More often than not, one’s macro opinions are quickly trumped by the markets, especially in the short-term, and as much as one may fight the logic, in the end it’s all about capital flows and shifts. Regardless of whether investors are correct or not, once money moves, someone is left holding the bag. The headline “U.S. Is The Safe Heaven” is not something that I had to get off of my chest as a matter of pride, but rather an observation of what the international markets are stating with their wallets.
Let’s not kid ourselves. The U.S. has plenty of issues that it must resolve, but as of now investors are choosing the dollar. U.S. Treasury auctions have been telling a story that continues to hold, and I start with Bloomberg’s report on November 22 – and please note the size of the bids.
The five-year notes sold today drew an auction record low yield of 0.937%, compared with a forecast of 0.951% in a Bloomberg News survey of nine of the Federal Reserve’s primary dealers. The bid-to-cover ratio today, which gauges demand by comparing total bids with the amount of securities offered, was 3.15, the highest since May and compared with an average of 2.83 for the previous 10 sales.
On November 23, MarketWatch reported another record low yield, this time for seven-year notes.
The Treasury Department sold $29 billion in seven-year notes Wednesday at a yield of 1.415%, the lowest on record for an auction of the notes. Bidders offered to buy 3.20 times the amount of debt sold, compared to an average of 2.75 times at the last four sales.
In addition, CNBC reported on December 14 that “Treasurys Extend Gains After Strong 30-Year Auction.”
U.S. Treasury debt prices rose on Wednesday, extending their gains after a $13 billion auction of 30-year bonds drew strong bidding. The Treasury Department auctioned off $13 billion of 30-year bonds at a record low yield of 2.90%. The bid-to-cover ratio, an indicator of demand, reached 3.05, compared with a recent average of just 2.65. It was the strongest level of demand for 30-year bonds since August 2000.
And the demand for Treasuries is not confined to the run of mill paper, with TIPS capturing the mood as well, even with “a yield of negative 0.877%,” as reported by MarketWatch.
The Treasury Department sold $12 billion in five-year Treasury Inflation Protected Securities on Thursday at a yield of negative 0.877%. Bidders offered to buy 3.01 times the amount of TIPS sold, the highest so-called bid-to-cover ratio since April 2010 and above the average of 2.6 times at the last four comparable auctions.
Adding insult to injury, and keeping with the capital flow theme, the Financial Times reported a “dive in deposits at foreign-owned banks in the U.S.”
Foreign-owned banks operating in the U.S. have suffered their largest six month fall in deposits on record in what some analysts have described as a “flight to safety” from European banks to domestic institutions. Cash on deposit at foreign-owned banks fell $291bn, or 25%, to $879bn from the end of May to the start of December, the first time deposits in the sector have fallen for six consecutive months since 2002, according to Federal Reserve data.
Thus the strength of the dollar is not surprising, and at the risk of sounding like a guru, I had pointed out in June that the dollar had probably seen its low in May – and keep in mind that this “market thing” is a game of probabilities.
The probability that the European crisis will not end well is extremely high, because beyond the daily moves and statements of appeasement, the eurozone doesn't not have any good solutions. Bloomberg had an article in November, “European Banks Get ‘False Deleveraging’ in Seller-Financed Deals,” that went by unnoticed, and it pointed out that some banks are financing the purchase of the very stuff they want to get rid of.
Royal Bank of Scotland Group Plc (RBS) may provide as much as 600 million pounds ($939 million) in debt to help Blackstone Group LP acquire part of a 1.4 billion-pound portfolio of commercial mortgages from the bank after the private-equity firm struggled to get outside funding, three people with knowledge of the transaction said. The deal, scheduled to close within weeks, follows Credit Suisse Group AG's (CS) agreement to finance the sale of $2.8 billion of property loans to Apollo Global Management LLC in December, two people with knowledge of the matter said.
And that's only part of the stuff that is extremely concerning and is being reflected in the macro, yet slow and somewhat invisible capital flows that will eventually strangle the eurozone economies. If you wish to know “the gross external, or foreign, debt of some of the main players in the eurozone as well as other big world economies,” the BBC has a very good graphic titled “Eurozone debt web: Who owes what to whom?”