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The first one is the USA Treasury Maturity curve (admittedly 6 months out of date), highlighting when the current debt will need to be redeemed or rolled over.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

The Flight – Keeping an eye on the real 30 Year Treasury Yield Rates

The real (inflation adjusted) 30 Year T-Bill rates have since the beginning of the year averaged 1.72% (simple averaging).

 

 

Since the beginning of September 2011 the average real rate has dipped to below 1.00% to 0.99%. (Our measurement).

 

Does this mean that the flight to other asset classes is now in full-swing or rather; where on the ‘flight to safety’ trajectory do we believe we are now?

 

We offer no opinion, but keep your beady eye on the T-Bill rates in the months to come, especially when the election process officially kicks off in the USA.

 

theMarketSoul ©2011

US Treasuries – Expanding the confidence time horizon

In our previous analysis piece on the Erosion of Confidence in the Capital Market, we discussed the downward trend in US T-Bill since 2006. In today’s brief analysis piece we have expanded the time horizon to the last 10 years from the beginning of 2001 to the end of the second quarter in 2011 (being June 2011). The view is each quarter end point for both 1 and 10 Year US T-Bills for this 10 year period.

 

What is interesting about both the 1month, 1 Year & 10 Year charts is the steady rise in rates (and economic confidence since the Iraq war in 2003 for both 1month and 1Year T-Bills). The Iraq war was declared on 19 March 2003 and this is the low point of the yield curves, followed by a steady rise in yield rates to their highest point (1 Year T-Bills) on 27 June and 18 July 2006 at 5.28% respectively.

The other point to note is the steady state of the 10 Year T-Bills between 2001 to 2006 bouncing around between 4% and 5% and then the steady erosion in returns since Q3 2006. As of 19 August 2011, 10Year T-Bills yielded a nominal 2.07% or a real (inflation adjusted) return of 0.02%.

The flight to more traditional bullion assets or other currency classes has been marked, with currencies such as the Swiss Franc, Canadian Dollar, Sterling Pound & Australian Dollar appreciating in value relative to the US Dollar as the flight to perceived safer haven assets classes and categories continue.

Our sister site (theVirtuousContinuum, launching on 26 August 2011) will have a more detailed briefing and analysis regarding the lack of Global coordinated Financial and Economic Leadership in order to stem the tide of confidence ebbing away in the global capital, commodities and wealth markets.

 theMarketSoul ©2011

Source Material:

US Treasury web site at: http://www.treasury.gov

The source input data is available by clicking on this link

US Treasuries – A steady erosion in confidence?

For today’s brief analysis of the US Treasuries (T-Bill) Yield rates, we constructed the chart and table below utilising data from the US Treasury official site.

We took a point in time being mid August for 5 consecutive years from 2006 through to 2011 and compared the 1-month through to 30 Year T-Bill Yield Curves.

As can be seen, the slope of the curves from 2006 – 2011 on all T-Bills is downward from left to right.

Some analysts view this as an erosion in confidence over this specific time period, with the lower yields indicating lower confidence in the US economic situation.  This feels a bit counter intuitive, when we compare it to our article The US Treasury Yield Curves – Are the markets really that bothered?  However, the argument is that there is a ‘flight to safe-haven / alternative asset classes’.

However, it might only partly explain the Standard & Poor’s position.

In tomorrow’s chart, we will expand the time horizon we are looking at to 10 years and choose the quarter ends to see if a different picture and analysis emerges for 1 Year and 10Year US T-Bills.

theMarketSoul © 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

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:

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx