Monday, May 25, 2009

The Moment of Truth?

Its pretty quiet out there tonight boys and girls.

Enjoy it because it won't last long. The credit markets will be buzzing like a beehive as they attempt to sell $100 billion in treasuries this week. Is this week the moment of truth? Could we have a failed auction over the next two weeks as we attempt to sell $170 billion in treasuries?

I wanted to share one article tonight around this.

US Dollar is trading near a 5 month ow in Japan tonight:

"May 26 (Bloomberg) -- The dollar traded near the weakest level in more than five months against the euro on speculation bond sales this week may renew concerns that a record supply of Treasuries will jeopardize the U.S.’s AAA credit rating.

Record Borrowing

Ten-year Treasuries completed the biggest weekly loss since June 2008 as the U.S. prepared to resume debt sales after a two- week pause. The Treasury plans to sell $40 billion in two-year notes today, $35 billion in five-year notes May 27 and $26 billion in seven-year notes May 28. It will sell $61 billion in three-month and six-month bills in a weekly auction today.

The U.S. is boosting debt sales to $3.25 trillion in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of 16 primary dealers required to bid at Treasury auctions, as President Barack Obama borrows record amounts to try to snap the steepest recession in at least 50 years.

S&P lowered its outlook on the U.K.’s AAA credit rating May 21 to “negative” from “stable,” raising concern that the same may happen to the U.S.

“Given growing concerns about U.S. creditworthiness, capital outflow from the dollar-denominated assets may gain further momentum,” said Kengo Suzuki, manager of the foreign bond trading department at Mizuho Securities Co., a unit of Japan’s second-largest banking group."

My Take:

Hold on tight this week folks! We got a lotta debt to sell in the credit markets. Something to take note of: If there is weak demand for this debt as the world continues to worry about our solvency, the primary dealers like Goldman get affected. They must fill the gap with liquidity if the demand isn't there.

This leaves them with less liquidity to pump into the market. It appears to me that the primary dealers will be doing a hell of a lot of financial juggling over the next two weeks as we sell record amounts of debt.

So the question to ask here is this: Do the Fed and the primary dealers pull liquidity out of the stock market in order to increase treasury demand and keep the bond market moving?

The resulting sell off in equities as the liquidity is pulled would of course scare investors back over to the "safe haven" of treasuries. This would dramatically help them sell the $100 billion in debt that they need to dump this week.

I wouldn't at all be surprised if we saw a lot of red in equities over the next two weeks as these massive bond sales continue.

As always, keep an eye on the bond market.

Stay Tuned!


Anonymous said...


The Fed has the perfect catalyst to sell Treasury notes this week. As GM faces bankruptcy deadline, clownvision will sure beat that subject to death. That will stir up fears and take down the market. Then investors will take flight to Treasury notes for safety.

I think the Fed picks this week for that exact reason.

Jeff said...


Great Point!

I Forget the whole GM cramdown goes down this week. I am sure the bond holders will be thrilled! Not!

Futures have sunk slightly into the red as I type.

Its going to be a short but exciting week.

Anonymous said...

Round one goes to the gub; looks like today's auctions were a success.

Jeff said...

It was GM mostly today. $30 billion bailout.

What a total cluster****.

Sigh. They are addicted to bailouts.

I will have a post up but it won't be up until around 7-8. Lots of reading to do