Bond vigilantes now likely to shift from Greece to the US and UK
Posted on 30 June 2011 with 1 comment from readers
Greece kicked its debt can down the road again yesterday. It will of course return as the implementation of austerity measures fail to deliver the economic growth required to pay a mounting interest bill.
But then the same could be said about the UK whose public sector borrowing over the past two months was up and not down. Bond traders have recently renewed the pressure on UK bonds for higher interest rates and lower bond prices.
US bond vigilantes
It is the same story in the US where the deadlock in Congress over budget cuts and deadline for the raising of the debt ceiling by August 2nd leaves the bond vigilantes with plenty of room to play their profitable game.
In both the US and the UK interest rates are being artificially held well below inflation rates. That is nasty for bond holders who are making a loss in real terms, and it leaves the market open to invasion by the vigilantes who try to accelerate the inevitable in these circumstances, namely higher interest rates.
US debt may be downgraded by the ratings agencies mid-month providing another target for such speculation. This certainly marks a shift away from a rush into US treasuries as a safe have during the Greek crisis.
And lest we forget the QE2 bond buying program by the Fed ends today. It will carry on rolling over some debt but the largest buyer of new debt is gone. That is not ususally a positive for any bond market.
What does this mean for investors? Short positions in US and UK treasuries ought to be very profitable but this is a market dominated by expert traders so the amateurs need to be careful that they are not as so often behind the curve.
New safe havens?
If treasuries are not a safe haven then what is? Inevitably precious metals will look more attractive, and will do until interest rates on bonds are above inflation – a day that still looks far away.
Stocks might pick up by default if treasuries are under pressure but such a heightened level of uncertainty is not what makes investors confident and they may sit on the sidelines in cash. The would leave stocks drifting sideways to lower.
Then you have to consider how austerity will really impact on the US and UK as it begins to filter through and real cuts are made. In the UK they have barely started as the rising monthly debt figures proclaim while in the US the Congress knows it wants cuts but has not made them yet.
In the meantime, expect some volatility in US and UK bonds where the policy of low interest rates with rising inflation looks unsustainable. The US dollar should benefit from the renewed pressure for higher interest rates.
1 Comment posted by readers:
I can see money moving out of debt into equities, unless they are dumb enough to let the Government shut down. Yesterday on Fox Business, Charlie Gasparino said that he had information that the House Republicans won’t go for a temporary debt ceiling fix because they don’t want to have to vote on the issue twice. He said they won’t agree on any tax increases.
After Obama’s press conference yesterday, it looks like we might be heading for a BIG stock market crash on Monday, August 1. A 1,000 point loss by the close of trading on August 2 wouldn’t surprise me. Thereafter, I expect a 200 to 500 point drop each day, until the debt ceiling is raised.
Every 7.6 seconds, someone in the USA turns 65 years old. That will last for the next 18 years.
Greenspan says Greece is the key to the future of the US economy. If Europe is taken down by Greece, US business profitability will suffer a LOT. A Greek default is inevitable, UNLESS fiscal consolidation happens in Europe, which he doesn’t expect. On August 3, 40% of the US spending will need to be cut immediately. The USA WILL continue to pay the interest payments, and won’t default. That is his opinion on what will happen. He thinks that when the 40% Federal budget shortfall hits, and the Government can’t pay its’ bills, and Congress witnesses the Federal Government shutdown, everyone will soon come to their senses.
This is going to be fun to watch. It will be interesting to see what happens to the price of gold as August 2 approaches and the panic begins. Will the President or Treasury Secretary make a formal announcement that the USA will honor its’ debt obligations first, no matter what else must be cut. I would expect that on Monday night in order to prevent a global financial meltdown.
Geithner will resign as Treasury Secretary after the debt ceiling is settled, CNBC.
Smart man to get out before peak oil becomes a BIG problem. The head of Shell USA just said that economic growth will soon make oil supplies very tight. He is the first person, (other than myself), that I have heard say that locomotives could run on liquefied natural gas (cryogenic with hoses from insulated tank cars connected to the locomotives.). Oil will have to get REALLY expensive before that happens. But it beats going back to steam engines, even though they are far cooler than boring diesels. Steam engines employ a LOT more people too.
As you can tell, I’m still mad that I just missed the steam era. When I was a little kid spending the weekend in my grandfather’s ‘camp’ (a small house built over water on piles) over Lake Pontchartrain, the Southern Railroad had ALREADY switched to diesels. The whole shoreline along Hayne Blvd. in the Eastern part of New Orleans was lined with ‘camps’. You had to cross double tracks to get to them. The weird thing was that they remained there virtually undamaged until hurricane Ivan hit in 2004. That camp was OLD when I was a kid swimming in the Lake in 1957. Ivan damaged it, then along came Katrina in 2005. It wiped out all the camps on the Lake. They can’t be rebuilt because of sewer issues, although I see that 4 have been rebuilt east of Hayne Blvd. on dry land owned by private individuals. People who used to spend their summer weekends over the Lake miss that lifestyle. You could go to a camp, and it was like you were in a different world on the other side of the levee. It was amazingly quiet, with fantastic sunsets on the Lake. The crabbing was great too. Elvis filmed parts of ‘King Creole’ at one of the camps. As I recall, someone got shot on one of the camp ‘runs’ (a wooden walkway connecting the camp to the land). You had to pay the railroad a trivial annual fee to cross their tracks. If you visit Google Earth, and go to the corner of Hayne Blvd. and Paris Road, you can still see the (closed) bar that my grandfather, Joseph Jensen, kept in business. He lived for 86 years. Beer can’t be too bad for you.
That airport terminal building is an Art Deco masterwork. It is currently being renovated by experts. They surrounded the original building with heavy concrete during the Cold War in case the Russian nukes missed by a few miles. The lobby has a VERY COOL large bronze compass embedded in the floor. It shows the distances from New Orleans to some of the great cities of the world. Katrina put water over the land, but I don’t think it got into the raised terminal building. It is one of only two such Art Deco classic airport terminal buildings from the 1930’s left in the USA. The renovation should be complete for the next Super Bowl in New Orleans in 2013.