I was at a recent Futures Industry Association Treasury Market Forum in New York and heard a fine presentation from Treasury on the success of their debt program. It was impressive. The Treasury has done a good job of engaging the street on determining what is the best way to minimize the impact of new debt on interest rates. The Treasury has been both lucky and good at their job. Unfortunately, it is the lucky part which should give pause for most investors.
What is scary is that the OMB is now projecting debt to GDP which will be higher than CBO. There is little wonder why the curve has remained steep and got steeper this year from the long-end going up especially outside the range where the Fed was active. (Of course, there was no room for the short-end to go down.)
The uncertainty about deficit is not a problem for today but in the future. The Treasury has hit a perfect spot of higher saving in the US, less corporate borrowing, less consumer borrowing, constraints on municipals, a better current account, strong official interest from central banks, and good interest from abroad. A great time to issue Treasury debt. But the fear is that the environment will change.
As risk aversion declines there will a greater demand for risky assets. This is already happening. The TIC data suggests that private flows are slowing into the US. The rates are low and the US is now thought of as a carry lender. Money will be moving into equities to capture the stock rally.
If the recovery takes hold, savings will decline and there will be more private borrowing. There will be competition for funds. Look for this to pick up in 2010.
Solving the global imbalance issue is not good for Treasuries. If consumer spending increases from foreign buyers, rates will have to rise.
Hard to be Treasury bull over longer term if you have any recovery story.
What is scary is that the OMB is now projecting debt to GDP which will be higher than CBO. There is little wonder why the curve has remained steep and got steeper this year from the long-end going up especially outside the range where the Fed was active. (Of course, there was no room for the short-end to go down.)
The uncertainty about deficit is not a problem for today but in the future. The Treasury has hit a perfect spot of higher saving in the US, less corporate borrowing, less consumer borrowing, constraints on municipals, a better current account, strong official interest from central banks, and good interest from abroad. A great time to issue Treasury debt. But the fear is that the environment will change.
As risk aversion declines there will a greater demand for risky assets. This is already happening. The TIC data suggests that private flows are slowing into the US. The rates are low and the US is now thought of as a carry lender. Money will be moving into equities to capture the stock rally.
If the recovery takes hold, savings will decline and there will be more private borrowing. There will be competition for funds. Look for this to pick up in 2010.
Solving the global imbalance issue is not good for Treasuries. If consumer spending increases from foreign buyers, rates will have to rise.
Hard to be Treasury bull over longer term if you have any recovery story.
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