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Obama Says Short US Treasuries, an Update

Interest-Rates / US Bonds Apr 27, 2009 - 10:46 AM GMT

By: Michael_Pollaro


Best Financial Markets Analysis ArticleBack in March, I penned this essay, Obama Says Short US Treasuries, making the bear case for the US government’s fiscal position and the Treasury long bond:

Then I wrote this follow-up, Inflection Point in US Treasury Bond Interest Rates Near:

Today, I bring you “less worse’ news and bad news.

First the “less worse” news.  It turns out that my initial estimates for US 4th quarter savings were low.  Personal savings improved quite a bit quarter over quarter.  As a consequence, the US government’s borrowing needs, while still surging, are not showing as big a take of US savings as originally thought.

The updated trends, with the revisions in red:


     Ratio         Public            Ratio              Gross

$Bill               Gross       to Gross        Held             to Gross          to Net

                       Debt       Saving         Debt             Saving            Saving*

1960’s               318        2.1x            255               1.7x                  3.3x

1970’s               560        1.7x            425               1.3x                  2.4x

1980’s            1756        2.4x           1412               1.9x                  3.7x

1990’s            4671        3.9x           3367               2.8x                  7.0x

2000’s            7456        4.3x           4306               2.5x                  9.3x

4Q08e            10700       6.9x           6369               4.1x               23.2x

4Q08r             10700       6.2x           6369               3.7x               14.7x


* Private, State and Local Savings, net of capital consumption on fixed assets.  Excludes Federal Government


Given everything the government is doing to discourage savings in favor of consumption, and the negative impact this will have on the economy, I do not think this ‘less worse” news will last long.  Indeed, I suspect that the driving force behind the 4th quarter savings build was people, with nothing in the bank and in fear of losing their jobs, stashing away all they could.  In light of the mounting unemployment, they might need every bit of those savings just to pay their bills.

Now for the bad news, I came across this essay the other day and highly recommend a read.

It seems that the deterioration in the fiscal position of the Social Security system is way ahead of schedule, and by the looks of it, this is anything but transient.  A major source of government funding is about to be no more.

Below some quotes:

“Remember how we didn't have to worry about Social Security now because payments from the program wouldn't exceed revenue for another decade or more?  Well, the CBO has revised its estimates

“The Social Security "trust fund," you'll recall, isn't a trust fund at all.  It's just another source of annual government financing and a future liability.  Today's receipts are used to pay current payments to retirees and, in the case of a surplus, whatever else the government is spending money on.  As the Social Security surplus shrinks, therefore, the government loses a source of funding.  If it wants to keep spending at its planned rate, it therefore has to borrow the difference.

“…last year where the US government had a $73 billion Social Security surplus to spend, this year it will be a paltry $16 billion and next year it will be a number indistinguishable from zero.

Looks to me like the US government is going to have to do some serious borrowing in the public debt market, in size, just a “bit” sooner then planned.  And this on top of what seems to be an Obama / Geithner spending agenda getting bigger by the day.

On March 18th, the Federal Reserve announced a new quantitative easing program which included the purchase of $300 billion in Treasury long bonds.  On that news, Treasury bonds surged and rates fell some 50 bps.  Guess what?  Those same Treasury bond rates are back to their pre-announcement levels, despite these purchases.

I’m not saying it’s straight up for rates from here.  Indeed, if there is another deflation scare, likely not.  But the clock is ticking, with rates set for perhaps some big moves when all this monetary pumping works its way into prices and puts an inflation premium into Treasury rates.

    By Michael Pollaro


    I am a retired Investment Banking professional, must recently Chief Operating Officer for the Bank's Equity Trading Division. I am also a passionate free market economist in the Austrian School tradition and private investor

      Copyright © 2009 Michael Pollaro - All Rights Reserved
      Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Michael Pollaro Archive

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