Treasury Results for 2009

Treasury Debt Sales Top $2.1 Trillion for Year .ArticleComments (6)more in Markets

By MIN ZENG
Wednesday's successful $32 billion seven-year note auction wraps up a record year of debt sales by the U.S. government.

The Treasury sold more than $2.1 trillion in notes and bonds this year, more than in the previous two years combined, to fund a widening budget shortfall and finance programs to rescue the banking system and support the economy.

Yet, despite the supply onslaught, buyers—from foreign central banks to U.S. households and domestic commercial banks—flocked to the sales. As a result, the government's borrowing costs fell to historic lows in 2009. That provided further support to the economy because Treasury rates are the benchmark for many types of corporate and consumer borrowing.

Strong demand for U.S. debt came when the U.S. economy was in dire straits, with unemployment rising as high as 10.2% and the government's deficit ballooning to $1.4 trillion in the fiscal year to September 2009. Beside the prospect of a recovering economy, concerns that buyers could stay away from this week's record-tying $118 billion in note sales led to a sharp spike up in Treasury yields in December. Two-, five- and 10-year yields rose to their highest levels since mid-August this week.

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Associated Press DEBT PROTECTION: The Treasury's debt auctions like the large ones this week are run by the markets desk at the Federal Reserve Bank of New York, shown above in April.
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The average yield in the two-year note auctions dropped to 1.002% in 2009, down sharply from 2.078% in 2008 and 4.307% in 2007, according to Ian Lyngen, senior government bond strategist at CRT Capital Group LLC. The average auctioned yield for the 10-year note fell to 3.262% from 3.681% last year and 4.632% in 2007, he said.

Wednesday afternoon, the benchmark 10-year note was up 6/32 point, or $1.875 per $1,000 face value, at 96 21/32. Its yield fell to 3.786% from 3.809% Tuesday, as yields move inversely to prices. The 30-year bond was up 22/32 point to yield 4.605%.

"It is a victory for the U.S. government," said Amitabh Arora, head of Citigroup Global Markets' U.S. rate-strategy group. Had the auctions not gone so well, he said, interest rates would be much higher, raising borrowing costs for homeowners and companies.

But, for investors, Treasurys weren't such a good investment as an improving economy boosted the returns on riskier assets such as stocks and corporate bonds. After a 14% return in 2008, Treasurys have handed investors a loss of 3.43% through Tuesday in 2009, putting them on pace for the worst annual return since at least 1973, according to data from Barclays. In contrast, U.S. high-yield corporate bonds have delivered a return of 57.9% this year.

Nonetheless, demand at Treasury auctions remained resilient throughout the year as the Federal Reserve held rates near zero amid the still fragile economic recovery and subdued inflation pressures. The Fed's $300 billion Treasury-buying program to support the economy also helped, while many foreign central banks bought Treasurys as a way to temper gains in their own currencies, which would have undermined their exports.


Timothy Geithner
.Foreign investors, including central banks and private investors, are forecast to buy a net $333 billion in Treasury notes and bonds this year, up from $315.4 billion for 2008 and the average of $282.9 billion from 2003 to 2007, according to a research report earlier this month by Mr. Arora and colleague Vikram Rai. The strategists expect net buying from foreign investors to be $325 billion in 2010.

China, the biggest owner of Treasurys outside the U.S., bought a net $71.5 billion through the end of October, according to the latest data from the Treasury Department. Japan, the second-largest foreign holder of Treasurys, was the biggest buyer this year, with a net purchase of $120.5 billion over the same period.

Next year, the Treasury is expected to sell about $2.45 trillion in notes and bonds, setting another record. But yields may need to rise to entice buyers, particularly as the economic recovery gathers pace. Treasury Secretary Timothy Geithner said recently the economy is growing again and that job losses are expected to come down rapidly. That makes it attractive for investors to hold riskier assets in seeking better returns.

The U.S. government also will face more competition for investors' dollars as the broader credit markets recover from the financial crisis and the sale of corporate debt and mortgage-backed securities picks up.

The Fed's decision to end its $1.25 trillion purchase program of mortgage-backed securities in March next year, as well as expectations that the central bank could start to raise interest rates again to keep inflation risks at bay, will also push up Treasury yields.

"We expect 2010 to be a tougher year for the Treasury to sell record amounts" of securities, said Adam Brown, managing director of Treasurys trading at Barclays Capital Inc. in New York.

Icahn Goes to Market
Icahn Enterprises LP is offering $2 billion in new senior bonds, its first such sale since 2005.

The notes will fund the buyback of $967 million of 7.125% senior notes due 2013 and $353 million of 8.125% senior notes due 2012 at a total consideration of just over 102 cents on the dollar.

"It's nice for the bondholders, taking them out early and giving them a little extra premium above par value," said Barbara Cappaert, an analyst at high yield bond research firm KDP Advisors. "It also takes care of refinancing risks in 2012 and 2013."

The investment management firm, controlled by activist investor Carl Icahn, didn't announce the maturity of the new bonds, which is being handled through private placement, so there was no disclosure in public filings.

Chief Financial Officer Dominick Ragone on Wednesday declined to comment further on the offering.

.The company also said in a statement it is in negotiations to acquire majority equity stakes in American Railcar Industries Inc. and food packaging firm Viskase Companies Inc., in each case from affiliates of activist investor Carl Icahn.

"The company will now have a good war chest to go out looking at other investments," Ms. Cappaert said, noting that Icahn Enterprises is using equity to fund the two company acquisitions and has historically been careful to maintain a large cash balance. "It will be interesting to see what sectors they see value in and decide to go after."

Many companies over the past year have bought back bonds due in the next few years and sold new, longer-term bonds to benefit from low rates now.

"It makes sense, taking advantage of the cheap capital sloshing around the system," said portfolio manager William Larkin at Cabot Money Management.

Icahn Enterprises' 7.125% notes due 2013 gained 1.35 points to 100.5 on Wednesday in thin late-December trade, according to online bond trading platform MarketAxess, which didn't list any trades for the 8.125% senior notes due 2012.

Moody's Investors Service rates Icahn Enterprises as Ba3, and Standard & Poor's puts it as BBB-, the last rung before junk status.

Mr. Icahn has taken positions in companies ranging from Take 2 Interactive Software Inc. to CIT.

Write to Min Zeng at min.zeng@dowjones.com

12/26/09 - the prospects of asset-backed keynsianism

treasury increases commitment to back freddie and fannie, removing any limit to the funds that would be used to support these agencies and reinforcing the administration's stake in trying to jump-start an asset-backed, comsumer-led keynsian econ revival. by stabilizing asset prices, most essentially home prices, it is hoped, will stabilize consumer spending which is the targeted engine of econ growth through the maintenance and increase of demand. demand thus leading the way to production, rather than vice versa.

the prospects of asset-backed keynsianism
a.) structurally impaired by shrinking credit available to consumers
b. the consumer is saving, repariing over-extended debt purchasings
c.) those on fixed incomes are constrained by near-0 interest rates
d.) a loss of 17 million jobs
e.) a second wave of foreclousres await with any future fise in interest rates or the ending of tax subsidies

deflation-inflateion prospects

a.) it looks like a draw
b. asset price inflation will reflect the effect of a weakening dollar, rather than a strengthening economy
c.) commodity price inflation will actually pressure corprate profits and to lead to alessening of demand for commodities. there will be little wiggle room for pass-through pricing of rising commodity costs.


capitalism's reappraisal

a.) an economic system is not a theoretical creation, it is successful insofar as it meets the needs of a society and that society's power relations between classes.

b.) capitalism exists under many different political systems or states: china, germany, japan, the us

c.) the 70s proved the vulnerabiliites of even the strongest domestic economy to extra-territorial forces, - oil shock, increasingly competitive japanese and euro imports.

d.) the domestic space was unable to remain self-regulating - the symptom was inflation

e.) neo-liberalism's reign will challenge the political space of the nation-state.

f.) capitalist success often involved the political choice to ignore social and environmental costs in the calculation of profits.

Lending Squeeze Drags On - Dec 9 2009 WSJ

DECEMBER 9, 2009.Lending Squeeze Drags On .ArticleComments (58)more in Economy ».EmailPrinter
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. Text .By LIZ RAPPAPORT and SERENA NG
Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.

The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. Before then, borrowing by U.S. consumers -- including credit-card debt and auto loans, but excluding mortgages -- had been growing for more than a half-century.

Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.


It's not just consumers having trouble borrowing. For all the talk of a revival in financial markets and a perception that the economy is on path to recovery, many companies lack easy access to borrowing.

"Despite the general improvement in financial conditions, credit remains tight for many borrowers," Mr. Bernanke said in a Monday speech, "particularly bank-dependent borrowers such as households and small businesses."

In the process of adapting to post-crisis realities, the nation's lending markets have changed significantly. In particular, markets where the U.S. government is either a big borrower or a de facto guarantor are ballooning, while some corporate-lending and consumer-finance markets have shriveled.

A Wall Street Journal analysis of data from the Federal Reserve and private research firms shows that these corporate- and consumer-credit markets have shrunk in size by 7%, or $1.5 trillion, in the two years through early November.

The financial markets that support credit-card lending, auto loans and home mortgages not backed by the government are between 10% and 40% smaller than they were in the second half of 2007.

On the other hand, Treasury debt outstanding has jumped about 40% as the government races to finance its deficits and investors seek the safety of U.S.-backed debt. The market for securities backed by mortgages that are effectively guaranteed by the government has expanded by 21%.

Credit markets have healed considerably, after having nearly shut down more than a year ago at the height of the global financial crisis. In the process, prices of almost every type of bond have bounced back from their historic crisis-era lows.

But the rally in prices doesn't mean borrowers have more money available. "Most of the money that's going into the markets is not flowing through into the economy yet," says Thomas Priore of ICP Capital, a small investment firm in New York.

Journal Communitydiscuss..“ It appears that lenders have now gotten back to using sound business principles and trying to actually determine if borrowers can repay their loans.
”
.— Edward Harris.
One measure of the retreat in consumer lending: In 2005, over six billion credit-card offers flooded consumers' mailboxes. This year just 1.4 billion have been sent out, according to Synovate, a market-research firm. Earlier this year, Visa reported that people for the first time were using their debit cards (which draw cash out of a bank account) more than credit cards (which use borrowed money).

The result of tighter lending: Consumers spend less and businesses are more reluctant to hire and invest. The changed credit markets, says Mohamed El-Erian, chief executive of bond-investing giant Pacific Investment Management Co., will mean the economy grows only 1.5% to 2% a year, a slow pace compared with the 3% that typically defines healthy expansion in the U.S.

"The idea that we will reset to where we came from is false," Mr. El-Erian says. "It is a bumpy journey to a new destination with significant long-term effects."

Some of the decline in lending is also due to lower demand as borrowers focus on paying off the debt they already have.

In the past 25 years, household debt has exploded. It now stands at 122% of total disposable income, up from just over 60% a quarter-century ago. At the end of last year's third quarter, household debt started to decline as Americans began belt-tightening.

The hardest-hit markets since the crisis were ones at the heart of the financial problem -- the "securitization" markets where loans for everything from mortgages to credit-card debt get sliced up and repackaged into complex securities.

The size of the market for securities backed by loans tied to homeowners' equity has shrunk more than 40% since the second half of 2007. The market for securities backed by auto loans has shrunk 33%. For securities backed by riskier mortgages, the decline is about 35% since the end of 2007, according to the Federal Reserve and data provided by FTN Financial.

These securitization markets provided as much as 50% of consumer lending in the years leading up to the crisis, says Tim Ryan of the Securities Industry and Financial Markets Association, a financial-industry trade group. "Without [the securitization markets], it's very difficult to replicate the amount of money moving into the economy," he says.

Classic short-term credit markets serving businesses have also withered. Commercial paper sold by businesses to finance payroll and other short-term cash needs has slumped by 35%.

The shrunken markets for short-term debt are also complicating life for investors in money-market funds.

These funds invest in short-term debt and have a reputation as being safe places to park cash. Worried investors (both individuals and corporations) have piled money into these funds. Money-market funds still have nearly $1 trillion more in assets than they did in mid-2007 before the credit crisis kicked off, according to iMoneyNet.

But the shrinking market for corporate short-term debt has limited the funds' investment options and forced them to funnel cash into government-issued Treasury bills that mature in three months or less. This heavy demand helped drive yields on some Treasury bills into negative territory last month.

In the corporate-credit markets, a strong rebound has created haves and have-nots. The market for investment-grade bonds, including debt sold by banks and backed by the Federal Deposit Insurance Corp., expanded by about 13% from November 2007 until November this year, while the junk-bond market receded about 7%.

Even companies that are able to borrow are being hurt because their suppliers are struggling. To help, Wal-Mart Stores Inc. is telling lenders it is standing behind its suppliers and encouraging lenders to let the suppliers use Wal-Mart purchase orders to obtain cash advances if needed.

Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com

Lending Squeeze Drags On - WSJ.com

DECEMBER 9, 2009.Lending Squeeze Drags On .ArticleComments (58)more in Economy ».EmailPrinter
FriendlyShare:
facebook ↓ More.
.StumbleUponDiggTwitterYahoo! BuzzFarkRedditLinkedIndel.icio.usMySpaceSave This ↓ More.
. Text .By LIZ RAPPAPORT and SERENA NG
Consumer lending shrank 1.7% in October, the ninth consecutive drop, extending the dramatic decline of financing available to help fuel the U.S. economy.

The $3.5 billion decline, calculated by the Federal Reserve, caps a 4% drop in consumer lending from its July 2008 peak. Before then, borrowing by U.S. consumers -- including credit-card debt and auto loans, but excluding mortgages -- had been growing for more than a half-century.

Consumer activity accounts for about two-thirds of U.S. economic growth. Curtailed lending to consumers could hurt the chances for a strong recovery.



Click to enlarge PDF.
.How markets have changed since the start of the recession
.Federal Reserve Chairman Ben Bernanke emphasized Monday that the economy is unlikely to experience a "vigorous" recovery. Even though unemployment for November was better than expected, he said, the picture for U.S. job growth remains unclear.

It's not just consumers having trouble borrowing. For all the talk of a revival in financial markets and a perception that the economy is on path to recovery, many companies lack easy access to borrowing.

"Despite the general improvement in financial conditions, credit remains tight for many borrowers," Mr. Bernanke said in a Monday speech, "particularly bank-dependent borrowers such as households and small businesses."

In the process of adapting to post-crisis realities, the nation's lending markets have changed significantly. In particular, markets where the U.S. government is either a big borrower or a de facto guarantor are ballooning, while some corporate-lending and consumer-finance markets have shriveled.

A Wall Street Journal analysis of data from the Federal Reserve and private research firms shows that these corporate- and consumer-credit markets have shrunk in size by 7%, or $1.5 trillion, in the two years through early November.

The financial markets that support credit-card lending, auto loans and home mortgages not backed by the government are between 10% and 40% smaller than they were in the second half of 2007.

On the other hand, Treasury debt outstanding has jumped about 40% as the government races to finance its deficits and investors seek the safety of U.S.-backed debt. The market for securities backed by mortgages that are effectively guaranteed by the government has expanded by 21%.

Credit markets have healed considerably, after having nearly shut down more than a year ago at the height of the global financial crisis. In the process, prices of almost every type of bond have bounced back from their historic crisis-era lows.

But the rally in prices doesn't mean borrowers have more money available. "Most of the money that's going into the markets is not flowing through into the economy yet," says Thomas Priore of ICP Capital, a small investment firm in New York.

Journal Communitydiscuss..“ It appears that lenders have now gotten back to using sound business principles and trying to actually determine if borrowers can repay their loans.
”
.— Edward Harris.
One measure of the retreat in consumer lending: In 2005, over six billion credit-card offers flooded consumers' mailboxes. This year just 1.4 billion have been sent out, according to Synovate, a market-research firm. Earlier this year, Visa reported that people for the first time were using their debit cards (which draw cash out of a bank account) more than credit cards (which use borrowed money).

The result of tighter lending: Consumers spend less and businesses are more reluctant to hire and invest. The changed credit markets, says Mohamed El-Erian, chief executive of bond-investing giant Pacific Investment Management Co., will mean the economy grows only 1.5% to 2% a year, a slow pace compared with the 3% that typically defines healthy expansion in the U.S.

"The idea that we will reset to where we came from is false," Mr. El-Erian says. "It is a bumpy journey to a new destination with significant long-term effects."

Some of the decline in lending is also due to lower demand as borrowers focus on paying off the debt they already have.

In the past 25 years, household debt has exploded. It now stands at 122% of total disposable income, up from just over 60% a quarter-century ago. At the end of last year's third quarter, household debt started to decline as Americans began belt-tightening.

The hardest-hit markets since the crisis were ones at the heart of the financial problem -- the "securitization" markets where loans for everything from mortgages to credit-card debt get sliced up and repackaged into complex securities.

The size of the market for securities backed by loans tied to homeowners' equity has shrunk more than 40% since the second half of 2007. The market for securities backed by auto loans has shrunk 33%. For securities backed by riskier mortgages, the decline is about 35% since the end of 2007, according to the Federal Reserve and data provided by FTN Financial.

These securitization markets provided as much as 50% of consumer lending in the years leading up to the crisis, says Tim Ryan of the Securities Industry and Financial Markets Association, a financial-industry trade group. "Without [the securitization markets], it's very difficult to replicate the amount of money moving into the economy," he says.

Classic short-term credit markets serving businesses have also withered. Commercial paper sold by businesses to finance payroll and other short-term cash needs has slumped by 35%.

The shrunken markets for short-term debt are also complicating life for investors in money-market funds.

These funds invest in short-term debt and have a reputation as being safe places to park cash. Worried investors (both individuals and corporations) have piled money into these funds. Money-market funds still have nearly $1 trillion more in assets than they did in mid-2007 before the credit crisis kicked off, according to iMoneyNet.

But the shrinking market for corporate short-term debt has limited the funds' investment options and forced them to funnel cash into government-issued Treasury bills that mature in three months or less. This heavy demand helped drive yields on some Treasury bills into negative territory last month.

In the corporate-credit markets, a strong rebound has created haves and have-nots. The market for investment-grade bonds, including debt sold by banks and backed by the Federal Deposit Insurance Corp., expanded by about 13% from November 2007 until November this year, while the junk-bond market receded about 7%.

Even companies that are able to borrow are being hurt because their suppliers are struggling. To help, Wal-Mart Stores Inc. is telling lenders it is standing behind its suppliers and encouraging lenders to let the suppliers use Wal-Mart purchase orders to obtain cash advances if needed.

Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com

Prudent Bear - What about raising interest rates? -Dec 4 2009

Prudent Bear - Dec 4 2009

"The reliable old Monetary Process - where Federal Reserve and GSE reflationary measures would immediately stoke rapid (and self-reinforcing) mortgage Credit growth, housing inflation, inflating household net worth, equity extraction, spending and government receipts - is no longer operable."

Noble writes that reflationary dynamics, including 0% interest rates are not stimulating the u.s. economy, but are leading to the routing of dollars offshore and towards commodities.

however it seems, even at 0% interest, foreign holdings of treasuries are increasing. that part of the dynamic seems to be holding and preventing any collapse of the dollar and its inflationary excesses. instead of going into the securitization process linked to real estate with quasi backing by the government, it is exiting the country to pump up foreign bubbles.

noble would like to see a quicker turn up in interest rates to turn off these reflationary tendencies which are doing nothing to help the domestic economy. easy dollar policy distorts investment away from production into commodities and other hard asset bubbles. what might be expected from raising interest rates now? banks might be even more reluctant to lend as they would need to assure a greater return even though a small one, the process of recapitalization of the banking industry would slow, the us would owe greater interest payments to foreign bond holders. would the domestic industry experience a benefit? banks might not be any less careful in their tight lending processes. it may be that reflating the rest of the world, thus stimulating a rise in us exports might not be so bad. asia has the potential policy option to increase export price in dollars and to invest dollars in something other than treasuries, but that is not their choice.

Still Unvoiced Econ Questions

the unvoiced
fundamental questions begging to be addressed

I. do we really need a private banking system?
banks would at first appear glance to be simple institutions. they take in deposits for which they pay interest and they lend money to qualified borrowers at a higher rate of interest, the difference between the two interest rates forming the bank's profit. banks decide who gets a loan based on the criteria of potential of the borrower to refund the loan through a series of payments. profitability, rather than any criteria of usefulness, enters into the decision of who is to be granted a loan.

doug noble of 'the credit bulletin' criticizes the easy monetary regimes of greenspan and bernanke for distorting the flows of capital into asset bubbles, rather towards more productive uses. but government has always subsidized the designs and projects of private capital from a perspective other than which employments of capital might be more productive or useful for the nation. in part, it seems that noble is criticizing just one more variation of government shaping of capital flows.

the tremendous buildup of capital wealth can no longer be assured of its profitable use. the subsidization of consumption by means of credit has reached a breaking point. from a capital accumulation perspective, existing investments and embodiments of capital wealth are superfluous and will need to be destroyed in order for a new virtuous accumulation cycle to begin.

but when this existing mass of production forces represents such a massive investment of social wealth and people are going without work, to destroy these means of production should seem foolish. why do the autoworkers and citizens affected by the auto industry seem to passively accept the onslaught of destruction at the auto plants they have relied upon for a livelihood?



which industries are the more vulnerable in an econ downturn? high-value durable goods such as auto and computers? or businesses affiliated with the service industry, such as financial services and insurance, advertising, real estate, restaurants, legal counsel, teaching, nursing? yes, it depends probably on where the government throws its money. teaching, nursing and government employment so far have seen increases even during the great credit crunch.


A note On Gold - 120109

banks are buying and trading gold with with interest free money from government.

a sign to look for that the gold rush is ending is the resumption of lending to actual businesses. this will result in a strengthening dollar.

the dollar's weakness affects gold but the reverse is not usually considered that the gold's relentless strengthening will pressure the fed to raise interest rates sooner than is desirable for econ recovery.

Defaltion or Inflation?

deflation dynamics are driven by capital overaccumulation. profits being too low to justify further investment. debt has to be reduced. one means is to lower the cost of capital. money is devalued by increasing supply. debt can be retired at lower cost than first acquired.