Technical Default Options – US Government Shutdown Analysis (Part2)

Seal of the United States Department of the Tr...
Seal of the United States Department of the Treasury (Photo credit: Wikipedia)

The real challenge and issue:

The US Debt default that is looming ever larger with each passing day that the US Congress, Senate and White House seem to treat as a brinkmanship fatigue challenge will have a specific default structure or process attached to it, that the rest of the world needs to get to grips with very quickly.

Breakdown of political party representation in...
Breakdown of political party representation in the United States Senate during the 112th Congress. Blue: Democrat Red: Republican Light Blue: Independent (caucused with Democrats) (Photo credit: Wikipedia)

What are the consequences:

Because, if Americans are willing to engage in quasi-negotiations with each other on this acrimonious level; then world beware, they will treat you with even more disdain and petulance than they have been treating each other.

And yet, no Creditor Nation of the USA seem in the least bit prepared for the hard bargaining the USA Treasury officials will engage in when the technical default moves into a more serious phase.

This is commercial war on a scale we have not experienced for quite some time.

And the most disparaging part of this process or potential risk is that no commentator has yet stood up and called time on this challenge or at the very least attempted to pull the veil from the threat and fall-out the rest of the world will experience.

The western front of the United States Capitol...
The western front of the United States Capitol. The Capitol serves as the seat of government for the United States Congress, the legislative branch of the U.S. federal government. It is located in Washington, D.C., on top of Capitol Hill at the east end of the National Mall. The building is marked by its central dome above a rotunda and two wings. It is an exemplar of the Neoclassical architecture style. (Photo credit: Wikipedia)

What next?

Of course 17 October 2013 is a technical default breach days only; because as most business people who experienced bankruptcy will attest to is the fact that you can continue to trade (on the goodwill of your creditors) beyond the point of being solvent, so long as those creditors continue to good-naturedly extend some further credit or payment terms to you.

theMarketSoul ©2013

 

Where will all the new money come from?

THIS POST IS A YEAR IN THE MAKING.

Wipe our Debt
Wipe our Debt (Photo credit: Images_of_Money)

We discovered it unpublished in our web archive today and as the theme is still very relevant today, we decided to publish it:

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

Image

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.

Image

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.

 Image

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

PS. Off course QE was the option and still remains so, for the moment…

The Return of Risk?

Department of Treasury Seal
Department of Treasury Seal (Photo credit: woodleywonderworks)

We take a brief look at two interesting Treasury Yield curves today.

The first Yield Curve takes a snapshot view of the yield curves at the end of Q1 2011 and Q1 2012.
What is very noticeable is the fact that the overall yields for the end of Q1 2012 is significantly lower than a year ago. Taking a look at the at the 5 year T-Note yields as an example, the spread between the end of March 2011 (5Yr T-Notes at 2.24% ) and the end of March 2012 (5Yr T-Notes at 1.04%) was 1.20% down. The question is what factors drove down the ‘risk-free’ rate on US Treasuries?

However, turning our attention to the second graph below, indicates a slightly different perspective; and hence the title of this post. Has and is risk returning to the capital and stock markets to levels we previously experienced?

Not quite, is the short answer, because the spread between 31 December 2011 (0.83%) versus the 1.04% rate at the end of March 2012, only indicates an uptick of 21 basis points in the yield rate. The significance is not the percentage spread, but rather the direction of movement and we will continue our analysis at the end of Q2 2012 to establish whether the direction in Q1 2012 will be maintained into Q2 and beyond.

The final question to ponder is this:

Are we finally seeing the corner turned, or are there still significant risks in the global economy and sovereign debt markets to cause a few further after shocks in the months to come?

theMarketSoul ©2012

The BIG Sovereign Debt Structure cliff – Part 1

In yesterday’s article, “Where will all the new money come from?” we concluded the brief analysis with the Sovereign Debt Maturity profiles (otherwise known as the Debt Structure) of both the USA and Italy, noting how similar the two profiles looked at first glance.

English: Update history of the rates of the Eu...
Image via Wikipedia

Digging a bit deeper today, we would like to compare those charts to cliff edges. We trust that the sentiment of the article is that we perceive Central Banks across the globe fretting about the ‘New Money’ we were referring to.  With general economic confidence waning and the outlook for a sustainable long-term solution to sovereign over (indulgence) spending fading, the landscape is looking very bleak at moment.

New money will have to be printed (Quantitative Easing or QE) if investors in the capital markets cannot be found to bear the burden of purchasing new Bond and Treasury issues.

English: Various Euro bills.
Image via Wikipedia

Some headlines over the few weeks alluded to Bond auctions in Portugal, Italy and Spain being well supported (see related article at the bottom of this post), but these were not major refunding and roll-over exercises.  Greece is continuing to be a welcome distraction for politicians and Central Bankers in both taking investor’s eye off the bigger problems coming along the line in Q2 2012 and in winning time to hopefully come up with a credible longer-term plan to reduce debt levels and then return to growth.

Auction Calendars

Let’s take a look at some of the crucial Sovereign Debt auctions coming up in the next few months:

The link below provides a time table schedule issued by the US Treasury for T-Bills, T-Notes, T-Bonds and TIPS, for at least the next six months.

US T-Bill Auctions schedule

Seal of the United States Bureau of the Public...

To get the equivalent Eurozone calendar is not so easy. (Partly because each individual country issues Bonds, as there is no Central Eurozone issuer of Bonds, but at least a central purchaser, namely the ECB – European Central Bank)

English: Development of government debt in the...
Image via Wikipedia

We are currently investigating sources of information for Eurozone Sovereign Debt Bond auctions and will return to this theme in very near future.

theMarketSoul ©2012

Where will all the new money come from?

Seal of the United States Department of the Tr...
Image via Wikipedia

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

Image

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.

Image

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.

 Image

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

Irony and Downgrade Anger

It is with a little amusement that we scanned through the Economic headlines today, following Standard & Poor’s decision to finally downgrade France’s and other Eurozone nation’s Sovereign Debt rating.  France lost its prestigious triple A (AAA) grade to AA+.

Sarkozy and French anger?  Indeed!

This image shows Nicolas Sarkozy who is presid...
Image via Wikipedia
Off course the irony is that an “outsider market agency” has at last pushed a button it has threatened to utilise, forcing a pause for both governments and investors alike.

But the problem is timing as far as Mr Sarkozy is concerned.  This is a Presidential election year in France, so this comes as a slight humiliation to Mr Sarkozy.  And so it should be! He should be shamed out of office! Therefore, hopefully S&P’s decision will  help the voters and tax payers of France sit up and realise that incompetent leadership and decision making in the Eurozone economies now urgently needs to be ‘punished’.

Thank you S&P, for taking this action, because the actions (or rather inaction) of the Eurozone bureaucracy and leadership so far in addressing the root causes of the multiple crises, is continuing to drag the global recovery off course.

Decisions to circumvent exiting (inadequate) European Institutional frameworks and pulling the wool over European Citizens eyes over the inadequate administrative burdens the bureaucrats have imposed on its Citizenry must finally come to an end.

Eurozone 02
Image by slolee via Flickr

Hopefully, we’ll see some slightly more competent new faces in the Eurozone leadership pool and summit photo call line ups very soon… Innovation in Europe might have to start with a new set of leaders?

Countries using the Euro de jure Countries and...
Image via Wikipedia

theMarketSoul ©2012

Our Lessons from 2011

 

We decided to summarise our learning from 2011 into two brief thoughts:

 

The May 1, 2010 cover of the Economist newspap...
Image via Wikipedia
  1. The pains and strains of the economic sovereign debt melt-down in 2011, should stand us in good stead to deal with even more debt and sovereign strain in 2012, as More and Bigger Europe continue to miss the point; this being that more bureaucracy and more government and regulation will not get the INNOVATION engine started again to Recapitalise Europe!

    Graphic "When Greece falls" presente...
    Image via Wikipedia
  2. Translational differences will matter.  The CLOUD is a huge business and business model transformation opportunity.  IT ‘Geekery’ and language could scupper this potential opportunity and we need to develop more ‘CLOUD TRANSLATION’ services so that a broader community and eco-system can get involved in an aspect of “INNOVATION ignition” in 2012.
Clouds over Tahoe HDR #1
Image by Bill Strong via Flickr

All the best and good luck in 2012.

 

theMarketSoul ©2011