U.S. Weighs Selling 50- and 100-Year Bonds After Yields Plummet

The announcement follows a plunge in the 30-year yield to a record low this week below 2%, and also comes in the wake of many other nations opting to extend their borrowing profiles with so-called century bonds. Investors have snapped up 100-year bonds issued by the likes of Austria, although the experience of Argentina underscores some of the potential pitfalls of buying such long-maturity debt. 

The challenge for the Treasury would be to offer a yield attractive enough for the typical investor base of pension funds and institutions, while keeping a lid on the cost of borrowing for U.S. taxpayers. 

By Braizinha’s estimates, the yield on a 50-year issue would be expected to come in around 10-30 basis points above the 30-year rate.

US National Debt Spiked $363 billion in Two Weeks, $1 Trillion in 12 months. But Who Bought This Pile of Treasury Securities?

Foreign investors bought hand-over-fist. But not the Chinese!

All foreign investors combined – so “foreign official” holders, such as central banks, and foreign private-sector investors such as banks and Mexican billionaires – held $6.64 trillion in US Treasury bonds and bills, having raised their holdings in the month of June by $97 billion, and over the 12-month period by $411 billion, all of it driven by frantic buying over the past seven months. 

No country comes close to Japan and China. The third largest foreign holder is the UK with $341 billion in Treasuries, followed by a gaggle of others. Most of the entries in the list are tax havens for corporate or individual entities. Belgium is home to Euroclear, which handles large amounts in fiduciary accounts (in parenthesis, Treasury holdings in June 2018):

• UK (“City of London” financial center): $341 billion ($274 billion)
• Brazil: $312 billion ($300 billion)
• Ireland: $262 billion ($301 billion)
• Switzerland: $233 billion ($235 billion)
• Luxembourg: $231 billion ($220 billion)
• Cayman Islands: $227 billion ($191 billion).
• Hong Kong: $216 billion ($196 billion)
• Belgium: $203 billion ($155 billion)
• Saudi Arabia: $180 billion ($164 billion)

Foreign investors, as we have seen above, bought $411 billion of this new debt. Leaves $417 billion that other non-foreign entities must have bought. 

Not the Fed. It got rid of $265 billion in Treasury securities over the 12 months, reducing its holdings to $2.1 trillion at the end of June. 

So other US entities must have bought the $265 billion the Fed dumped, plus the $417 billion in new debt that foreign entities did not buy, for a total of $682 billion. But who? 

US government entities bought $106 billion in Treasury securities over the 12 months, bringing their total holdings to $5.83 trillion. This “debt held internally,” when seen from the other side, are assets in funds such as the Social Security Trust Fund and government pension funds.

So over those 12 months, the government added $828 billion to its debt. Foreign investors bought $411 billion of it; the Fed dumped $265 billion; and US government funds acquired $106 billion. Leaves $576 billion that someone must have bought. Who? 

The only one left. 

American institutions and individuals added $576 billion of Treasuries to their holdings, bringing them to $7.46 trillion. US banks were large buyers of Treasuries. According to the FDIC, in the first quarter, the latest data available, banks added $55 billion in Treasuries to their holdings, “the largest quarterly dollar increase since fourth quarter 2014,” the FDIC said.

Other large US institutional holders include bond funds, pension funds, hedge funds, businesses with cash balances that they don’t want to keep in a bank, and private equity firms sitting on their “dry powder.” Individuals are also large holders, via their accounts at Treasury or at their broker. All combined, American institutions and individuals held 34% of the US gross national debt.

Gold Nears Record Highs In Euros as Deutsche Falls To New Record Low Showing Bank Contagion Risk

Gold has consolidated on recent gains this week and has crept higher in all major currencies (see LBMA prices below) and is nearing all time record nominal highs in euros 

* Deutsche bank’s new record low at €5.80 underscores German and European banking contagion risk 

* FTSE 100 opens slightly higher after trading delay of 90 minutes on trading trading services ‘issue’ 

* GE falls the most in 11 years after Madoff whistleblower calls it a ‘bigger fraud than Enron’ 

* Gold prices are marginally lower today but are currently set for another higher weekly close as safe-haven buying continues 

* The wider economic, monetary and geopolitical backdrop will support safe haven assets and investors without an allocation to the precious metal should cost average into physical gold

12 Reasons Why Negative Rates Will Devastate The World

1. Lower bank profitability 

2. Reduced rather than increased credit creation to the real economy 

3. Higher rather than lower bank lending rates 

4. Higher rather  than lower savings rates by households and non-financial corporates. 

Similarly there is little evidence that the non-financial corporate sectors of Euro area and Japan have reduced their financial surplus by more than the US since the introduction of negative policy rates in 2014. Higher uncertainty and the pressure to save more for retirement are likely behind persistently high savings rates by both households and companies. 

5. Impaired functioning of money markets 

6. Reduced liquidity in bond markets 

7. Increased rather than reduced fragmentation 

8. Lower bond yields increase pension fund and insurance company deficits putting pressure on pension funds to match assets and liabilities. 

9. More income and wealth inequality as households and small businesses fail to benefit or are even hurt from negative rates. 

10. Central banks are trapped. 

11. The death of creative destruction and the zombification of corporations 

By potentially allowing unproductive and inefficient companies to survive, helped by low debt servicing costs, negative rates could potentially hinder the creative destruction taking place during a normal economic cycle. 

12. QE exacerbates so called “currency wars”. 

It is this sense of abnormality and uncertainty that makes businesses and consumers less rather than more keen to spend and banks more rather than less averse to taking risk and extending credit to the real economy. 

Which is also why if and when negative rates are adopted by every central bank in the world, the consequences for society, for the economy, and for capital markets will be nothing short of catastrophic.

 DYI