Treasury auction “sloppy”

The government didn’t get the subscription levels it was hoping for, yields are up, and the market is facing a new reality. We have come to depend on foreign purchases of our debt. The recent norm has been about 45% of buying coming from foreign lenders (foreign governments, banks, etc.). In contrast, this auction had only 35% coming from those same lenders. (http://www.marketwatch.com/story//treasurys-under-pressure-before-10-year-note-sale-2009-12-09) Where are they? In my mind, sovereigns need to buckle down and keep their cash on hand in case they need it for domestic spending. In that case, they wouldn’t want to pile it into UST. Yes, they are probably afraid of currency fluctuations and the US credit rating, but I think they are more afraid that 1. they get no return on their money and 2. they might actually need it.

We’ve discussed the short Treasuries trade for a while and are still holding on to our TBT position. We are in an environment where we could see a stronger dollar and declining Treasury prices simultaneously. In the past, a strong dollar led people to park their cash in Treasuries, but now, I think people will want to hoard their cash (deflationary) and not lend it to the government. It will be good for the savings rate – at least that. In every other respect it will pose big problems. For one, it’s deflationary, which scares the Fed. Interest rates rising may lead to another leg down in real estate (I believe this is happening already, and can be especially troublesome with the tighter lending standards).

One of our readers talks about “deflation in wants, inflation in needs”. I think he’s probably right on a relative basis, as needs will go down less than wants, but overall, both will be impacted. Yesterday, Kroger reported that even without writedowns, profits would have been down 26% (http://markettalk.newswires-americas.com/?p=6822), so the needs vs. wants might not be so clear-cut.

So the disconnects continue, and the fear of deflation continues to haunt Bernanke. But maybe, just maybe, deflation isn’t that bad. Maybe deflation is the economy’s way of rewarding the savers, despite all attempts to reward the over-spenders. Maybe for those who have savings and cash on hand, the time might come in the not-too-distant future when spending and investing (namely, putting your cash to work) will make a lot of sense. See also: Mike Shedlock’s piece from a couple of months ago (click here).

Last 5 posts by Yaron Sadan

• Portugal, and Yields, and Iran . . . - January 30th, 2012
• The Hunt for Yield - January 26th, 2012
• All eyes should be on Iran - January 23rd, 2012
• Quick note - January 19th, 2012
• Our monkey mind - January 17th, 2012

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