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The U.S. Treasury Bubble Springs a Leak

Written By Brian Hicks

Posted May 26, 2009





The “big story” on the Street late last week was the possibility that the U.S. could eventually follow Great Britain and perhaps lose its long held triple AAA debt rating.

That shook the markets hard on Thursday as Wednesday’s late sell off bled heavily into the following day.

Of course, Britain’s AAA rating became endangered when Standard & Poor’s lowered its outlook on the nation’s debt to “negative” from “stable,” citing a debt level that was approaching 100 percent of U.K. GDP.

That naturally caused a few here in the U.S. to take a hard look in mirror as we try borrow or way out of this mess by soaking up a what the rest of the world will no longer lend us—which is something I’ve written about many times before.  (Most recently in this article entitled: The Most Dangerous Man in China.)

On top of that the “Bond King” himself Bill Gross said that while a U.S. ratings cut is “certainly nothing that’s going to happen overnight,” markets are “beginning to anticipate the possibility.”  Needless to say it all landed with a market breaking thud.

As a result, as we have warned many times before, 10-year Treasury yields jumped 17 basis points to 3.36 percent on the day and have moved even higher this morning. (As I type yields are up to 3.48%).

Meanwhile, Uncle Sam continues to borrow like there is no tomorrow, bring even more supply onto the markets. The U.S. Treasury said on Thursday it would heap another $101 billion of 2-year, 5-year and 7-year notes onto markets next week, matching an April record and pushing Treasury debt prices lower.

More worrisome however, is this.  The Treasury also allowed that net new borrowings of $2 trillion for the 2009 fiscal year ended Sept. 30 would be needed overall. So based on those estimates alone Treasury is only halfway there with a little over four months to go in the fiscal year

That has caused something of a loud hiss in the Treasury Bubble as the U.S. printing presses come increasingly under attack, especially from the biggest holders of them all—the Chinese.

From the Financial Times by Ambrose Evans-Pritchard entitled: China warns Federal Reserve over ‘printing money’

“Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”

“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.

His recent trip to the Far East appears to have been a stark reminder that Asia’s “Confucian” culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.

Mr Fisher, the Fed’s leading hawk, was a fierce opponent of the original decision to buy Treasury debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate into Argentine-style financing of uncontrolled spending.

However, he agreed that the Fed was forced to take emergency action after the financial system “literally fell apart”.

Nor, he added was there much risk of inflation taking off yet. The Dallas Fed uses a “trim mean” method based on 180 prices that excludes extreme moves and is widely admired for accuracy.

“You’ve got some mild deflation here,” he said.

The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of “creative destruction”, has been running a fervent campaign to alert Americans to the “very big hole” in unfunded pension and health-care liabilities built up by a careless political class over the years.

“We at the Dallas Fed believe the total is over $99 trillion,” he said in February.

“This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them,” he said.

His warning comes amid growing fears that America could lose its AAA sovereign rating.”

Long story short, higher interest rates are likely on the way.

Related Articles:

Richard W. Fisher Nails It

Jim Rogers Warns Dollar Faces a “currency crisis”

The treasury bubble meets the most dangerous man in China

The Great Depression’s Ben Bernanke

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