So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor's finally took the 'big step' on Friday 5 August, after the major markets closed.
So what next?
In our article 'US Treasuries - Are the markets really that bothered?' published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.
Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:
Is this an FX or market call?
What we meanby this question is:
Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?
All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.
Other factors that might come into play soon would be QE3 and attitude hardening by major T-Bill investors.
How the US Treasury and administration now react will be crucial.
Who are we going to trust to make this big call?
theMarketSoul © 2011
We are here to INSPIRE... Inspire vision, direction, clarity of economic thought and above all the creation of an environment in which human dignity and rights are preserved, in order to give life force to the ideas of hope and prosperity, not at any cost, but at responsibly true and fair economic factor costs; so that we can encourage the growth and development of sustainable human endeavours ...the rest is just noise! (...and if you where wondering - It's Basics)
Showing posts with label Yield Curves. Show all posts
Showing posts with label Yield Curves. Show all posts
Sunday, 7 August 2011
Monday, 1 August 2011
A sigh of relief?
Some say that in life timing is everything...
And so too it is with economics. We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.
Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.
In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14th Amendment.
And this is where the timing conversation picks up its thread again. The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending. Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt. In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries. If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.
If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.
But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.
theMarketSoul ©2011
Sunday, 31 July 2011
The US Treasury Yield Curves #2 – Do you factor inflation into the deal?
In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills. The Nominal (quoted) Yield Curves and Real Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.
Yield Curve 1
What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors. Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields. In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.
A cynic might make this remark:
“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”
They win both ways!
theMarketSoul ©2011
Source Material: US Treasury web site:
Saturday, 30 July 2011
The US Treasury Yield Curves – Are the markets really that bothered?
As a general introduction today we will look at two US Treasury Yield curves. The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.
Yield Curve 1
In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate. The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011. There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.
The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011. As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.
Yield Curve 2
In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries. (See US Treasury web site).
It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.
theMarketSoul ©2011
Source Material: US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx
Subscribe to:
Posts (Atom)