Depending on whom you ask, the lengthening maturity of US government debt is either a smart response to unusually loose financial conditions or an unhelpful countervailing force to Federal Reserve policy.
Either way, the assumption is that the chart below (from page 23 the Treasury’s most recent Quarterly Refunding Report) reflects the deliberate choices of policymakers rather than anything else: Read more
A new paper by several Harvard economists, including former Treasury Secretary Larry Summers, argues that a little more than a third of the impact of the Fed’s asset purchase programmes was “offset” by the Treasury’s decision to lengthen the maturity of its outstanding bonds:
A major FT exclusive on Monday:
Standard and Poor’s has warned Germany and the five other triple A members of the eurozone that they risk having their top-notch ratings downgraded as a result of deepening economic and political turmoil in the single currency bloc. Read more
Another nail in the coffin for old Europe’s risk free status.
The French 10 year note is now seen as a spread product over comparable Bunds — 153bp at pixel time. Read more
Remember the good old debt shenanigans? Where soon-to-be eurozone countries did everything they could to bring their debt figures down?
Every so often you’d read a story about a clever bit of financial engineering like an off-market swap that looked like debt, smelled like debt, and seemingly wasn’t reported to European statistical agency Eurostat as debt. Even though it should have been. Read more
There’s a wider theme running through the relatively technical question of how the European Central Bank’s massive holdings of Greek government bonds will fare in any Hellenic debt restructuring.
There are plenty of market participants who already believe the likelihood the ECB will have to suffer the same losses as private investors on their Greek debt investment, is very very low. They figure the central bank will seek preferred creditor status, lowering the payouts left for other investors. Then there are others who argue that the ECB should seek de facto preferred creditor status to avoid a pari passu precedent. Then there are people like Roubini who argue that the ECB has already claimed de facto juniority (?) because it’s agreed to be on the hook for about €91bn worth of Greek liquidity lines. Read more
Generally a poor outlook for the chances of a merger between National Bank of Greece and Alpha Bank on Monday, for quite a few reasons: an awkward history of past attempts, disputed valuation, plus …
… the small matter of both banks’ Greek government bond holdings. Read more
In the wake of the Greek crisis, the European Commission is considering imposing a charge on bond sales by countries that breach eurozone debt rules, Bloomberg News reports. Members that don’t keep their debt-reduction promises could face “a levy in the form of a predefined percentage (number of basis points) on any issuance of government debt,” according to an EC proposal obtained by the newswire.
Japan on Tuesday moved to shore up confidence in its state finances by issuing a “fiscal management strategy” that aims to cap government bond issuance at current levels, curb future spending growth and target primary budget balance by 2020, the FT reported. The government aims to ensure that debt issuance next fiscal year does not exceed the roughly Y44,000bn expected this year, and that it “steadily decreases” thereafter.
Eurozone governments are moving gingerly towards an enhanced system of economic governance, uncertain how far they ought to limit national sovereignty in the name of saving their monetary union, reports the FT. The development comes as Germany warns that a failure to reduce public debts could trigger another worldwide economic crisis, according to the FT, saying that its planned cuts in spending will not endanger global growth.
Here’s something for the weekend — a nice overview of US debt, courtesy of BNP Paribas.
The idea is to look at all forms of American debt, private as well as government. Read more
Public spending cuts and tax rises in advanced economies are required by next year at the latest to deal with “very unfavourable government debt dynamics”, the OECD warned on Wednesday. The organization also saw the need for interest rates in the US, UK and Canada to start rising by the end of the year. But as FT Alphaville pointed out, the report also contained something for the bulls.
Speculators raised their bets against sterling to record levels after the recent UK general election, as worries escalated over the government’s finances, the FT said. Positioning data from the CME, often used as a proxy for hedge fund activity, showed that speculators had extended their bets against sterling from 72,188 contracts to 76,745 contracts, equivalent to $6.9bn, in the week ending May 18.PO
George Magnus’ most recent report on the upcoming global structural crisis to come is so good, we thought it was worth highlighting some additional extracts.
Consider, for instance, the charts below. According to the UBS senior economic adviser, these reflect the makings of a potential debt-trap in not one, but numerous over extended OECD governments the world over: Read more
“Corporate finance is built on the idea that companies are more likely to go bust than governments.” Discuss.
According to the thinkers at the Economist, it is time to rethink the notion that the risk-free rate can always be used as a basis for pricing other assets: Read more
FT Alphaville has written about the (new) negative territory being experienced in US government swap spreads – the 10-year government swap, to be precise. On Tuesday, however, that spiral descended further, taking in the 7-year swap spread. Read more
The prospects for Barack Obama’s healthcare reform legislation brightened considerably on Thursday, when the independent Congressional Budget Office said the final bill would cut the US deficit by more than $1,300bn over the next 20 years. In anticipation of a vote on the bill on Sunday, Mr Obama postponed his trip to Indonesia and Australia for a second time. He now plans to now go in June.
Morgan Stanley’s Graham Secker has put out an interesting note on the rising cost of capital on Monday.
And it’s not a cheery read if you happen to be a sovereign issuer, given the shift of private-sector debt into the public sector. Read more