Goldman Sachs estimates the US government will issue US$2.5 trillion in debt this year, way up on the US$850 million it issued last year. That’s partly because of president Obama’s US$800 million bail-out package.
But Treasuries investors are balking at buying up all this debt, and Treasuries prices are hitting record levels, particularly in the long-end of the market, of five years or over, where investors are worried about the long-term risk of inflation.
The US is now rated as more risky than France in the credit default swaps market.
Some analysts are comparing the situation to the 90s, when so-called ‘bond vigilantes’ forced Bill Clinton to abandon his plans to increase government spending by pushing Treasuries prices up.
The vigilantes, in that case, were trying to get the Federal Reserve to participate as well. That, apparently, it was is happening here too – the bond markets want the Fed to bail out the bail out, by buying up new long-term US Treasuries.
The biggest holders of US Treasuries, at the moment, are not US dealers, but emerging market central banks and sovereign wealth funds, particularly China and Saudi Arabia.
But US Treasuries investors say these players are unlikely to buy more Treasuries debt:
“To the extent that the Chinese and others do not have the necessary funds, someone has to buy them,” Bill Gross [head of Pimco bond fund] said in an interview with Bloomberg Television. “It is incumbent upon the Fed to step in. If they do, that will be a significant day in the bond market and the credit markets.”
Personally, it sounds to me like US bond investors are trying to get a boost on their US Treasuries holdings by forcing the Fed to come into the market.
Pimco, which is the biggest private bond fund in the world, pulled this trick before – it bought up Fannie and Freddie debt, then made a big noise about how the US government had to bail them out immediately, otherwise it would be cataclysmic for the bond markets. The government duly did, and Pimco made a killing.
