We’re coming a little late to this, but it’s still worth a note.
Dec. 24 (Bloomberg) — Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations…”
The U.S. government needs to spend on infrastructure to maintain job creation as it will take a long time for banks to recover from $1 trillion in credit-market losses worldwide, Mikuni said. The U.S. also needs to launch public works projects as the Federal Reserve’s interest rate cut to a range of zero to 0.25 percent on Dec. 16. won’t stimulate consumer spending because households are paying down debt, he said.
Combining a debt-waiver with infrastructure spending, as Mikuni notes, would be very similar to the Marshall plan — the US’s strategy to rebuild Europe post-WWII (along capitalist lines of course). Of more interest in terms of the treasury market at least, is the flipside of the unlikely event of Japan writing off US debt. That would be, we would think, Japan not buying treasuries anymore — at least not for a while.
That’s very reminiscent of the noise surrounding China’s 4 trillion yuan fiscal stimulus plan announced in November. Commentators then worried that the Asian giant would have to sell-off all or parts of its vast portfolio of US treasuries to finance the package. Adding Japan to the mix, would, we think, exacerbate the potential for a sudden drop-off in demand for treasuries. Analysts from Bank of America for instance, have already worried that as non-US countries grapple with their own economic problems, they’ll stop snapping up US bonds.
That’s a big deal for the States. The Treasury has said it has something like a $1.5-$2 trillion financing need in fiscal 2009, according to BoA. That number, nearly four times the previous highest need in the Treasury’s history, means a vast amount of debt issuance at a time when there’s already talk of a treasuries bubble. No surprise then, that the Fed is considering buying longer-dated treasuries to support the market and the economy.
In any case, Barron’s, in an article ominously titled “Get out now!”, is this morning saying treasuries are today’s biggest investment bubble:
THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt…
The chief risk to the Treasury market stems from the potentially inflationary impact of both the Federal Reserve’s super-accommodative monetary policy, which has dropped short rates close to zero, and the enormous looming fiscal stimulus from the federal government. It also may take higher yields to attract investors — particularly foreigners — as the Treasury seeks to fund an estimated deficit of $1 trillion or more in the coming year.
All eyes on the treasury market this week then — when the Fed’s expected, according to the Wall Street Journal, to auction some $50bn in three and 10-year treasury notes and 10-year TIPs. Treasuries were already under pressure on Friday, with the benchmark 10-year yield rising 0.16 percentage points to 2.417.
Related links:
Get out now! - Barron’s
All the treasuries in China - FT Alphaville
Economic nationalism and the USD - FT Alphaville
Of money market funds and treasuries - FT Alphaville
