Wednesday, February 17, 2010

Foreign demand falls for Treasuries

Like a deer in front of an oncoming automobile, the masses of investors, politicians, economists, et. al. rarely see a catastrophe coming their way. Try to voice a concern or sound an alarm of warning, you will simply be either passed off as a charlatan or not taken serious altogether—despite the fact that you have been right in the past. Granted, the past is no indication of the future. Nevertheless, heeding the warning (or at least considering it) is always a wise. But the masses being what they are, this is highly unlike of ever occurring.

Today’s article in the Financial Times regarding the fall in foreign demand for treasury securities is an example of a frozen deer. What the article mentions is merely a symptom of a larger problem, which is the root of all evil: fiscal deficits ‘til the eye can see and no credible options of retiring the public debt. Since the U.S. Dollar is still perceived as a the “flight to quality” currency, buyers of such assets are simply setting themselves up for a cataclysmic result. There is no question that the “flight to quality” idea of the U.S. dollar will someday disappear. What is difficult to gauge is when exactly that will happen. But that it is coming, of this there is no doubt. But still, few consider this prognostication as accurate or probable. Nevertheless, it pays to consider the evidence and make a decision for yourself whether this is just a fancy or a possible scenario.

Here is the article:

By Alan Rappeport in Washington
Published: February 16 2010 (Financial Times)

Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.

China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.

The shift in demand comes as countries retreat from the “flight to safety” strategy they embarked on upon during the worst of the global economic crisis and could mean the US will have to pay more to service its debt interest.

For China, the shedding of US debt marks a reversal that it signalled last year when it said it would begin to reduce some of its holdings. Any changes in its behaviour are politically sensitive because it is the biggest US trade partner and has helped to finance US deficits.

Alan Ruskin, a strategist at RBS Securities, said that China’s behaviour showed that it felt “saturated” with Treasury paper and that this is the sign of a trend. The change of sentiment could come at the detriment of the US dollar and the Treasury market as the US has to look to other countries for financing. Japan and the UK could pick up some of that slack and last month both added to their Treasury holdings. However, the overall monthly sell-off of $53bn was the biggest on record.

The figures come as the White House grapples with how to cut the US deficit, which is projected to be $1,560bn in 2010, or 10.6 per cent of gross domestic product. However, the move away from the safety of US debt is a sign of growing confidence in the global economy.Net purchases of long-term US securities declined to $63.3bn from $126.4bn in November, according to Treasury figures. Foreigners increased their purchases of US equities, buying $20.1bn in December after buying $9.7bn the previous month.

However, Gregory Daco, economist at IHS Global Insight, said that global appetite for US assets remained relatively solid , and that the recent turmoil in European bond markets caused by the Greek debt crisis meant the US would remain attractive even as the dollar strengthened.

“A stronger US dollar should not deter foreign investments as long as real GDP [gross domestic product] and productivity growth remain strong,” he said.

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