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The
Wall Street Journal reports about the unintended cost of the bailouts.
(emphasis mine) [my comment]
Unintended
Cost of the Bailouts
By
RICHARD
BARLEY
The
gap between government- and corporate- bond yields is starting to contract, but
not as policy makers would like.
Rather than corporate-credit yields falling, making it cheaper for
companies to borrow, most of the change has come from government yields
rising instead.
Since the start of the year, 10-year bond yields in the U.S., Germany and
the U.K. have jumped, with the bulk of the move coming last week. On
Friday alone, 10-year German bund yields rose 0.15 percentage point to 3.25%,
accounting for half of the 0.30-percentage-point rise this year. That is
despite a half-percentage-point cut in interest rates.
That partly reflects the way government bonds are being used to finance
financial-sector bailout plans. The distinction between credit and
sovereign risk is blurring as losses that would otherwise be taken by the
private sector are reallocated to the public sector.
That change is visible in the credit-default-swap market, where the
cost of insurance against default is now an appreciable proportion of
government-bond yields.
In the U.K., 10-year credit-default swaps are indicated around 1.35
percentage points, or 36% of the 3.67% yield available on 10-year gilts. Before
the financial crisis, sovereign credit-default swaps traded in single digits.
The recent rise in yields also reflects supply fears. Barclays Capital
estimates government-debt issuance in the U.S., euro zone, U.K., Japan and
China will rise to $3.2 trillion in 2009, pushing debt to
gross-domestic-product ratios to record postwar levels.
The market could [will] balk at the huge issuance, particularly in the
U.S., which is slated for $1.8 trillion of new paper [it will be closer to 3
trillion]. That will test the appetite of foreign buyers, including
official institutions such as central banks that held $1.94 trillion of
Treasury debt as of November 2008, $323 billion more than a year earlier.
Bloomberg
News/Landov
Added to that is competition from newly created government-guaranteed bank
debt.
Citigroup on Friday raised $12 billion, the largest deal so far. There are
concerns about the liquidity of this paper, but the yield pickup is
substantial, 1.05 percentage points more than U.S. Treasurys on the
fixed-rate portion of the Citi issue.
Rising Treasury yields have a silver lining. A steeper yield curve
should allow banks to earn a spread and encourage them to lend. But the
Federal Reserve, under Chairman Ben Bernanke, will dwell more on the clouds.
With U.S. housing still in a mess, the central bank will be far more worried
about the impact of rising Treasury yields on the mortgage market. Last week,
data from the Mortgage Bankers Association showed 30-year mortgage rates
rising 0.35 percentage point.
The Fed already is acquiring agency and mortgage-backed debt to try to
reduce mortgage spreads. But expect more talk of buying long-dated Treasurysv
[it will be more than talk as treasuries keep falling], as it tries to force
down consumer borrowing costs.
My reaction: This
was to be expected. The government can't buy up trillions in toxic debt and
guarantee trillion more without there being serious consequences. Treasuries
will likely keep falling until the fed steps in to put a floor under them.
When the fed does start its purchases of treasuries, it will get really
interesting. Gold prices are likely to explode, despite every attempt to
contained them.
On the topic of precious metals…
I got an email from David pointing out that silver forward rates have gone
negative again (backwardation):
Silver
is in backwardation again and has been for over a week. This backwardation is
worse in terms of negative price and how many months out it goes than the
previous backwardation at the end of last year. Why is nobody talking about
this? Any comment?
http://www.lbma.org.uk/?area=stats&page=sifo/2009sifo
For more on why
backwardation in precious metals is important, see The Enormous Significance Of Gold
Backwardation.
Eric
de Carbonnel
Market Skeptics
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