Debt Auctions Bombing … China Heading for the Hills … Higher Rates Dead Ahead!

Debt Auctions Bombing … China Heading for the Hills … Higher Rates Dead Ahead!

by Mike Larson 02-19-10

Mike Larson

You can’t count on Washington to proactively warn you about major economic and market problems …

blackhalfarrow Debt Auctions Bombing ... China Heading for the Hills ... Higher Rates Dead Ahead! Politicians and Fed policymakers failed to warn investors away from tech stocks during the Nasdaq bubble.

blackhalfarrow Debt Auctions Bombing ... China Heading for the Hills ... Higher Rates Dead Ahead! They failed to warn you in advance that the housing and mortgage markets would crash.

Now, they’re doing it again!

They’re failing to warn you about the next massive threat to your wealth — a Treasury bond crash and the corresponding surge in interest rates.

Fortunately, as a Weiss Research subscriber, you don’t have to worry …

  • We warned you that tech stocks would crash well before they did.
  • We told you the housing market would implode well before it did.

And as you know, for months we’ve been ratcheting up our warnings about the government bond market.

Now, the very latest data suggests the day of reckoning is fast approaching. This is no longer some theoretical, potential future event. It’s a crisis that could strike with deadly force at virtually any time. You simply must consider taking action to protect yourself and profit before it’s too late!

Let’s get right to the numbers …

10-Year, 30-Year Auctions
Stink Up the Joint!

Every few weeks, Uncle Sam floods the bond market with a deluge of new long-term notes and bonds. The government has no choice! It’s running massive budget deficits, with tax revenues failing to cover expenses, and it has to borrow to make up the difference.

Historically, the Treasury Department hasn’t had any trouble finding buyers for its bonds. It could always count on loyal foreign and domestic bidders to show up at its debt auctions.

Treasury is having trouble finding buyers for its bonds.
Treasury is having trouble finding buyers for its bonds.

But times are a-changing!

Just a few days ago, Treasury tried to auction off $25 billion in 10-year notes and $16 billion in 30-year bonds. Investors failed to step up to the plate in either auction — a bright red warning sign for bonds if I’ve ever seen one!

With the 10-year auction, only 33.2 percent of the notes sold went to so-called “indirect bidders,” a group that includes key debt buyers like foreign central banks. That indirect share was well below the 39.3 percent average for the last ten auctions, a sign that foreign buyers are no longer buying aggressively.

Not only that, but the auction’s bid-to-cover ratio fell to 2.67 from 3 at the last sale. This indicator measures the dollar volume of bids against the dollar volume of Treasuries being sold. The lower the number, the less aggressive bidders are being.

Finally, the Treasury had to sell the notes at a yield of 3.692 percent. That was higher than the 3.68 percent investors were expecting. Translation: Uncle Sam had to pay up to get buyers to open their wallets!

As for the 30-year bond sale, Treasury had to pay a yield of 4.72 percent, more than the 4.687 percent estimate of analysts. The bid-to-cover ratio was just 2.36, compared with an average over the last 10 auctions of 2.48. And indirect bidders took down just 28.5 percent of the bonds sold, compared to a 10-auction average of 43.2 percent.

There is simply no way to sugar-coat these results. They stink! And the lousy debt auction results aren’t the only cause for alarm …

China Heads for the Hills,
Dumps the Most Treasuries on Record!

Foreign creditors own roughly 60 percent of all our marketable debt outstanding. That means we’re in hock to the rest of the world like never before in history.

The biggest buyers of our bonds are countries like China, Japan, Russia, and the OPEC block of Middle Eastern nations. And now, we’re seeing signs that they’re fed up — and starting to head for the hills.

China recently sold a big chunk of its stockpile in Treasuries.
China recently sold a big chunk of its stockpile in Treasuries.

Take China …

It’s been our largest foreign creditor for a long time. But a not-so-funny thing happened in December. It dumped more Treasuries than in ANY month since the government started tracking in 2000! Specifically, China sold a net $34.2 billion in Treasuries. That left it with just $755.4 billion.

Am I surprised? Not in the least! I said last September that we couldn’t count on foreigners to bail us out forever. And in August, I warned that currency reserve diversification by countries like China would ultimately lead to lower bond demand and higher long-term interest rates.

Now, as I said at the outset, falling bond demand is no longer in the realm of the theoretical. It’s happening. Right before our eyes.

And yet — AND YET — our political “leaders” are still refusing to tackle the problems that brought us to the edge of the abyss. The New York Times summed it all up with a story on Wednesday headlined “Party Gridlock in Washington Feeds New Fear of a Debt Crisis.”

Politicians are more concerned with getting reelected than tackling fiscal problems.
Politicians are more concerned with getting reelected than tackling fiscal problems.

As the story notes:

“After decades of warnings that budgetary profligacy, escalating health care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in lost tax revenues and higher spending for safety-net programs.

“Yet rarely has the political system seemed more polarized and less able to solve big problems that involve trust, tough choices and little short-term gain. The main urgency for both parties seems to be about pinning blame on the other, before November’s elections, for deficits now averaging $1 trillion a year, the largest since World War II relative to the size of the economy.”

With no one in Washington willing to tackle these problems head on, you have only one choice: Take action on your own!

Seriously consider dumping your long-term bonds. Or if you’re more aggressive, look into buying investments designed to RISE in value as bond prices FALL. You can find more details here click here.

Until next time,

Mike


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