Where will all the new money come from?

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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

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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.

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The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over.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.

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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

Peak Debt – What Peak Debt?

Peak Debt is in essence the point at which a sovereign nation reaches its maximum indebtedness and cannot afford to service the debt anymore, thus prompting a reduction in the debt (principal).

So, Europe proved yesterday with the uplift of the EFSF (European Financial Stability Fund) from its current base of €440bn to €1tr (boosting it by 127%), that it certainly has nowhere nearly reached European Peak Debt.

Well, as long as the Capital Markets buy this solution, can make a profit and move on to the next wave of Debt delusion, who are we mere citizens and commentators to criticise the massive instability Big Government and a BIGGER EU causes?

We argued back in 2009 that you cannot solve a “debt crisis with more debt” and this sentiment still rings true today.  So when will they ever learn?

Yours forever indebted,

theMark(debt)etSoul ©2011

Frameworks, frameworks, frameworks…

Today (26 October 2011) is an important watershed date (or not) for Europe.

Will our leaders and the politicians be able to agree an all encompassing Framework to rescue the Euro, or will we need to think about a more modular approach for the future?

We believe that it might be in the Euro’s short-term best interest to look for a more flexible, yet fragmented modular approach. However, the capital markets might not appreciate the continuous uncertainty and political wrangling whilst we keep on looking for a ‘best fit’ modular solution and what that might entail…

theMarketSoul (c)2011

US Treasuries – 4 trading days on and rates look rosy?

Today’s brief commentary piece tracks the US Treasury Yield curve of 5 August 2011 (before the Standard & Poor’s downgrade announcement) and the closing rate on 10 August 2011.

As can be observed, across the board, the T-Bill yields of 10 August are lower than on 5 August 2011.

 

It begs the question:

Is a ratings agency downgrade actually good for business?

The table below reinforces the point:

At least the volatility we have been observing in the stock markets of late, has not yet manifested itself in the capital markets.  How long can this continue?

theMarketSoul ©2011