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Is Sovereign Debt Going The Way of Securitization? Then What?

The events of 2008 cut off the “supply” of securitized debt.

In 2007 in USA that “sausage-factory” was creating over $2 trillion of new or rolled-over “product” a year, by way of comparison the average sale of US Treasuries was less than $500 billion a year; Uncle-Sam was just a sideshow compared to the shadow banks.

Over 70% was “investment grade” (i.e. it carried a risk-weighting of 20%), and over 25% got “exported”.  Now the “supply” has dwindled to about zero and there are not many prospects of the industry re-starting.

What a lot of people don’t realize is that market was demand-driven. What Goldman Sachs now calls the “sophisticated investors” (banks, insurance companies, pension funds), just couldn’t get enough of the stuff. That’s because they had (and still have) an obligation to hold a certain portion of their portfolios of as “liquid” investment-grade securities, and that was one of the reasons that quality standards slipped and the rating agencies started stamping AAA on any-old rubbish.

The idea that the bond salesmen went round banging on doors spinning yarns and persuading poor innocent Norwegian pension funds to buy dodgy AAA bonds is not true, the “salesmen” were basically order takers, the customers called them and asked “what you got this week”, and it was “take it or leave it”.

Well in 2009 the source of supply dried up, stone dead, and it will be a while before that dead-donkey can be coaxed back to life…if ever.

But then there was always sovereign debt.

That “had” to be safe, particularly if it had a Moody’s stamp on it, and the same people who were buying those “Positively Best Value CDO” contracts from Goldman Sachs, are he same “sophisticated investors” who were piling in to Sovereigns.

According to the latest BIS Quarterly report the “International Debt Securities Market” has been running at a net supply (all types - not simply investment grade) of $2 trillion a year, so that ought to be able to take up some of the slack from the desperate buyers!!

And then there was Greece.

Well now, no one believes the rating agencies on anything, no one believes the issuers, and it’s going to be a long time before even slightly suspect countries will be able to sell a significant amount of investment-grade paper (which is where the market demand is).

But the demand is still around…that’s a demand for $2 trillion to $4 trillion of investment grade securities a year – being supplied from where?

Err…on top of that there are mutual funds that are wary of equities, plus not everyone is convinced that gold is going to $3,000, so where do they park their money?

Well luckily for all those “sophisticated investors”  (and even the unsophisticated ones) the US Treasury is set to sell a couple of trillion of securities over the next year.


Now I wonder what's going to happen to the long term Treasury yield? Perhaps it was Tim Geithner who was shorting that Greek debt?

Now there's a conspiracy theory!!!

Disclosure: "No Relevant Positions"