Tags: Pento | Treasury | Fed | China

Pento: Interest Rates to Jump as Foreigners Slow Treasury Purchases

By    |   Thursday, 29 August 2013 08:05 AM

Interest rates will soon skyrocket as foreigners slow their purchases of U.S. Treasurys, causing "massive interest rate shock," warns Michael Pento, president of Pento Portfolio Strategies.

The Treasury Department reported a record $40.8 billion of net foreign selling of Treasurys in June, Pento writes in an article on his company's website. That was the fifth straight month of outflow.

China and Japan, the two major creditors, accounted for $40 billion of those net bond sales. The Federal Reserve's plan to decrease its Treasury purchases, now at $45 billion a month, is prompting China and Japan to shy away from U.S. government bonds, Pento says.

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Obama Blunder Spawns Massive Profit Opportunity

If it weren't for the Fed's purchases, investors would require a much higher return, Pento asserts, saying the 10-year Treasury rate would be close to 7 percent if not for the Fed.

Treasury investors are probably worried about the record $17 trillion government debt, which is 107 percent of gross domestic product (GDP), and a weakening U.S. dollar, as well as inflation on account of the Fed's record $3.6 trillion balance sheet.

Japan has more debt as a percentage of GDP but, unlike the United States, it has a history of deflation and only 10 percent of its debt is foreign held, while 50 percent of U.S. debt is held by foreigners.

"Therefore, there hasn't been any real concern about foreigners abandoning the Japanese bond market because of a fear that the yen may collapse," Pento explains. "But the tremendous number of foreign U.S. creditors need to be constantly vigilant of the dollar's value."

When the Fed stops buying Treasurys, both foreign and domestic investors will also halt purchase, he predicts. No one will be buying Treasurys unless prices drop. "The effects of rising rates will be profound on currencies, equity prices, real estate values and economies across the globe."

While not as pessimistic, other experts agree the Fed's plan to wind down its bond purchases is causing foreign investors to avoid Treasurys.

John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, said China might be delaying purchases until yields rise, according to China Daily.

Also, China may have less money to invest as it transitions from an export-driven economy to one more based on consumption.

"If you're not an export-driven economy and you are more of a consumer-driven economy, your exports will come down, your imports will increase, so your current account deficit will come down," Praveen tells China Daily.

"So they have less money to invest. It may be part of that overall strategy, of reducing how much money they put into the U.S. Treasury market."

Editor’s Note: Obama Blunder Spawns Massive Profit Opportunity

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Interest rates will soon skyrocket as foreigners slow their purchases of U.S. Treasurys, causing "massive interest rate shock," warns Michael Pento, president of Pento Portfolio Strategies.
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2013-05-29
Thursday, 29 August 2013 08:05 AM
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