Felix Salmon Says: Please, China, Sell Your Treasury Notes!

He appears to be the only optimist this weekend:

Please, China, Sell Your Treasury Notes!: The good news is that I think we might now have reached the limit of fixed-income asset classes which can suffer an exodus of investors who thought they were taking no credit risk and no liquidity risk. The bad news, of course, is that the asset classes which have already been hit could get much worse before they get any better. And the arbitrageurs - the hedge funds and others who in an efficient market would be jumping in at this point and snatching up high-yielding ultra-safe instruments - all mark to market and therefore risk getting big margin calls if things continue to get worse. Besides, their own cost of funds these days is pretty high.

It's probably too much to hope that the US government itself might start embarking on a massive carry trade, issuing two-year notes at 1.5% and investing the proceeds in agency debt. But some of the trillions of dollars currently being held by foreign central banks could definitely come in handy right now. They're sitting on nice capital gains on their Treasury holdings, thanks to the current flight to liquidity. It would be great if they started dumping those Treasuries and buying the bonds of Fannie and Freddie instead, at least for the time being...

Comments

[albrt]

Haven't most of the big holders lost more money in local currency than they've gained on the freakishly low dollar yields? Oh well, at least I agree with the "dump treasuries" part.

[Richard H. Serlin]

On a different subject, it appears Paul Krugman is actually mistaken. In his March 10, 2008, 4:59 pm, blog post, "A cartoon model of the crisis (more serious wonkery)" at:

http://krugman.blogs.nytimes.com/2008/03/10/a-cartoon-model-of-the-crisis-more-serious-wonkery/

It seems that he has the situation graphed wrong. I commented on his blog:

The basic thrust of your analysis is correct, but it’s off. You assume that the time period for this supply and demand analysis is so short that the supply of securities cannot change. It’s a fixed vertical line, but then you contradict this assumption by saying margin calls make holders sell off securities, which is the same thing as increasing supply.

So for this analysis to be logically consistent, your second graph should have a normal crescent shaped demand curve, and it’s the supply curve that should be unusual — shaped like an S — and intersecting the demand curve at three points.

The third graph should be the S shaped supply curve with the crescent shaped demand curve to the left of it, and intersecting it at the bottom.

[Neal]

The cover-up continues- $100B TAF and now $200B TSLF. None of this restores confidence in the dollar. None of this restores confidence in the MBS. Time is being bought at the price of the remainder of the economy. Why would other countries, SWFs, and private investors put money into a system that is so obviously struggling with an opaque problem?

Who buys a pig in a poke sack when there is blood dripping from the sack?

The public/private collusion is evident in the reluctance to downgrade the bond raters and in the way the AAA to Aaa bands have not been revalued.

We are being more firmly placed in the international fiancial plague ward with each of the iterations of denial and "financial innovation".

By the way, what other countries have had to resort to the same extraordinary machinations as the US?

It's lonely in the plague ward.

[Neal]

By the way, isn't there a whiff on monetization of treasury debt in the structure of the TSLF? Propping up a decrease in demand for treasuries?

[Neal]

From Bloomberg, on the securities accepted under TSLF

(quote)

Moody's, S&P Defer Cuts on AAA Subprime, Hiding Loss (Update1)

By Mark Pittman

March 11 (Bloomberg) -- Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.

None of the 80 AAA securities in ABX indexes that track subprime bonds meet the criteria S&P had even before it toughened ratings standards in February, according to data compiled by Bloomberg. A bond sold by Deutsche Bank AG in May 2006 is AAA at both companies even though 43 percent of the underlying mortgages are delinquent.

Sticking to the rules would strip at least $120 billion in bonds of their AAA status, extending the pain of a mortgage crisis that's triggered $188 billion in writedowns for the world's largest financial firms. AAA debt fell as low as 61 cents on the dollar after record home foreclosures and a decline to AA may push the value of the debt to 26 cents, according to Credit Suisse Group.

``The fact that they've kept those ratings where they are is laughable,'' said Kyle Bass, chief executive officer of Hayman Capital Partners, a Dallas-based hedge fund that made $500 million last year betting lower-rated subprime-mortgage bonds would decline in value. ``Downgrades of AAA and AA bonds are imminent, and they're going to be significant.''

(end quote)

[Ginger Yellow]

"It's probably too much to hope that the US government itself might start embarking on a massive carry trade, issuing two-year notes at 1.5% and investing the proceeds in agency debt. "

Isn't that basically what the Fed is doing with the TAF and TSLF?

[bumble]

..Isn't that basically what the Fed is doing with the TAF and TSLF?..

The Fed is doing a massive bailout of the BANKERS. Yes BANKERS, Not BANKS.

The banks are in trouble. Option one is to nationalize them. Shareholders and execs get zilch. Option two is to do tricks like this to keep the system running long enough for inflation to catch up. This lets the execs and shareholders keep their ill-gotten money.

Guess which one the Fed, WallStrret and their "economist" toadies prefer.

The economic profession, as a class is in bed with the financial industry (i.e other than the loonies) The way to fame and power through Treasuery and banking posts and connections is by whoring with Wall street.

That may sound harsh, but then "Kill all the lawyers" does too, and Shakespeare was only echoing the attitude of those times. In the 21st century, economists will take the place of lawyers in public hatred.