Where will all the new money come from?

Today’s brief analysis of US Treasury Yield curves and the Debt profiles of both the USA and Italy highlights the enduring question in the title of this post.

The first graphic highlights one important issue.  We chose 2 August 2011 versus 17 February 2012 as key dates to compare the US Treasury Yield curve.  If we cast our minds back to 2 August 2012 two key facts emerge:

1. This was the D-Day of the US Debt Ceiling vote
2. The US still had a Triple A credit rating

The key take-away from the Yield Curve comparison is that even with a ratings downgrade, the US is actually able to borrow new capital at a lower rate of interest 6 months on.

However, to pour a bit of realism into the analysis, we highlight two interesting Debt profile graphics below.

The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over.  The second is the Italian Bond Maturity curve.  You will notice just how similar the USA and Italy Debt Maturity profiles are.

From this comparison, the critical question currently for us is:

Where will all the new money come from to roll over the debt maturing during the next 3 – 12 months?  QE is one option, but investors still need to be convinced that their capital is safe and relatively risk-free.  It is the Risk-free equation (or investor risk appetites) that needs to be explored in more detail.

theMarketSoul ©2012

Related articles

• Raymond James Weekly Bond Market Commentary (learnbonds.com)
• The Fed’s Undistinguished Macro Discussions Circa Jan 2006 (wallstreetpit.com)
• S&P on Italy: Borrowing is Going to Be Tough for a While (blogs.wsj.com)
• Not Making Sense Of The Economy (lezgetreal.com)
• The Italian Yield Curve Vs The Euro Basis Swap (zerohedge.com)
• Bond Report: Treasurys stay down after 10-year auction (marketwatch.com)
• Bill Gross Exposes “The New Paranormal” In Which “The Financial Markets And Global Economies Are At Great Risk” (zerohedge.com)
• Are western central banks having an existential crisis? (ftalphaville.ft.com)
• Vickers: Italy’s Debt Looks More Sustainable (businessweek.com)
• PIMCO’s Bill Gross’ New Bet On Treasuries: Roll Down The Yield Curve (forbes.com)