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The Samurai Solution To Massive U.S. Debt Issuance

|Includes: SPDR Barclays 1-3 Month T-Bill ETF (BIL), GLD, IEF, IEI, IPE, ITE, PLW, SHV, SHY, SLV, TIP, TLH, TUZ

According to Wednesday's Reuters article, the US Government is about to issue a substantial amount of debt:

The Treasury's borrowing advisory committee estimated that the Treasury's net debt issuance for fiscal 2009, which ends Sept. 30, would be $1.5 trillion to $2.05 trillion. This would fall to $1 trillion to $1.6 trillion for 2010.   <snip>

Bond dealers estimated the U.S. deficit for fiscal 2009 at about $1.644 trillion, about $100 billion lower than their estimate months ago and below Congressional Budget Office estimates of $1.825 trillion.
The Treasury Borrowing Advisory Committee is comprised of representatives from the Bond Market Association. The advisory committee meets on a quarterly basis with U.S. Treasury officials to hash out the Federal Government's borrowing needs. Recently,  the advisory committee warned of impending problems as the US shifts its borrowing needs to the longer end of the spectrum, as reported by Reuters:
"The government's considerable funding needs are "problematic for the longer end of the Treasury market," the committee said in meeting minutes, adding that current budget deficits were "unsustainable".
Our foreign creditors, China, Japan and the Gulf States seem to be content to keep financing the U.S. Deficit for now.  Especially since the flight to safety has driven them into the safety of US Treasuries. What has me worried is the advisory committee's stern warning that the deficits are unsustainable.

What if the US Treasury held a bond auction and no one came?

While auction failures have occurred in the UK debt market, auction failures haven't yet occurred in the U.S.  At a time when Foreign Central Banks, worried about a decline in the dollar, are looking for ways to decrease their purchases of U.S. debt, we are asking them to lend even more.

A glimpse of the future comes from the trend-setters at retail giant Wal-Mart. Last week Wal-Mart sold $1.1 billion in Samurai Bonds, denominated in yen currency. ¥83.1 billion in fixed-rate bonds at 55 basis points above prevailing yen swaps and ¥16.9 billion in floating-rate bonds at 60 basis points above the six-month LIBOR offered rate for yen.

A Sign of the Times?

According to last week's Bloomberg, Wal-Mart is the first U.S. retailer to sell yen denominated debt since Sears, Roebuck and Co. in 1979.  It's one thing for a global financial firm such as Lehman to issue Samurai bonds as way to exploit the yen carry trade.  It's quite startling when non-financial U.S.-based firms issue debt denominated in non-U.S. currencies.

Suspicious of shaky currency regimes, creditors demand debt denominated in hard currency from third-world countries with dubious currencies. Although Walmart voluntarily borrowed in Yen, our foreign creditors may one day get sick of holding debt denominated in ever-depreciating U.S. dollars.  Could this be the future of the U.S.? Will our creditors one day say "enough is enough" and start demanding debt denominated in yen, euros or renimbi?

Of course a proud yankee could never stomach national borrowing in the form of "Samurai Bonds."  To make the idea more palatable to the American electorate, A patriotic name must be created. I am polling my readers for possible substitute names:

Eagle Bonds?
Obama Bonds?
Bernanke Bonds?

Please vote for your favorite in the comments section below.

Full Disclosure: Author holds no position in any commodity derivative or in any fund mentioned in this article. This article is for informational purposes only and is not meant to be construed as an invitation to invest with any specific strategy or to buy or sell any securities. You should perform your own due diligence and consult with a professional before investing.