Best of the Week
Most Popular
1.Bitcoin War Begins – Bitcoin Cash Rises 50% While Bitcoin Drops $1,000 In 24 Hours - Jeff_Berwick
2.Fragile Stock Market Bull in a China Shop -James_Quinn
3.Sheffield Leafy Suburbs Tree Felling's Triggering House Prices CRASH! - Nadeem_Walayat
4.Bank of England Hikes UK Interest Rates 100%, Reversing BREXIT PANIC Cut! - Nadeem_Walayat
5.Government Finances and Gold - Cautionary Tale told in Four Charts - Michael_J_Kosares
6.Gold Stocks Winter Rally - Zeal_LLC
7.The Stock Market- From Here to Infinity? - Plunger
8.Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - MarketsToday
9.Electronic Gold: The Deep State’s Corrupt Threat to Human Prosperity and Freedom - Stewart_Dougherty
10.Finally, The Fall Of The House Of Saud - Jim_Willie_CB
Last 7 days
Stock Market More Correction Ahead? - 19th Nov 17
Universal Credits Christmas Scrooge Nightmare for Weekly Pay Recipients - 18th Nov 17
Perspective on the Gold/Oil Ratio, Macro Fundamentals and a Gold Sector Bottom - 18th Nov 17
Facebook Traders: Tech Giant + Technical Analysis = Thumbs Up - 18th Nov 17
Games Betting System For NCAA Basketball Sports Betting - Know Your Betting Limits - 18th Nov 17
Universal Credit Doomsday for Tax Credits Cash ISA Savers, Here's What to Do - 18th Nov 17
Gold Mining Stocks Fundamentals Q3 2017 - 17th Nov 17
The Social Security Inflation Lag Calendar - Partial Indexing - 17th Nov 17
Mystery of Inflation and Gold - 17th Nov 17
Stock Market Ready To Pull The Rug Out From Under You! - 17th Nov 17
Crude Oil – Gold Link in November 2017 - 17th Nov 17
Play Free Online Games and Save Money Free Virtual Online Games - 17th Nov 17
Stock Market Crash Omens & Predictions: Another Day Another Lie - 16th Nov 17
Deepening Crisis In Hyper-inflationary Venezuela and Zimbabwe - 16th Nov 17
Announcing Free Trader's Workshop: Battle-Tested Tools to Boost Your Trading Confidence - 16th Nov 17
Instructions to Stop a Dispossession Home Sale and How to Purchase Astutely at Abandonment Home - 16th Nov 17
Trump’s Asia Tour: From Old Conflicts to New Prospects - 16th Nov 17
Bonds And Stocks Will Crash Together In The Next Crisis (Meanwhile, Bond Yields Are Going Up) - 16th Nov 17
A Generational Reset That Will Redistribute Wealth to the Bottom 60% Is Near - 16th Nov 17
Ethereum (ETH/USD) – bullish breakout of large symmetrical triangle looks to be getting closer - 16th Nov 17
Gold’s Long-term Analogies - 16th Nov 17
Does Stripping Streets of ALL of their Trees Impact House Prices (Sheffield Example)? - 15th Nov 17
The Trump Administration’s IP Battle Against China - 15th Nov 17
5 Ways Bitcoin can Improve its Odds of Becoming the Future of Money - 15th Nov 17
These Headlines Say Gold is Building a Base for Something Big - 15th Nov 17
Protect Your Savings With Gold: ECB Propose End To Deposit Protection - 14th Nov 17
Gold on the Ledge, Trend Forecast - 14th Nov 17
The Unbearable Slowness Of Fourth Turnings - 14th Nov 17
Silver Sign’s Confirmation & More - 14th Nov 17
Could This Be The End for Tesla? - 14th Nov 17
Harry Dent’s Fourth Cycle: More Evidence of Stock Market Downturn - 14th Nov 17
Why Having Good Credit Is Important If You Want to Invest - 14th Nov 17
The Bitcoin Bubble Explained in 4 Charts - 13th Nov 17
How the US Has Secretly Subsidized China to Produce Eco-Unfriendly Solar Panels - 13th Nov 17
The Increasingly Unstable Middle East Must Be On Every Investor’s Radar - 13th Nov 17
Stock Market Critical Supports are Being Challenged - 13th Nov 17
The One Chart All Investors Should See Before 2018 - 13th Nov 17
Short-Term Stock Market Uncertainty Following Recent Rally, Will Stocks Continue Higher? - 13th Nov 17
Is Hillary Just the “Fall Guy” for the Intel Agencies and their Moneybags Bosses? - 12th Nov 17
Stock Market Correction Phase - 12th Nov 17
Finally, The Fall Of The House Of Saud - 12th Nov 17

Market Oracle FREE Newsletter

Traders Workshop

What Happens When the Bond Markets Turn Against the US?

Interest-Rates / US Bonds Dec 29, 2012 - 06:53 AM GMT

By: Graham_Summers

Interest-Rates

The US Fed is committed to keeping interest rates low for the simple fact that if interest rates were to rise then the payments on the debt would send the US into an EU-syle debt crisis along with the commensurate intense austerity measures being implemented.

Unfortunately for the Fed, the bond markets may indeed force this in spite of the Fed’s efforts.


Weimar Germany, like most historic episodes of hyperinflation, occurred when Germany’s Central Bank began monetizing its debts. This worked until the country lost credibility in the international bond markets at which point the Central Bank was forced to monetize everything resulting in a currency collapse and one of the worst episodes of hyperinflation in history.

The US has been moving increasingly down this path which each new QE program. The two reasons the US has not yet entered an inflationary death spiral are:

1)   The fact that the US continues to maintain its credibility in the bond markets (at least compared to Europe and Japan).

2)   Large financial institutions’ needs for high-grade sovereign bond collateral.

Regarding #1, the US has never defaulted on its debt. Compared to Germany (another safe haven), which has defaulted on its debts twice in the last 100 years, the US remains one of the most credible governments in the world, regardless of how bad the country’s finances are becoming (for now at least).

Regarding the collateral situation, as I’ve explained in recent articles one of the most critical issues in the financial system is the shortage of high grade collateral to backstop the $700 trillion derivatives market.

With France and the ESM bailout fund recently losing their AAA status this issue is only getting worse. The US, despite losing its AAA rated status is still consider high grade due to its having never defaulted on its debt. With that in mind, the Fed decision to take US Treasuries at a time when more and more countries are losing their AAA rated status means that even less high grade collateral will be in the system.

Indeed, as I’ve noted before, because so much of the US debt market is already held by government controlled entities, the Treasuries shortage is even worse than the below article indicates.

Clearinghouses, run by firms such as Chicago-based CME Group (CME) and London-based LCH.Clearnet Group, make traders provide collateral, including government bonds, that can be seized and easily converted into cash to cover defaults. Traders may need from $2 trillion to $4 trillion in extra collateral to meet the new requirements, according to Timothy Keaney, chief executive officer of BNY Mellon Asset Servicing.

The trouble is finding all that high-grade debt. The U.S. had $10.8 trillion in Treasuries outstanding at the end of August. Other countries, including Japan and European nations rated AAA or AA, had about $24 trillion of debt in the second quarter of 2011, according to an April report by the International Monetary Fund. Those government securities are already in heavy demand from central banks and investors.

The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards, in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” The maneuver allows investors who don’t have assets that meet a clearinghouse’s standards to pledge corporate bonds or mortgage-linked securities to a bank in exchange for a loan of Treasuries. The investor then posts the Treasuries—the transformed collateral—to the clearinghouse. The bank earns fees plus interest, and the investor is obliged at some point to return the Treasuries. In effect, the collateral is being rented…

JPMorgan Chase (JPM) and Bank of America (BAC) are already marketing their new collateral-transformation desks, executives at the companies say. Other banks confirmed they’re planning to offer the service too, including Bank of New York Mellon (BK), Barclays (BCS), Deutsche Bank (DB), and State Street (STT).

http://www.businessweek.com/articles/2012-09-20/a-shortage-of-bonds-to-back-derivatives-bets

Here’s the actual amount of Treasuries available to the banks:

Total US Sovereign Debt $16 trillion
Foreign Nation holdings $5.4 trillion
Intergovernmental holdings $4.8 trillion
US Federal Reserve $1.5 trillion
Remaining $4.3 trillion

Indeed, as the below article reveals, the search for high quality collateral is one of the primary items holding up the Treasury market. The Treasury’s latest information reveals that:

Foreign ownership of U.S. Treasury securities rose to a record level in October, a sign that overseas investors remain confident in U.S. debt despite a potential budget crisis.

Total foreign holdings of U.S. Treasurys rose to $5.48 trillion in October, the Treasury Department said Monday. That was up 0.1 percent from September. Still, the increase of $6 billion was the weakest since total holdings fell in December 2011.

China, the largest holder of U.S. government debt, increased its holdings slightly to $1.16 trillion. Japan, the second-largest holder, boosted its holdings by a smaller amount to $1.13 trillion. Brazil, the country with the third-largest holdings, increased its total to $255.2 billion.

http://hosted.ap.org/dynamic/stories/U/US_FOREIGN_HOLDINGS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2012-12-17-09-44-48

My point with all of this is that the search for collateral will drive yields lower… until the bond markets truly begin to spin out of control. In the meantime, the US Fed is playing a very dangerous game by purchasing as many Treasuries as it is. But that game can last much longer than anticipated.

How precisely these issues will finally play out is a mystery. But the consequences will be tremendous. And enormous fortunes will be made by those who get it right. The first key clues will be when Bunds and Treasuries begin to nose dive in a big way.

If you’re an individual investor (not a day trader) looking for the means of profiting from all of this… particularly the US going over the fiscal cliff… then you NEED to check out  my Private Wealth Advisory newsletter.

Click Here Now!!!

Graham Sumers

Chief Market Strategist

Good Investing!

http://gainspainscapital.com

PS. If you’re getting worried about the future of the stock market and have yet to take steps to prepare for the Second Round of the Financial Crisis… I highly suggest you download my FREE Special Report specifying exactly how to prepare for what’s to come.

I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com and click on FREE REPORTS.

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

© 2012 Copyright Graham Summers - 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.

Graham Summers Archive

© 2005-2017 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

Catching a Falling Financial Knife