Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else

Tyler Durden's picture

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

As we pointed, the number one reason why 2010 is set to be a truly "interesting" year is a result of the upcoming explosion in US Treasury issuance. Fiscal 2010 gross coupon issuance is expected to hit $2.55 trillion, a $700 billion increase from 2009, which in turn was  $1.1 trillion increase from 2008. For those of you needing a primer on the exponential function, click here. But wait, there is a light in the tunnel: in 2011, gross issuance is expected to decline... to $1.9 trillion.

And while things are hair-raising in "gross" country (not least not yet), they are not much better in netville either. Net of maturities, 2010 coupon issuance will be about $1.8 trillion, a 45% increase from the $1.3 trillion in FY 2009 (and the paltry $255 billion in 2008).

Now everyone knows that the average maturity of the UST curve has become a big problem for Tim Geithner: nearly 40% of all marketable debt matures within a year (a percentage that has kept on growing). In fact, the Treasury provided guidance in its November 2009 refunding, in which it stated that it intends "to focus on increasing the average maturity" of its debt after relying heavily on Bill issuance in H2. Once again, we wish Tim the best of luck.

Why our generous best intentions to the US Treasury? Because unless the US consumer decides to forgo the purchase of the 4th sequential Kindle and buy some Treasuries (and not just any: 30 Year Bonds or bust), the presumption that the Bond printer will have the option of finding vast foreign appetite for its spewage is a very myopic one. We already know that China is a major question mark, and will aggressively be looking at pumping capital into its own economy instead of that of Uncle Sam's - at some point the return on investment in its own middle class will surpass that of funding the rapidly disappearing US middle class. That tipping point could be as soon as 2010.

As for Japan - the country has plunged into its nth consecutive deflationary period. Whether or not the finance minister announces yet another affair with the Quantitative Easing whore on any given day, depends merely on what side of the bed he wakes up on. The country will have its hands full monetizing its own sovereign issuance, let alone ours.

Lastly, the UK - well, with the country set to have zero bankers left in a few months, we don't think the traditionally third largest purchaser of US debt will be doing much purchasing any time soon.

None of this is merely speculation: October TIC data confirmed these preliminary observations. It will only become more pronounced in upcoming months.

How about that great globalization dynamo: emerging markets? Alas, they have their hands full with issuing their own record amounts of both sovereign and corporate debt as well: in 2009 gross EM debt issuance reached an astounding $217 billion, $29 billion higher than the previous record in 2007. Gross EM issuance was particularly high in the last quarter at $73 billion, with October breaking the record for the largest ever monthly gross issuance of emerging market global bonds at $38 billion (January is traditionally the busiest month of the year.) With $81 billion, 2009 was notably a record year for sovereign bonds, while gross issuance of corporate bonds amounted to $136 billion, the second highest level after that of 2007 with $155 billion.

Bottom line: everyone has major problems at home, and is more focused on the supply than the demand side of the equation.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

  1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
  2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
  3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent. We hope mainstream media takes the ideas presented here and processes them for broader consumption as indeed the Fed is caught in a very fragile dilemma, and the sooner its hand is pushed, the less disastrous the final outcome for investors. Then again, as Eric Sprott has been pointing out for quite some time, it could very well be that the US economy has become merely one huge Ponzi, and as such, its expansion or reduction on the margin is uncontrollable. We very well may have passed into the stage where blind growth is the only alternative to a complete collapse. We hope that is not the case.

Merry Christmas and Happy Holidays to all readers.

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bugs_'s picture

Well done.  Would it not make more sense

to mandate a percentage of IRA and 401k

be invested in treasuries for safety?  What

is a good estimate for the total of individual

ira, roth ira, sep ira, 403(b), and 401(k)

accounts?  Perhaps they'd only need to

mandate 5% to acheive the 2.2b.  Next

year they could kick it up to 12% to keep

the ponzi going.


Once they begin - people will have an

even bigger incentive to pull the accounts

so they will have to substantially raise the

penalties for doing so.  Expect it and


Rusty_Shackleford's picture


Review Argentina's approach to said problem...



                            over, man.

Hephasteus's picture

I guess it's time to extract the lessons from it all. There is not working compounding interest money system. It all ends like this. But it works like a champ and makes a few people rich in the mean time. Now it's time to let it go or for them to try to stick us to a we'ere always broke but interest is low there's no fixed income for everyone just a few but people take all their money out of the banks and buy gold which doesn't get inflated but doesn't earn interest. But since our banks won't pay interest for the rest of eternity why not.

arkady's picture

I do not understand some of the technical jargon in the article, but get the gist. 

My two main questions are and if anyone can field them, I will be grateful.


What is happening to Treasuries in 2010?  Bond market has always been a big mystery to me, but I am unclear as to the significance of the charts for 2010/2011.


If the Fed chooses scenario 2 and raises rates.  How will that result in runaway inflation exactly?  Other than speed up the already collapsing real estate market it will also usher in defaults for all equity lines, credit cards, etc.  This sounds more like significant deflation...

FLETCH's picture

waterfalls of liquidity as everyone dumps their bonds and the Fed is out of ammo to absorb. money supply goes nuts, consumers buy out of fear



Anonymous's picture

You nailed it buddy. That's the game plan.

deadhead's picture

Both Obama and Geithner some time ago were spewing words about the USA consumer needing to save more.  All I could think of was that they are setting the stage to drive consumer money into Treasuries.  It could end up being like the war bond approach to WW2 all over again.

I have a personal alert for Messrs. Geithner and Bernanke:  I came across two US Savings bonds for one of my kids that he received when he was born 19 yrs ago and have decided to cash them in for next semester's money needs.  It's going to end up being around $150 bucks and I do hope that it won't hurt the country too badly.  Please don't blame me if this redemption is the final straw on that poor camel's back.

Cognitive Dissonance's picture

You, my dear deadhead, will be the straw that breaks the camel's back. At least we will know who to blame for the resulting crash. Time to go underground before the angry hoards of undead are unleashed by the main stream media to string you up from your front porch. :>)

wackyquacker's picture

ding ding ding ding ding ding ding ding!

Anonymous's picture

Great idea from a bankster! Your bankster games turned everyone's 401s into 201 and now you want the rest! To the guillotines! To the guillotines!

curbyourrisk's picture

That is plan B.  A very viable alternative.  It will be doen, and it will be done to protect the people, and for the good of the people.


Sit people.....Good people...

Cursive's picture

Elevenfold, huh?  Interesting that you referenced the Sprott Hypothesis.  QE I is to sunset in March 2010, but we may have a shadow QE going on, via QuEasyGate.

Zina's picture

Yeah, QE I is to sunset in March 2010, but the "Household Sector" (freemansory? extraterrestrials?) will continue to buy all issued debt. There is no way the US Government can default on its debt. Everything is gonna be alright. No woman no cry.


Zina's picture

By the way, I have a suggestion for the tea party crowd: abolish ALL the taxes and substitute it by the Household Sector (aka the printing presses).

So the US may fund all its wars in the Middle East AND have a completely free healthcare system without collecting any taxes! The great Household Sector can easily fill all the budget needs.

Why nobody thought of this before?


Andrei Vyshinsky's picture

"...but the "Household Sector" (freemansory? extraterrestrials?)..."

You forgot antinomians, and what's more you know better. Shame. :-)

MsCreant's picture

Option three. We are all socialists now. The government will own the collapsed stock market too via bailouts.

Bob's picture

The dumbest socialists in history, then.  By far. 

Seer's picture

Who else is left, but the government, to buy a failed system?

Anonymous's picture

the government, to buy a failed system... with WHAT?? There ain't no there there...........

web dizajn's picture

who else but a socialist government, to buy a failed system? izrada web stranica

SayTabserb's picture

So, they've actually done it, at last. Congress, the Oval Office, the Fed - they've gone over the Event Horizon. You have to be right, Tyler. No way around it. You can feel it. 2009 was the one year they could get away with it. I read a post on HuffPo not so long ago where Dean Baker, arguing for more govt spending as the answer, complained about "deficit idiocy." You know, taking the deficit seriously. Krugman today talked about "fiscal scolds." The idea being: after all, as a percentage of GDP (that magical phrase used as an elixir to excuse the natl debt, however humongous), is not so great. But: they forget about its ABSOLUTE size, and this (ahem) also matters. Because we need foreign help (and the "Household!" too) to deal with it, and it's so frigging huge, there just isn't enough dough in those other, teensy GDPs to spare. I think the Blithe Keynesians may have forgotten that little nugget. One question: if they melt the market down, will they ligquefy enough? Or will they still have to use Phantoms?

Bob's picture

That was interesting:

Our colleague Rob Arnott, who always does terrific research, wrote in his recent report that "at all levels, federal, state, local and GSEs, the total public debt is now at 141% of GDP. That puts the United States in some elite company--only Japan, Lebanon and Zimbabwe are higher. That's only the start. Add household debt (highest in the world at 99% of GDP) and corporate debt (highest in the world at 317% of GDP, not even counting off-balance-sheet swaps and derivatives) and our total debt is 557% of GDP. Less than three years ago our total indebtedness crossed 500% of GDP for the first time."

Anonymous's picture

Can some one enlighten me, who are the creditors for this 575% debt to GDP? And if they are not aliens why worry.

Anonymous's picture

Creditors are fractional reserve conjurers whose principal AND interest can never be repaid without hyperinflation.

Create something for nothing and set the payment due and terms a long way off and you really can hoist yourself by your own petard.

An economic version of Stone Soup, but the Newish central bankers don't even provide the fire or the kettle.

They provide the worship of money, a golden calf, and a lotta confidence.

waterdog's picture

What could they do to engineer a stock market crash and not be choosing option #2?

Didn't blind growth get us here?


Rusty_Shackleford's picture


Riddle me this Z-men (and ladies):

When calulating an individual person's financial risk and viability, we look at his debt to income level (DTI), but when talking about a country we always look at debt to GDP.

However, is this valid?

Every dollar said government borrows and spends makes the GDP go up.

This is akin to looking at an individual person and counting everything he has purchased with his credit cards as "income".



(Also, the GDP is not the Government's income.  It is ours.

As soon as the government starts creating something of value and selling it at a profit, it can count it as it's income.)


Shameful's picture

I like where you are going with that but consider this angle, that we are their property.  Why can the government enslave us via the draft, because we are their property.  Why can the government take our property and earnings without our permission, because we are their property.  Why can the government pursue our income and property across the globe, be cause we are their property.  Slavery still exists in the US.  They got rid of private slavery and kept only public slavery.  Every American is a slave to the Federal Government.  They are free to take our fortunes and indeed our lives at their pleasure.  The only thing holding them back is the armed segment of the population, after all it's harder to rob an armed man.

skippy's picture

Shameful, with all due respect, the arms you speak of give a false sense of security.

Firstly the thief must be with in range DC/WS can be a long way, away and does your ammo have the ability to penetrate their armor. 

Secondly, in a war between facts and the *truth* the frame is cognitive not material, have you ever tried putting a hole in a thought with a bullet. Your enemy's are many, can your clip dispatch them all before the need to reload arrives?

Lastly, if any one actually uses violence *especially with ballistics* you will only further their grip of power over you and yours as it will be used to enact stronger reaction on their part. My thought is to de-legitimize their power by not participating in the voting process, take the mandate away or as voices of the people they must have sufficient backing to lay claim to such and with out the backing will be naked for all to see.

Mad Max's picture

How did that work for Chinese students in 1989?  Hungarian uprising?  Prague spring?  Palestinians today?

Nonviolent resistance works, sometimes, when the oppressor isn't all that evil and isn't all that interested.  Gandhi succeeded because the British Empire was spent.  MLK because the US culture was changing and he was in the right place and time.

Now how do I emigrate to Norway?

Anonymous's picture

Pick up a copy of Getting Out: Your Guide to Leaving America by Mark Ehrman.5

Bob's picture

A simple work stoppage is all it would take in America, I think.  No need to  march, demonstrate, etc..  A uniquely convenient revolution.  Efficient, too. 

Hell, you could fully man your post in that revolution from home.  Sleep very late and dvr the media coverage if you like. 

Too bad there are too many cowards, scabs, sycophants and stooges to give even that "uprising" any traction. 

Eternal Student's picture

Heck, keep working. Just stop spending.

But it seems to me that we're heading that way right now, in both areas.

DosZap's picture


Brother, the majority of us have already been doing this,(at least those who are smart).

No one has a clue what to do, because as you know, their NEW programs are going to affect us in way's undreamt of.

Easily have stopped me from spending on a new vehicle, or any major appliances , needs thus far, since the new Admin.

But, again, this too is/has been pre planned, IMHO.

"Never fail to take advantage of a Crisis".

(Or create one).

Neo-zero's picture

I've hear an idea floated a few place's recently about jacking your exemptions to the max and depriving them of the free loan on your money.  Starve the beast!!!

Anonymous's picture

It's a good start, but everything we purchase above-
ground feeds the beast(leech). Most companies pay taxes and all of their employees pay taxes too. Self-suffiency and boycott are our most powerful weapons. The democratic process is a total sham. Divide and conquer.


Anonymous's picture

Your points are valid to the geopolitical, although, I would point out that our masters like the illusion of kindness as it helps with their global strategic endeavors ie: spinning the good fight propaganda.

In my humble opines they are all looking at the last enchilada and whom will feed upon it, just look at all the wizardry needed in the financial's to extend and pretend this construct of power and privilege over us.

To whit, if it can be shown, their avarice, to become naked in it and of it. We could then as people of many bolts of cloth come together and remove them diminish them with out resorting too a roll of the dice on direct confrontation.

Skippy...Ya don't want the farm treatment.

narlah's picture

There is a ultimate weapon of choice - we stop supporting the system. It's called "Faith based system" for a reason. The moment 'fate' is gone - the system is down too.

Anonymous's picture

Simply stop spending except on things that makes you more self sufficient (ie. gardening, beer brewing, etc.), and refuse to take on new debt with any bank. The cannot force you to go into debt, you make that choice yourself. Also, pay cash where possible. Banks get 1-3% of each purchase you make every time you use plastic. It's not much, but it helps. Do things that minimize your tax exposure, or trade in ways that minimize it. Buy things online that are tax free, or buy used off of sites like Craigslist and deal in cash. Stop supporting your destroyers.

Rick64's picture

Have to disagree, It will work everytime if enough people are behind it and willing to suffer for it. Ghandi succeeded because the british companies weren't making any money thus having an impact on britian, MLK didn't change things by himself their were several people,groups, and organizations. He tried to make the demonstrations non-violent and unite the people. Right place at the right time? Tell that to the people that were murdered and prosecuted.

Seer's picture

It will work everytime if enough people are behind it and willing to suffer for it.

And that's how it HAS been working: enough people have supported this system as they suffer from it...

While the British were effectively run out of India, I've got to wonder, looking at their caste system, whether it really has turned out all that well.

But yes, it's about the people preceding governments.

Shameful's picture

You mistake that I would have any intentions of fighting any kind of armed conflict.  I have zero interest in that.  My statement is simply that by the fact that a person is armed that makes a looter think twice before robbing him.  While you are correct that the Overlords are Quite safe in Mordor on the Potomac (DC) however the Orcs (IRS, EPA, etc) are less likely to unleash their full depravity when there is a chance a slave might take a shot at them.  Ultimately the gov would of course win a crushing victory over any armed resistance, no doubt.  All it would take would be to shut of water/power/food in a city for a week and the masses will gladly accept the shackles once more. Much less the use of the wonderful tech toys they have developed to murder and suppress populations.  Full agreement that armed resistance is futile, I merely think that by being armed we mitigate some of the depravity, or at least slow it down.  Think Fleet in Being doctrine.

As to not voting, they don't care.  They don't care about you not playing the game because if you don't so what?  The only way to "win" is to leave.  Deprive the beast of your labor, and your productivity.  No to be a fatalist, but the oligarchs won.  At least here in America, it's all over but the crying.  Well unless the sheep wake up, but they have their CNN, MSNBC, and Faux News to tell them it's all Red/Blue teams fault.

Bob's picture

IIRC, we already have had the lowest voting rate of any Western country for at least a generation, by far. 

I agree, the overlords couldn't care less.  In fact, it even serves their purposes, leaving only the most naive to continue fanatically rooting for the virtually indistinguishable candidates of this wonderful two party "democracy" to provide empty play-by-play analysis material for the media to trumpet.  It's like professional sports--you only need two teams to produce the Superbowl, and most people have no particular attachment to the teams on the field by the final game, but most of the population is nonetheless raptly tuned in on the Big Game day. 

Anonymous's picture

Just dont support the system. Pay off or default on your debts, and don't use credit cards or incurr more debt. Use cash or barter for all transactions, preferably barter.

If even a minority of the population would do this, the system wouldn't last 6 months.

Ripped Chunk's picture

Good advice indeed!  The IRS hates barter. The old "valuation" issue.

If its ok for the banks to fuck with valuations I think its ok for us to do so as well.

ConfederateH's picture

Not voting simply makes it that much easier for them to steal the election.  All roads lead to secession and civil war.  The federal government is far too big to be manageable, far too bloated to be rescuable and far too poorly run to be worth the effort.

The states will be forced to secesseed one by one as the federal government implodes.  Look at the break up of the USSR for tips.

Anonymous's picture

How do you know your vote even counts now? Its all electronic anyway, do you ever see when your ballot goes through the system that the number changes by how you voted? The whole system is a farce.

Bob's picture

Can't argue against your premise altogether, but the financial slavery argument seems to give short shrift to the private sector slavery most people know oh so well.     

zero-my-hero's picture

You are right, we are slaves to the government. I recently received a jury summons. I'm expected to be on call for an entire month to be available for jury duty. How am I to plan anything at work for that month? I like the idea of trial by a jury of one's peers, but the fact is it is not voluntary and feels like slavery. Why not make it voluntary? I'm sure there are many people who could use the money, or are retired and have the time and interest. I'll happily volunteer when I'm retired. Now I have to have a significant disruption to my work and scramble for child care (my current childcare coverage and the courts schedule do not overlap by just 30 minutes). Say what you will, it feels like slavery.