Thank god for safe haven demand.
US Treasury financing needs for fiscal year 2009 are projected to blow out to $3-trillion and are back-weighted to $1.7 trillion in the second half of the year according to Goldman Sachs. There are plenty of buyers, figures Ed McKelvey of Goldman. The scary part is that one of the biggest buyers is potentially the Fed.
Money market funds who moved out the risk curve and bought Lehman Brother debt were big losers in 2008. “Treasuries are the remaining asset of choice,” says Ed McKelvey of Goldman, so the industry could absorb another $200-billion in Treasury debt over the next six month based on recent trends.
Foreign investors are another source of financing for Treasuries though less so than in previous years due to a shrinking U.S. current account deficit. The director-general at the China Banking Regulatory Commission sums up foreign attitudes to Treasury purchases best in a Financial Times interview: “…. We know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
The shrinking current account deficit will equate to only $90-billion in Treasury demand over the second half of 2009, figures McKelvey.
Rather than send dollars abroad through the trade account, U.S. households are a new source of supply given the expected rise in the personal saving rate to roughly 9% of personal income. A one percentage point increase in Treasury holdings out of $40-trillion in financial assets equates to $400-billion in household demand per year. This may not be a stretch since investors have been burned by triple-a rated Wall Street securities and will probably want to own the real thing.
Fear not, the other $600-billion or so can easily be funded by way of the printing press. The Fed has already “volunteered” to buy $300-billion between March and August. If the Fed was simply to reverse the decline of its Treasury holdings over the last two years, that could provide an additional $1-trillion in demand figures McKelvey.
On that note, investors might just want to hold a little gold next to those Treasury securities too.
