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Primary Dealers Will Not Be Happy With The Record Direct Bid In Today's 7 Year Auction
Just like in yesterday's scorching 5 Year auction, demand for today's $29 billion in 7 Year paper was blistering, with a yield of 2.105% stopped through the When Issued 2.108%, and the lowest since November as appetite for the belly of the curve is the highest in months. The Bid to Cover was also very strong at 2.723, the highest since November 2012, and like in other shorter-maturity auctions, has reverse the recent declining trend in BTCs. But the most notable features in the conclude auction, the bulk of which will naturally be quickly flipped back to the Fed, is that while Indirects took down 41.12% or spot on with the 12 Month average, and Dealers were left with 34.28%, below the 40.0% TTM average, it left Directs with 24.6% - this was the highest Direct take down in the history of the bond. The Primary Dealers, who have been openly complaining about Direct Bidder participation in bond auctions in recent weeks, will certainly not be happy about this particular development as increasingly more paper goes straight into the hands of Direct bidders.
Most importantly, and like before, if there are still any vestiges of the Great Rotation from bonds to stocks, don't look for them here.
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Interesting the increases in US Treasury debt "foreigners" have amassed.
Global
Jan '00 - '07 - Dec '13
$1 T ---> $1.6 T ---> $5.6 T (cumulative "foreign" held US Treasury debt)
25% ---> 40% ---> 55% (% of notes / bonds held by "foreigners")
1% ---> 1% ---> 25% (% Fed held notes / bonds...Fed primarily held Bills until '08)
74% ---> 59% ---> 20% (% domestically held notes / bonds)
180% ---> 130% ---> 247% (% public vs. intra-gov debt)
350% increase (public outstanding debt, $3.5 T to $12.4 T)
250% increase (intra-gov debt, $2 T to $5 T)
6.6% ---> 5% ---> 2.4% (net interest rate on debt)
$300B -> $270B ---> $223B (net interest paid on national debt)
$9.2 T --> $13.7 T --> $16.1 T (GDP = 75% increase);
$5.7 T --> $9 T --> $17.4 T (National debt = 305% increase )
Japan vs. US debt - In Japan we are told institutions buy Japanese debt due to deflationary conditions coupled w/ a sense of national duty but nearly all Japanese debt is domestically held. In the US, 1/3 of all Treasury debt is now "foreign" held and 55% of Public Outstanding. With the Fed tapering (for argument sake to zero by year end) and deficits persisting, someone will need to continue buying the new issuance of a minimum of $500 B plus rollover all existing debt. States and domestic institutions are loathe to buy @ such low rates. This leaves only "foreigners" to continue increasing their gross and % of US debt likely to 75% holdings of all notes / bonds by 2015 and nearing a 50% holding of all US Treasury debt.
The implications for Japan are scary but regardless whatever debt level is hit and the corresponding interest payments, the silver lining is the money will remain in the Japanese economy. These Yen paid in interest can at least stay within the Japanese economy increasing the money velocity and multiplier effects.
The implication for the US are honestly far worse as "foreigners" are under no such national duty and may redeploy assets as they please. Much of the interest paid to "foreigners" simply exits the economy with no multiplier or velocity effects.
The idea that this is sustainable or that US debt isn't an issue right now, right here is unbelievable. There is a $5 T and growing weight over our heads and the rope suspending it can fail at any moment. A reversion to the average 50yr yields around 7% would produce Treasury yields with gigantic interest payments, of which nearly half would exit the economy to "foreigners":
5% blended interest payments = $875 B of which nearly half would likely exit the economy.
7.5% = $1.3 T
10% = $1.75 T
(btw - total '13 Federal tax revenue = $2.8T)
Of course there is always the chance that the Fed (or it's agents) are actively buying Treasury's in a shadow QE as some portion of the "foreign" demand. And that's a whole other discussion.
Jus saying.
if i were a foreign bank,
i would short yen and buy treasuries. once the default happens, come and get all the collateral.
Oh, is so so sad and gloomful... Crony middleman dealer is make less money. Please to wait while Boris is stimulate tear duct for authentic appearance of cry.
We gave China the gold, why not the rates. Bring it on, bitchez. Step inside...step inside.
This:
"gigantic interest payments, of which nearly half would exit the economy to "foreigners" "
There really is no way that the US' Ghordian knot can be undone.
No, is afraid knot.
If foreigners want to buy long-term US debt at historically low yields, I say let them buy it.
Funny domestic buyers (states, pensions, institutional buyers) have acted somewhat rationally...buying next to none of the low yielding Treasury debt as higher yielding debt continues to roll off their balance sheets.
However, "foreigners" love our debt the lower the yield goes and just literallly can't get enuf. Sorta made sense in '09 as a "flight to safety" meme but now??? Looks quite irrational "foreign investors" or "foreign CB's" would plow ever more to receive ever less???
Really makes one wonder who those "foreigners" are and who's really on the hook for those purchases...qui bono? If I were a cynical man, I'd sugget the Fed is buying the majority of this "foreign" debt and that after a engineered interest rate spike..woud pull off a wildly popular move with the electorate of defaulting on our "foreign" debts... where unbeknowced to the populace, the US tax payers were actually the ultimate holders...luckily I'm not so cynical.
"Really makes one wonder who those "foreigners" are and who's really on the hook for those purchases...qui bono?"
Round-Robin debt in the suspended state.
The US Fed buys Japanese debt and Japan buys US debt. Same with the Euro debt.
Hambone
Don't forget the trillions of US dollars propping up much of this foreign held debt.
It is a circle jerk and the US taxpayer gets the full face surprise.
im surprised at the behavior of the 10y as of late
seems to be quite divergent from gold, s&p, and the dollar.
canary in the coal mine?
yield of the 10yr is about a .5pt higher than what it was in darkest depths of the '08/'09 GFC...w/ S&P 666...now S&P @ 1850 and 10yr yields only slightly higher and 5yr bout the same...as during '09 "flight to safety" bid.
The 10yr indicative canary was put down a while ago...it's just a little stuffed bird now where once a "market" may have existed.
As always, fuck the primaries.
No worries, the NY FED will reverse repo treasury collateral to anyone that needs it to backstop "investments" like money market gambles in ukrainian, italian, spanish paper. Who needs to buy treasuries when the NY FED will pay you to take it from them for a day (or two, or three, or four...).
$130 billion in reverse repos yesterday. dudley said it was only to be used for "operational readiness"...my a$$
Right.
Rotation from Stocks to Bonds now as they are getting ready to clean some 401K/IRA/Pension fund chips off of the equity craps table.
The mutual fund managers are dusting off their "don't panic, invest for the long term" speeches and the CONgress Critters readying some legislative band-aids.
the subsidized tbtf middle men oligarchy are concerned about the subsidized tbtf middle men oligarchy. why can't we outsource them too?
EM crashing, FX tanking, Euroland sinking, China, well who knows wtf is going on over there but it aint pretty either way, throw in some geopolitics, Ukraine, NK, Venezuela, Argentina, did i forget MENA? sheesh
RISK ON and coming to a theater near you...