Silver Senator Note:
Recall our prior post re Bill Gross buying Mortgages and Treasury Bonds again for Blockbuster results.
Although the idea that the US Treasury may eventually be unable to service the debt on Treasuries has gained some momentum since we first raised it a long time ago, the fact is that debt service is still only the sixth-largest Federal Budget item, despite the unhealthy $6.2 T debt increase under this Administration, Court and Congress:
http://en.wikipedia.org/wiki/2012_United_States_federal_budget
As posted, big banks/primary dealers like JPM apparently used Interest Rate Swap Derivatives to keep interest rates low for the Fed and their Mortgage/Treasury portfolios in an attempt to jump start a contracting economy, led down by housing and jobs:
http://silversenator2012.blogspot.com/2012/05/treasury-typhoon.html
The US Treasury also extended their debt portfolio duration from months to years, in case of short-term interest rises, not likely in the Greater Depression, with little demand for credit.
The fact also is, long Treasuries were a superb holding since we first bought them for clients in 1981:
http://www.forbes.com/sites/investor/2012/01/25/more-juice-left-in-treasurys/print/
While most forecast a bond bomb blowup for some time, our contrary current idea is that the Ten-Year Treasury Notes on which mortgage rates are based, currently yielding as low as 1.533%, are targeting an astounding 0.7%.
The Thirty-Year Treasury Bonds that price the growth rate of our economy, currently as low as 2.585%, are currently targeting a shocking 1.7%.
Our collegial friend Gary Shilling's easy explanation is that the real economy is contracting at a rate of 3%.
When added to the 1.533% yield of TNX, or the 2.585% yield of TYX (30-Year treasuries), that gives real yields of 4.553% and 5.585%, well above the historical norm around 3%.
Thus, like the Roman General Pompey, we take fear headlines like this cum grano salis, or a pinch of wit, whichever applies first and last:
http://en.wikipedia.org/wiki/Grain_of_salt
Somebody had to take the other (losing) side of the trade...
Time Bomb?
Published:
Thursday, 31 May 2012 | 2:42 PM ET
Text Size 
By: Jeff Cox
CNBC.com Senior Writer
CNBC.com Senior Writer
US
and European regulators are essentially forcing banks to buy up their
own government's debt—a move that could end up making the debt crisis
even worse, a Citigroup analysis says.
 |
Regulators
are allowing banks to escape counting their country's debt against
capital requirements and loosening other rules to create a steady market
for government bonds, the study says.
While
that helps governments issue more and more debt, the strategy could
ultimately explode if the governments are unable to make the bond
payments, leaving the banks with billions of toxic debt, says Citigroup
strategist Hans Lorenzen.
"Captive
bank demand can buy time and can help keep domestic yields low,"
Lorenzen wrote in an analysis for clients.
"However, the distortions
that build up over time can sow the seeds of an even bigger crisis, if
the time bought isn't used very prudently."
"Specifically,"
Lorenzen adds, "having banks loaded up with domestic sovereign debt
will only increase the domestic fallout if the sovereign ultimately
reneges on its obligations."
The banks, though, are caught in a "great repression" trap from which they cannot escape.
"When
subjected to the mix of carrot and stick by policymakers...then
everything else equal, we believe banks will keep buying," Lorenzen
said.
Institutions both in the U.S. and abroad have been busy buying up their national sovereign debt
![[cnbc explains]](http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/_News/_CNBC_EXPLAINS/_IMAGES/CNBC_explains_icon1.gif)
for years, he found.
for years, he found.
Spanish
banks bought 90 billion euros worth while Italian firms picked up 86
billion euros just between November and March.
Even in the UK, which has
avoided a debt crisis as it is outside the euro zone and able to set
its own monetary policy, banks have increased holdings of gilts by 100
billion pounds over the past few years.
And in the U.S., banks, though having "comparatively low holdings" of Treasurys, have bought $700 billion of American debt since 2008.
"Ask
the simple question: Why are banks buying sovereign debt when yields
are either near record lows, or perhaps more interestingly, when foreign
investors are pulling out?"
Lorenzen wrote.
He thinks he has the answer.
For one, the European Central Bank's
Long-Term Refinance Operations provided guarantees
for the debt, which Lorenzen deems a "heavily sweetened form of
financial repression given the pressure banks were under" to buy.
Long-Term Refinance Operations provided guarantees
for the debt, which Lorenzen deems a "heavily sweetened form of
financial repression given the pressure banks were under" to buy.
"Banks have ended up buying bonds at yields where they would happily have sold them only a few months prior," he said.
Moreover,
banks are allowed to not count the sovereign debt against their Basel
capital requirements.
Also, Lorenzen argued, European banks have escaped
the onus of stress tests this year, a less-than-subtle hint that
authorities are willing to tolerate a bit of looseness in banks so long
as they are helping to stave off a full-blown debt crisis.
"One
doesn’t have to be too cynical to hypothesize that all the disclosures
on sovereign exposure have become a bit of a political liability at a
point in time where the only buyers in size of periphery sovereign debt
are periphery banks funded by the ECB," he said.
"As
long as funding for sovereigns in markets remains in jeopardy, and as
long as there is no clear move towards proper fiscal solidarity in
Europe, we reckon there will be a strong political incentive to make
banks captive buyers.
That implies a move away from marking sovereign
debt to market, away from raising risk weights, away from capital ratios
that don't risk weight assets and away from stress tests incorporating
government bonds."
For investors in bank bonds, the news is good — for now.
"As
long as policy remains to sustain the status quo, bondholders should
come out fine.
Conversely, if the burden becomes too great, then the
alternative will most probably involve a radical departure from current
convention — to the detriment of bondholders," Lorenzen said.
"We
suspect this binary outcome requires a political judgement that many
funds are not particularly well placed to make." he added. "Instead of
those economics, accounting and finance degrees perhaps you should have
done political science after all."
Questions? Comments? Email us at NetNet@cnbc.com
Follow Jeff @ twitter.com/JeffCoxCNBCcom
Follow NetNet on Twitter @ twitter.com/CNBCnetnet
Facebook us @ www.facebook.com/NetNetCNBC
10 Comments Total
COMMENTS
| HAHAHEHEHOHO | May 31, 2012 02:47 PM ET |
AH YES A MULTI BUBBLE WORLD THAT IS NOW IN FULL POPPING MODE
LATER DEBT CHUMPS
LATER DEBT CHUMPS
| fdo | May 31, 2012 02:59 PM ET |
WOW !!!!!!!!!
is this news ???????
everyone with just a few neurons known this all along...
THIS IS NOT GOING TO END WELL FOLKS.....GET READY!!!
is this news ???????
everyone with just a few neurons known this all along...
THIS IS NOT GOING TO END WELL FOLKS.....GET READY!!!
| rintincop | May 31, 2012 02:59 PM ET |
Europe
is planning a "redemption fund," which they have been working on behind
the scene since last year. Under this scheme, all debt over 60 percent
of a country's GDP would be placed in a fund (a really big fund).
Countries could get money from the fund (backed by eurozone gold
reserves) in exchange for constitutional commitments to fiscal reforms.
Sounds like a back door way to get to eurobonds, doesn't it?
| DGS755 | May 31, 2012 03:01 PM ET |
This is the first step in getting this debt crisis behind us despite the Bankster spin it will implode.
People, the banks buy the government debt with the
phony funny money known as fiat currency. It cost's a bank nothing other than a few key strokes to create the money to buy the bonds. How can this
hurt anything ??? In fact everyone on the planet should get the same priveledge as banks to borrow all they want at 0%. The bankster scam is finally coming undone by their own greed and criminal activity. I love it. F..ck the Banksters !
People, the banks buy the government debt with the
phony funny money known as fiat currency. It cost's a bank nothing other than a few key strokes to create the money to buy the bonds. How can this
hurt anything ??? In fact everyone on the planet should get the same priveledge as banks to borrow all they want at 0%. The bankster scam is finally coming undone by their own greed and criminal activity. I love it. F..ck the Banksters !
| Buck_Ofama | May 31, 2012 03:05 PM ET |
DGS755 | May 31, 2012 03:01 PM ET
This is the first step in getting this debt crisis behind us despite the Bankster spin it will implode.
People, the banks buy the government debt with the
phony funny money known as fiat currency. It cost's a bank nothing other than a few key strokes to create the money to buy the bonds. How can this
hurt anything ??? In fact everyone on the planet should get the same priveledge as banks to borrow all they want at 0%. The bankster scam is finally coming undone by their own greed and criminal activity. I love it. F..ck the Banksters !
Pure Poetry!
This is the first step in getting this debt crisis behind us despite the Bankster spin it will implode.
People, the banks buy the government debt with the
phony funny money known as fiat currency. It cost's a bank nothing other than a few key strokes to create the money to buy the bonds. How can this
hurt anything ??? In fact everyone on the planet should get the same priveledge as banks to borrow all they want at 0%. The bankster scam is finally coming undone by their own greed and criminal activity. I love it. F..ck the Banksters !
Pure Poetry!
| seanindundee | May 31, 2012 03:09 PM ET |
And you see this as a problem why?
It was a house of cards before, and now it's like a personal challenge for politicians to see who can balance even more cards on top of all that!
All this while acting like it can never go wrong.
It's not creative accounting anymore— it's criminal accounting and we will all pay for it in the end with a full implosion of the system.
It was a house of cards before, and now it's like a personal challenge for politicians to see who can balance even more cards on top of all that!
All this while acting like it can never go wrong.
It's not creative accounting anymore— it's criminal accounting and we will all pay for it in the end with a full implosion of the system.
| TRUTHschmuck | May 31, 2012 03:10 PM ET |
When
the euro was at $1.40 that conjob guy used to describe it as the
mighty, manly 40% higher than the USD. Now that the Euro is sucking bull
pizzle at $1.23 it is now mighty, manly, kingly, lordly 23% higher than
the USD. If this sucker ever drops to parity there may not be enough
adjectives in the english language to make up for the percentage drop.
LMAO
http://www.cnbc.com/id/47631340
http://www.cnbc.com/id/47631340
| glocksngold | May 31, 2012 03:15 PM ET |
Just like a black ruled third world banana republic, if you'll pardon all the redundancy.
http://www.cnbc.com/id/47633576
I doubt the American sheeple will choose Dr. Paul, unfortunately. Continue to build and plan for the worst and stock up on ammo, once the “election” is over, it’s going to get ugly.
Why use “peaceful” protest against tyrants? What a great opportunity to have Bilderberg’s toads in one place. What a great service to mankind than to hold the severed heads of David Rockefeller and Heinz Kissinger up to the people?
Why else would they still be playing all these 80′s so-called ‘Classic Rock’ hits, which never remotely served a function on the real music lover’s ‘A-lists’ ?
And ROCKEFELLER is its prophet!
That’s why your car gets 22MPG on poisonous fuel, why Women are getting 400% more breast cancer (from filling their own tanks) and why there was a war //”Prohibition” //on alcohol and Hemp…
I don’t see why the world can’t cooperatively “detain and de-throne” the uber-wealthy Billionaires, and underwrite a ‘NewStart” arrangement for the remainder of humanity at large?
Imagine actually being able to enjoy places like Miami, Paris and New York City again, just as they have existed for their residents over time!
Ron Paul Loses His Home District
By Joe Deaux – 05/30/12 – 11:08 AM EDT
NEW YORK (TheStreet) — Rep. Ron Paul (R., Texas) failed to win his home district in the Texas primary Tuesday night as Mitt Romney clinched the GOP nomination.
RON PAUL 2012!
The answer is obvious then! Ron Paul is controlled opposition, right?
Now that’s an embarrassment!
So I get the big picture…..lol
The Pauls Build A Libertarian Machine
From Kentucky to Texas, libertarian acolytes are poised to win primaries and take over their party. “We need reinforcements,” says Rand.
http ://www.buzzfeed.com/rosiegray/the-pauls-build-a-libertarian-machine?s=mobile