The United States is struggling to sell a truckload of Treasury’s this year. (Several European nations are in the same boat too.)
This slow bleed can easily magnify into a full-blown crisis over the next few years if the global economy fails to recover.
From 1981-82 until December 2008 Treasury bonds enjoyed a secular bull market. During that time, interest rates collapsed from a Volcker Fed peak of 20% in 1981 to 2.25% in December last year.
Zero-coupon bonds – long-term bonds on steroids – have earned big double-digit gains over the last 28 years as rates tumbled handily outpacing most global stock markets.
But the big bond bull market is over.
The U.S. is now facing both plunging tax revenues and an unprecedented funding gap amid the worst credit collapse since the 1930s. That’s why the United States is now issuing more debt than ever before to finance its expenditures.
Nobody Has a Debt like the U.S. – Nobody!
It’s estimated the U.S. government will auction off about $2 trillion in debt this fiscal year. And what the Treasury can’t finance, they will simply monetize the debt vis-à-vis the Federal Reserve. (It’s called “quantitative easing.”)
Several other central banks are doing the same thing this year, including the Swiss National Bank and The Bank of England.
Treasury Prices Have Continued to Climb for the Last 27 Years…
Yet nobody has the debt the size of America’s. Deficits are clearly out of control with no political resolve to reduce spending. At some point, we could even see a major lenders’ strike especially if foreigners balk at financing this paper.
That could force the United States to impose a deficit-financing tax or a VAT consumption tax to finance its explosive debt and the interest required to service outstanding Treasury bonds.
The Chinese are stuck with about 40% of this paper, the Japanese about 25% and the British about 10%. Rightfully concerned, the biggest holders of U.S. Treasury debt outside of Japan and England have increased their rhetoric lately as they grow nervous about their declining dollars.
The Chinese and the Russians are the most vocal, fed-up with dollar depreciation.
It’s Only a Matter of Time Before Investors Stop Buying…
Last Thursday, the Treasury was successful in selling its tranche of seven-year Treasury bonds. But for the second time this week Treasury attracted poor demand for the sale of five-year and two-year notes. That raises the cost for Treasury as it relies on the Fed to absorb unwanted notes.
If you need to park short-term funds, then avoid longer dated notes. In fact, I’d be shorting or betting against 20-year and 30-year Treasury bonds. Stick to the short end of the yield-curve or bonds maturing no later than in 2011-2012. That’s what PIMCO is doing now.
Last Tuesday, Treasury suffered its worst five-year auction in history. Yet that news barely made a headline.
It’s not the first time Treasury has struggled to sell its paper and it’s certainly not alone. The Germans, among several other Eurozone credits, have struggled to auction their debt since last October with four failed or reduced bond auctions. That’s almost mind-boggling because I’d consider the Germans the best government credit in the world, possibly along with the Swiss and Norwegians.
Failed bond auctions in the West since October mark the beginning of the bear market in government bonds. Assuming we don’t slip into a deeper recession or worse, the bond market is the worst place to park long-term funds.
We’re staring down the barrel of the next inflation crisis, a dollar blow-up and, eventually, higher interest rates to support ever-growing government borrowing. Avoid this crisis now…and get out of long-term Treasury debt.