After a year of calling for the bursting of the Treasury bubble, I am seeing it unfold in front of our eyes.
For more than a year, I have been calling for the collapse of US Treasury bonds, which will lead to massive rise in interest rate while growth remains tepid.
This started back in the dark days of 2008, when the financial world was collapsing and the average investor was fleeing to the ‘safe haven’ investment of US Treasurys. While I understood the action, I couldn’t help but shake my head in disbelief about the dolt mentality that was driving this trade.
The biggest cause of the collapse in 2008 was the over-leveraged markets. Debt levels were at record highs, both at corporate and national levels. It wasn’t just the Fortune 1000 companies that were borrowing to the hilt. It was the local and state governments who had leveraged themselves to the hilt and invested in the now defunct CDOs, CDO-Squared and other fake financial products.
When the financial high tide receded, we could see who was swimming naked in the ocean. And most were caught without their swimming trunks.
But enough about the past. Let’s see what is unfolding now and how that will crush the fledgling recovery that people say is occurring here in the US.
The crisis unfolded in the US Treasury market, where a three-year note auction was met with the weakest demand in two years. Indirect bids, a gauge for foreign central bank interest, accounted for just 27.6 percent of the $32 billion on offer — the lowest takedown since May 2007.
The result saw the US 10-year bond trade 11 bips (basis points) higher on the day to 3.74 percent; the five-year yield increased 13 bips to 2.40 percent; the two-year was 9 bips higher at 0.85 percent.
Folks, this is what I have been warning about for the past year. The foreign investors are going to demand higher, much higher, interest rates for their investment. Capital flows to where it is treated with respect (and higher interest rates). And this lack of demand is clearly indicating that foreigners won’t invest in US Treasurys if the rates remain low.
All of this is unfolding while our esteemed members of Congress play a game of chicken with the debt limits.
The U.S. laws mandate that the US Congress approve the government borrowing funds to finance its insatiable appetite to spend beyond its means. And the current level of debt authorized stands at a staggering $14.29 trillion. As of last week, the U.S. debt (including what was owed) stood at $ 14 trillion, a mere $290 billion away from the ceiling. At the current rate of spending, that ceiling will be reached in the next 45 days or so.
And some congressional members are willing to pretend to block the ceiling from being raised.
I can’t believe that any congressional member has the courage to go down in history as the person who made the U.S. Treasury default. While it is inevitable that this will happen, no one wants to be the one to cause it.
The process of reaching consensus to raise the limit will be contentious and rocky. The new found Republicans will want significant spending cuts, a move deeply resisted by the Democrats. What a bunch of bickering hotheads!
And all this while Asia eats the U.S.’ lunch!
Back in November last year, I had made the prediction of India having a sterling growth year with agriculture leading the way. And what a way that has come true. India just announced its Q3 GDP numbers — 8.6 percent growth. And agricultural component of this growth was a whopping 5.4 percent, up from 0.4 percent year over year. This will lead to a cooling down of food inflation in India, albeit not enough.
What perplexes me is what is happening on Dalal Street (India’s Wall Street) in the past several weeks. It is now down 16 percent from its peak in November and with such sterling growth and robust all round development, I can’t figure out the rationale behind such a precipitous drop, which is being attributed to inflation. I will go out on a limb and predict a swift rebound in the stock market there over the next several weeks.
So the trade over the next several weeks: sell U.S. Treasurys and buy Indian stocks (select stocks only).
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