Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19
The Exponential Stocks Bull Market Explained - Video - 13th Mar 19
TSP Recession Indicator - Criss-Cross, Flip-Flop and Remembering 1966 - 13th Mar 19
Stock Investors Beware The Signs Of Recession / Deflation - 13th Mar 19
Is the Stock Market Still in a Bear Market? - 13th Mar 19
Stock Market Trend Analysis 2019 - 13th Mar 19
Gold Up-to-Date' COT Report: A Maddening Déjà Vu - 12th Mar 19
Save Fintech? Ban Short Selling. It's Not That Simple - 12th Mar 19
Palladium Blowup Could Expose Scam of Gold & Silver Futures - 12th Mar 19
Next Recession: Concentrating Future Losses & Bringing Them Forward In Time As Profits - 12th Mar 19
The Shift of the Philippine Peso Regime - 12th Mar 19
Theresa May BrExit Back Stab Deal Counting Down to Resignation, Tory Leadership Election - 12th Mar 19

Market Oracle FREE Newsletter

Stock and Finanacial Markets Trading Analysis Worth

Peak Imbalances Are Falling, New Bear Market in Bonds

Interest-Rates / US Bonds Mar 21, 2012 - 05:45 AM GMT

By: Fred_Sheehan

Interest-Rates Best Financial Markets Analysis ArticleThe topic at hand is the 10-year U.S. Treasury bond, its falling price, and consequent rising yield. The ten year was trading at a 2.03% yield on March 9 and rose to 2.38% on March 19, 2012. These things happen and the ten-year may fall back to a price and yield that satisfies central bankers and Wall Street. Nevertheless, the era of artificially low government bond yields is coming to a close.


There is a simple reason for the new, protracted bear market in bonds, however complicated it is to divine the particulars and time of the unwinding. Starting with animal impulses, the remaining market participants believe that central banks control markets today. On the date it is recognized the Fed has lost control, yields across the curve - and on corporates, junk, municipals, and stocks - will be adrift, without their bearded anchor.

We have passed the peak of post-Bretton Woods accumulations. Peak Imbalances are falling.

The United States cut the world loose from the International Gold-Dollar Standard on August 15, 1971. Thereafter, international trade and financial balances (obligations among countries and other counterparties) have not settled. Such liberties were not possible prior to President Nixon's repudiation. Now, there is no constraint, other than the parties' willingness or ability to fill other parties' deficiencies. Since obligations never settle, they accumulate. The United States has accumulated a $7.5 trillion current account deficit. (The current account is composed of trade, services, and transfers, but mostly trade)

This deficiency on the part of the U.S. has been most conspicuously filled by the Chinese government's willingness to finance American shoppers' every wish. The PRC's continued willingness is not a question, but China is no longer able to harbor this imbalance.

China produces and America buys. The Chinese have financed American purchases by purchasing U.S. securities, primarily Treasuries and mortgages: we'll ring fence (as the eurocrats like to say) the discussion around U.S. Treasuries. Since the U.S. was buying (importing) more goods than it was selling abroad, China accumulated dollars, year after year. From this pile of dollars, China bought U.S. Treasuries. The recycled dollars financed granite, kitchen countertops and trips to Wally World.

This arrangement has ended. China's Minister of Commerce Chen Deming announced that China will be the world's largest importer in a few years. (Xinhua, March 18, 2012) We have reached, actually passed, China's peak purchases of U.S. Treasuries. Instead of buying, the Bank of China will need to sell U.S. Treasuries to finance its trade deficit.

The same is true of Japan. It is now an importer rather than an exporter. To pay for goods coming ashore that exceed goods shipped abroad, it will need to sell U.S. Treasuries.

Even as these accumulations roll over, the U.S. Treasury needs to borrow at an increasing rate. In February 2012, the Treasury spent one dollar for every 31 cents it received in revenues (basically, tax receipts).

The post-1971 arrangement described above fostered an accumulation of central planning by central bankers. Today, central bankers are economists. They do not have experience in markets. They consider markets to be a tool for "policymakers," as Federal Reserve Chairman Ben S. Bernanke describes himself. Central bankers opened this pretense of mental perfection by interposing their superior egos into markets. Lately, they have manhandled each and every one of them: government yield curves, stocks, commercial paper, money-market funds, commodities, currencies, credit-default swaps, and houses.

"Houses?" one might ask. Yes, support operations (in the United States) of securities markets are underwritten by the Fed's house market collapse prevention policy. Above all else, the Fed is a Muppet of Too-Big-to-Fail banks. It encouraged the criminal financing of mortgages on the way up, and still props house prices today. The preternatural policymakers would not consider the improbability that they cannot perpetually elevate bond, stock, commodity, currency, and houses, even though their seedy, CDO-mortgage economy came a cropper.

It was not only China that underpriced its currency while overpricing the diminishing value of American credit. Other Asian central banks have operated in a similar fashion. The U.S. current account deficit rose from $114 billion in 1995 to over $800 billion in 2006. To pay for this underproduction of goods and services, the United States borrowed $2 trillion from abroad in the 1990s. Then, the U.S. borrowed another $4 trillion between 2001 and 2010. Recall that borrowing and lending never need be settled under the present dispensation. The $2 trillion in 2000 expanded to $6 trillion by 2010.

China posted a $31.5 billion trade deficit with the rest of the world in February 2012. Exports grew 18.4% to $114.5 billion while imports grew 39.6% to $145.9 billion. Commentators explained that waning exports to a waning Europe caused the deficit. Yet, exports increased 18%. The Chinese New Year and industrial retooling were other explanations. Noted.

Bill King (The King Report) was probably on the mark when he wrote that China is now importing inflation. This being so, the Bernanke answer to all problems (create money) will exacerbate the Chinese trade deficit.

Japan had a trade deficit in 2011, the first such deficit since 1980. Exports shrank by 2.7% in 2011 and imports rose by 12.0%. Japan is the second largest holder of U.S. Treasury securities, after China. They both hold over $1 trillion of Treasuries. Reasons stated for Japan's falling trade fortunes include the 2011 earthquake and tsunami, falling exports to waning Europe, and its aging population.

The Bank of Japan also faces a new problem of funding the Japanese Government Bond (JGB) market. The Japanese people and companies have been reliable buyers. This will no longer be possible. Even if Japan's trade deficiency is arrested, the Japanese are now spending their accumulated savings.

Another complication is the need to fund the United States' deficit. The United States had accumulated a public debt of $3.8 trillion by 2007. It is expected to reach $11.6 trillion in fiscal year 2012. Foreign central banks hold over $5.5 trillion of U.S. Treasury securities. This is Exhibit #1 of policymaker interference in markets. These holdings demonstrate a blatant manipulation of the Treasury market. What yields might be without central banking policymaking is not known. After it is recognized the Fed has lost control, we may find out.

In February 2012, U.S. Treasury receipts were $103.4 billion and federal spending reached $335.1 billion. The Treasury only received 31 cents for every dollar spent.

In concert with falling trade surpluses, foreign central bank buying of Treasuries has waned. Between August 1, 2010, and July 31, 2011 foreign central banks increased their U.S. Treasury holdings by $381 billion. Since August 1, 2011, their holdings have fallen, not by much, but the behemoth wad of forthcoming Treasury issues requires elephantine buyers that are indifferent to prices: that is, central banks.

The ECB, Bank of England, and Central Bank of Iceland are unlikely candidates. It is possible some U.S. financial institutions can be persuaded to buy with abandon, but there would seem to be a limit. ("There would seem to be": Who knows anymore the limits of crony capitalism?) This leaves the Federal Reserve as buyer of Treasury securities at the same moment they are issued by the Treasury Department. Have no fear: Ben's modeled that.

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules