indexed notes at a yield of 1.589 percent, better terms for investors than similar issues on the secondary market at the time. Of particular note was the fact that so-called indirect bidders, mostly foreign central banks, stepped up for just 26.1 percent of the sale, as against 47.2 percent at the last such auction in January, which was before the policy of Fed purchases of Treasuries was announced.
Mohammed El-Erian of leading bond investor PIMCO told CNBC that government bonds were “not worth owning right now” because of the “tremendous” amount of debt the U.S. will have to sell.
The Fed will buy up to $300 billion worth of longer-dated Treasuries over the coming months to help keep interest rates low throughout the economy but at the same time it is buying from a market that is well aware that the Treasury needs to sell some $2 trillion of debt this year.
Speaking in Tokyo, it was clear that Dallas Fed governor Richard Fisher is aware of foreign investor’s concerns and has been seeking to reassure:
“Demand for U.S. Treasuries … will be determined by their attractiveness relative to alternatives and they may be judged more, rather than less, attractive under most reasonable future scenarios,” he said on Wednesday.
The Fed is determined to “short-circuit” any inflationary consequence of its balance sheet growth, and is in the process of acquiring new tools to help, he said.
“We realize … we are at risk of being perceived as monetizing the fiscal largess of Congress,” Fisher said.
Exactly. And while some might argue that the higher interest rates the U.S. may be paying will inflate away unpayable debts, this is perception that if anchored among investors, can very easily take on an extremely dangerous momentum of its own.
IT’S NOT EASY BEING BRITAIN
Similarly, the Bank of England intends to buy up to 75 billion pounds of assets, mostly gilts, over three months, but similarly Britain plans to issue a record 147 billion pounds of gilts in the coming financial year. There is also the possibility of more issuance to come if an upcoming budget includes new provisions for simulative spending.
Britain was unable to sell more than 100 million pounds of 40 year gilts at the end of March, the first such failure since 1995, and had to make heavy concession at an auction earlier this week.
All in all, it’s a sort of strange mirror to the criticism that is made of temporary stimulus measures; that because taxpayers can tell they will be forced to pay in future for the goodies they are given now they may save, blunting the impact of the stimulus. In the same way, today’s bond buy backs will need to be financed via tomorrow’s taxes, bond issues or eroded via inflation, making the current path of policy a very difficult tightrope.
It may be that in a world of poor alternative investments both countries can sell their debts at reasonable prices, but along with and interacting with currency moves, it is an important vulnerability.
The bond market vigilantes, who used to enforce a rough and sometimes destructive justice, may be saddling up again.
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J - I’m pretty sure that there are no taxes on government bonds and I don’t think its the Gov buying these bonds from themselves, its the Reserve buying them with an intent to inflate the money in circulation. The plan is for the Gov and the Fed to do this until the private sector stop deleveraging or the bond market get wise and invest elsewhere, isn’t it?
I have a widget in my pocket. No one really wants to pay much for it. Hmmm… Eureka! I will borrow money to buy it from myself at the profit point I thought it was worth! OK, how does this in reality make me poorer?Because I pay tax on the profit I made on my widget, and interest on the loan which over the term will equal a large proportion of the principal when paid in full. This is essentially what the banks and the governments are doing. They only way this could possibly work is if there are massive amounts of fraud and dishonesty in the process, or I simply default on the loan I took to buy a worthless widget from myself. Hmmm… that couldn’t be happening, could it?
To all those who hold gold:
Gold is a lovely and precious metal but is is a commodity just the same as silver or platinum. What is its uses? Other than for ornamental and jewellery use I can’t think of too many other uses. What determines its value? The same criteria that determines the value of other commodites and the fundamental equation is supply and demand.
Those who advocate gold as a basis for the monetary system are living in a dream world. The gold coins o srecurities will rest in the drawer or safe as a beacon of hope for a ‘better tomorrow’ that will not come.
If you are thinking about rushing out to get some gold to protect your yourself from a decline inthe value of your economic holdings, think again.
Although a huge slush of new money is being created and pumped into the economic pipelines when this begins to have an inflationary effect beyond what the central banks consider a ‘prudent’ level (why do they tend to use this word so much when it is evident that there is little that is ‘prudent’ about what they do?) then we will see interest rates start to climb up and possibly exceed previous highs.
Given the prevailing conditions in the ‘global economy’ it does not seem like the scenario of rising interest rates will be around too soon. First, people have to get over the credit crunch hangover and resume the process of comsuming and investing on credit and when the levels of credit consumption have hooked enough fish then the interest rate trawler will haul them in.
What will happen to gold? It will go down as investors switch to interest rate securities.
Conclusion: Trade gold just like any other investment should be traded and if you know the market then you should do vey well.
You are missing the larger picture.
This entire “global economic crisis” is deliberate by the entity controlling the money supply. It has been coordinated for more than a decade. Its purpose is to establish new global currency, or the control of the worlds currencies, and it will be done through the floor by floor demolition of the US Dollar which the Federal Reserve and associated money controlling partners, in collusion with the elite of the US government, have been orchestrating for years by selling billions of dollars of repackaged securities labelled triple AAA (knowing full well they would implode in their banks) to get the world HEAVILY invested in the dollar to ensure collapse.
IT IS NOT ABOUT THE MONEY ! IT IS ABOUT RESTRUCTURING AND EXTENSION OF GLOBAL MONEY CONTROL !!!
I have an idea Victor, empty the prisons and fill them with Politicians, Bankers, and Corporate Executives. When capitalist societies around the world collapse we will have little need for them anyway.
It is obvious that Wall Street views still carry significant clout in Washington. The Banking Industry as most of us know is by all measures bankrupt. The toxic Assets have no takers at any discount level and the current strategy of finding a realistic Value is lacking in integrity. As a prelude to finding a value the Investment Banks are fraudulently inflating value by round tripping aka Circular Trading. I Buy your junk real value 5 cents for 60 cents,you buy my junk of 5 cents also for 60 cents. The securities may be different but quality is same. This way you kill two birds with one stone. The value of the junk has shot up from 5 cents to 60 cents so the difference will be shown in absolute terms as Profits for the quarter. Secondly these toxic assets will subsequently be transferred to the Government at these fraudulent values.
If you see a big spike in Profit of Banking Companies this quarter please dont rush to buy their stock,since you now know from where these fictitious Profits have come.
Real Magic with final outcome that will be nothing if not tragic.Taxpayers,please get yourself a CAN.
Although I agree with james and most of the coments everybody seems to be blaming the obvious targets ie. bankster,inept central banks,incopetent regulators. We should start to look at ourselves, yes we all wanted rapid inc. in our properties and 30% annual gains in shares. It was as much our greed that caused the problem the obvious targets just helped us along.
[...] Are bond market vigilantes saddling up? [...]
Its a vicious money go round: with a perceived goal of keeping the relative strength of home currency in comparison with other currencies, governments are essentially printing new currency notes, borrowing from future pool of tax collections from their citizens. Why this is not supposed to affect hyper inflation after some time, is interesting to ponder.
Problem actually lies in admitting once for all that a huge number of private institutions, especially investment banks and insurance companies, are sitting on hugely inflated, non existing (read not-mark-to-market)
asset values, which if exposed, would render them insolvent straightaway. Hence the need to keep a certain value of the currency, the strength of which would ensure the solvent status of their operation.
Governments trying to gloss over this fact is nothing short of eye popping fraud committed to its own population. Remedy lies in letting ALL those institutions that become insolvent fall and preparing the populace for huge social disturbances as a result. Unless this hard medicine is spelled out, consequences explained and followed up with mounting a military operation in-house to control the resultant anarchial situation for some time at least, no stimulus packages are going to work.
There is no alternative to hard work, honest trading and
open governance, something that has failed in toto in the current imbroglio. We all need to stay positive and hit the straps once again while keeping stringent checks and balances on those in charge of oversight. Perhaps summery long term lock-ups made mandatory for some time at least, for those found wanting in discharge of their duties. Even after all this, keep our fingers crossed: it may still come to naught! Its that serious a situation.
Kanwal
An increase of 1 percent in sovereign bond rates has a big impact on the internal economy, but currency rate volatility can exceed 10 pct in one year.
So attracting offshore/external capital looks very expensive, and is probably exponential rather than linear as the pool of available capital is drained.
If I wanted to lend to the US/UK/Japan/Russia/… government, I would want to be redeemed in gold, not 2014 USD.
This currency debasement risk is in addition to the risk of sovereign default.
If one’s background is in statistics and computing, the arts of the economic alchemists are magic indeed.
Governments ought to know that investors in Gilts are top notch investors and not the everyday Joe Blow looking to put his saving somewhere. ‘Buying’ back their own debt with QE and then spinning out new Gilt issues to fund new debt is not exactly a mouth watering prospect for investors.
Good luck
The USA is now on the debt standard. Every time the USD drops by a penny the Chinese lose 20 billion USD. No wonder they are nervous.
Absolutely. The bond market is reacting with a lot of sense. The only things that current policies are doing are (1)cushioning and delaying an unavoidable landing [which would not be such a bad thing if it was the only consequence] (2) playing with fire by thinking it can avoid facing market constraints [no wonder why there are growing calls for a new gold standard or its equivalent] (3)building the conditions for future inflation (4) creating interferences on a market where government issued instruments are a reference and hence putting in jeopardy the conditions of access to this market for other actors [operators may need to find new benchmarks, which will not be an easy thing]. With or without these governments’help, the global ecomomy needs to clean up the excess debt. It is painful, but no one can escape this reality call.