“We’re not overweight Treasuries. We’re certainly underweight Treasuries, but that does not mean we don’t own lots of other bonds. German bunds and Canadian bonds are rallying. We simply think those are better alternatives. It does not mean as well that we’re not a little bit shy in terms of duration…Bloomberg’s numbers as of last night show us beating 2/3′s of managers. We’re having a good year…so don’t cry for Pimco.” Continue reading »
Treasuries
It’s “a no brainer” to sell short Treasuries, Nassim Taleb, a principal at Universa Investments LP in Santa Monica, California, said at a conference in Moscow today. “Every single human being should have that trade.”
Is anyone else looking forward, really looking forward to The Safecracker’s Beijing trip next week? We certainly are. Reuters says this:
U.S. Treasury Secretary Timothy Geithner has a chance next week to persuade anxious Chinese authorities their investments in huge and growing volumes of U.S. debt securities are safe and sound.
His visit to Beijing must deal with tough economic realities: the United States is issuing new debt in record volumes as it seeks to finance an array of programs to right its economy, while China is growing nervous about whether its U.S. “nest egg” is secure.
Of course, much hinges on the Timster’s visit. A small error could spell big problems. So we’ve put together a little “DOs” and “DON’Ts” list. We know Tim reads us, so we’re confident this will smooth things over and keep things on the up and up.
DO: Make sure your visa is in order before getting on the government jet.
DON’T: Bring sunscreen. The smog takes care of that for you.
DO: Bring Treasury brochures and marketing materials. We are particularly partial to the “Safe Savings For Education” series.
DON’T: Try to avoid the VAT. We know it is tempting. Just trust us. They aren’t as forgiving as confirmation committees in the United States. And, no, Tim, there is no “TurboTax 2009: The Chinese VAT” software add-on.
DO: Bring enough lubricant. Xie Xuren will want some minions to try before he buys.
DON’T: Present a Publisher’s Clearing House sized check for “Six Dollars” marked “Paid In Full” at the bottom. Chinese humor can be difficult to manage and the consequences of failure are extreme.
DO: Beg. It works in the East.
DON’T: Bow when the cameras are rolling. Duh.
DO: Be polite to your secret-police minder.
DON’T: Ask him about the execution/organ harvesting vans unless you want a personal tour.
We are pretty confident that, if he follows our advice, Timmy will manage his way back just fine. (Though sitting on the plane for double digit hours on the way home might be a tad painful).
Geithner to Beijing: Keep buying our debt [Reuters]
No wonder they want to invent a reserve currency that has some merits over the United States Dollar. It would be a form of methadone treatment:
China, the U.S. government’s biggest creditor, increased its purchases of American securities in February just weeks before the country’s officials questioned whether such investments were safe.
While China’s purchases slowed and most were in short-term Treasury bills, the country remained the largest foreign holder of Treasuries after its holdings rose 0.6 percent to $744.2 billion, according to a monthly report released in Washington.
We have long considered hollow the cries that the Chinese might abruptly cut off their large-scale purchasing of Treasuries. To do so would be cutting their own throat as their own prosperity is tied quite directly to their ability to find and fund customers for their chief exports (cheap labor and manufacturing). It is worth pointing out that Chinese leaders are not afraid of being deposed. They are afraid of being shot if they break the grand bargain they struck with their subjects: keep us in power, we’ll give you a taste of capitalism and the trappings of upward mobility, but we will manage that social stuff and political voice for you.
China Bought More U.S. Securities Even as Its Concerns Grew [Bloomberg]
Our spy on a Treasuries desk has some interesting things to say via the mailbag about the bond market in the imminent face of $300 billion in quantitative easing by proxy:
Wall Street Dealers are giving the Treasury the biggest “fuck you” on new Treasury debt. There’s an auction today and a buy program tomorrow. Since Bernanke just announced that the Treasury is buying bonds, Wall Street- the dealers en masse- are basically refusing to show a good bid but then taking out a huge profit out of the Treasury. You want to talk 90% taxes? This is unprecedented.
Hell hath no fury like a bond trader scorned? We aren’t so sure. The UK had similar problems today.
The U.K.’s effort to buy government debt wasn’t enough to prevent today’s failed auction of 40-year gilts, the first time that the government failed to attract enough bids at a sale of nominal debt since 1995. Investors bid for 1.63 billion pounds ($2.4 billion) of 4.25 percent notes, less than the 1.75 billion pounds offered.
“The failed gilt auction doesn’t bode well for Treasuries,” said Michael Franzese, head of government bond trading for Standard Chartered in New York. “It is a supply issue on top of that. Is the buying that’s happening today by the Fed going to offset the selling that’s going on today and tomorrow by the Treasury?”
What say you DB? The largest bond price fixing conspiracy in history? That would be quite entertaining.
Treasuries Fall as Five-Year Note Auction Draws Yield of 1.849% [Bloomberg]
It is popular to speculate about what might happen if China ever grew tired of providing the United States with cheap capital to fund [mass consumerism/the real-estate bubble/our exorbitant lifestyle/our fat/flat-screen televisions/the deadly "greed virus"]. We think these questions overblown. It might be simplistic to think about Sino-American economic relations as China lending us money at low rates so that we can buy massive amounts of cheap exports that the Chinese would never want and could never use, thereby keeping their unemployment rates low and providing a nice return on their investment. Then again it might not.
Chinese leaders are not as concerned with staying in power as not being shot in the back of the head. The bargain the Party has struck with its subjects (“Leave the political power to us and we will deliver you a measure prosperity via ‘capitalism lite,’”) doesn’t leave much room for maneuver if the prosperity bit starts to slip. It isn’t an accident that the government recently made some gentle reminders to its humble citizens (and not so humble students) that another Tienanmen wouldn’t be tolerated. So, dump treasuries in bulk? Not so fast. But they will, we think, try to get some mileage out of the perception.
The premier said Beijing expected to see results from President Barack Obama’s economic recovery plan but expressed concern that massive U.S. deficit spending and near-zero interest rates would erode the value of China’s huge U.S. bond holdings.
That’s right, Mr. President. You work for Beijing now.
China is the biggest holder of U.S. government debt and has invested an estimated 70 percent of its $2 trillion stockpile of foreign exchange reserves, the world’s largest, in dollar assets.
“We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries.
“I would like, through you, to once again request America to maintain their creditworthiness, keep their promise and guarantee the safety of Chinese assets,” Wen said.
This may well end in tears.
China expresses worry over its U.S. assets [Reuters]
Unless you can collect the protection in Swiss Franc, we find it difficult to get our head around credit default swaps on U.S. Treasuries. Surely, if you find yourself actually needing the protection, the last thing you want is U.S. Dollars. And in addition, if you find yourself in a position to expect payment from your counterparty, how likely are you to get paid? And finally, why in the world would the U.S. choose to default, rather than just turn on the printing presses?
First, default, at least domestic default, is much more common than you might think. Reinhart and Rogoff’s The Forgotten History of Domestic Debt is an interesting place to start if the topic compels you.
Second, what constitutes a default isn’t at all clear when you see credit default swap prices thrown about. To the extent the OTC market is a substantial portion, it is difficult to know exactly what constitutes a default.
Third, use of the “no-arbitrage” model to price credit default swap spreads can be misleading, particularly in times of financial crisis. (Sound familiar?)
All this is a gentle way of bracing you for the rumor fact that spreads on credit default swaps on U.S. Treasuries have blown out to triple digits today.
Uh oh.
Now if only we could find a reliable counterparty to write us some CDS contracts denominated in gold.
Alea points out that 5 year CDS spreads on Treasuries are alarming. (82 basis points). Discuss.
The Across the Curve blog often has insightful and potent analysis, with a focus on credit markets that reveals some real expertise in the area. Today, however, its author, originally a weak supporter of government intervention, has made a rather public about-face.
We are forced to agree with him. Matters are quickly getting out of hand and deeper government involvement in the essential engines of the economy, and the deficit spending required to entrench it, is looking less and less desirable by the day.
From the outset, I have always been a supporter of government intervention as a means to prevent this unique crisis from taking the system down. I have always believed that the consequences of inaction were greater than the cost of government involvement. I question that assumption now.
The bailouts began with the deal in which JPMorgan took control of Bear Stearns with government assistance and continues to this day with the government intervention in the Bank of America union with Merrill Lynch.
The Federal government will now be an integral part of the financial system for a very long time and will influence decision making and risk taking in that sector during the time in which taxpayers are a partner in those businesses.
I now think that we would have been better off with some truly cathartic event which would have curbed the animal spirits of traders but which would have established a basis for a market prescribed recovery. Succinctly stated, the government is not in the business of taking risk and I would argue is in the business of risk avoidance.
In retrospect, the commonweal would have been better served had nature taken its course and allowed for capitalism to travel its natural course. I fear that this new course has placed on us a path to a very slow recovery and one in which innovation and risk taking will be viewed through the narrow and ill begotten prism of some bureaucrat.
Some Opening Comments [Across The Curve]
If you want a measure of:
A. How broken the credit markets are, or;
B. How totally fucked we are,
The fact that credit default swaps for 10-year protection on U.S. government debt have jumped to 56 points is a good candidate. Which one is really at work here, A or B is anyone’s guess.
“There is a lot more money to be spent and it is not clear how it is going to be financed,” said Tim Brunne, a Munich-based credit strategist at UniCredit SpA. “Credit spreads don’t reflect expectation of default, just the uncertainty over the enormous cost to the government.” [emphasis ours]
Yeah, we don’t get that quote either.
The Fed’s new plan to kick-start markets for loans to students, car buyers, credit-card borrowers and small businesses means it will be taking on credit risk by buying debt. The central bank pledged to purchase as much as $500 billion in mortgage-backed securities as well as up to $100 billion in direct debt of Fannie Mae and Freddie Mac, the world’s two largest mortgage buyers, and Federal Home Loan Banks.
Treasury Credit Swaps Soar to Record on New $800 Billion Pledge [Bloomberg via Alea]
29.2 basis points on a 10-year treasury CDS. This is either a fantastic opportunity, or the beginning of the end. Salt to your own taste.
US 10-year Treasury CDS widens to record 29.2 bps-CMA [Reuters via Alea]
