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Why Are Primary Dealers Buying US Treasuries?

Daniel Kruger writing in BusinessWeek provides the most helpful October 17, 2011, article Central banks sell most US bonds since 2007 as funds buy

Mr. Kruger writes describing the strong buying of US Treasuries by US Dealers stating “Demand at government auctions helps show why yields are at about record lows. Treasury sold $13 billion of 30-year bonds Oct. 13 at an all-time low yield of 3.12 percent even as demand from the class of investors that includes foreign central banks was below the average for the prior 10 sales. The ratio of total bids to debt sold was 2.94 times, the most since March. Investors bid $2.98 for each of the $1.68 trillion of Treasury notes and bonds sold this year. That almost matches last year’s record $2.99 in bids when the Treasury sold $2.2 trillion, and is up from $2.56 in 2007 when the U.S. issued $581 billion in notes and bonds, government data show.”

Mr Kruger continues: “That gap suggests that there is more untapped demand that will come from U.S. investors, said Amitabh Arora, an interest rate strategist in New York at Citigroup Inc., one of 22 primary dealers that trade with the Fed. “Our indicators suggest money managers are definitely underweight” U.S. government debt, Arora said in an interview.”

I comment that the explanation of money managers are “definitely underweight” is just a smokescreen and serves as an enticement for asset managers of mutual funds to buy Treasuries. I believe that the strong purchase of Treasuries by primary dealers is simply a commitment as part of an ongoing business plan to be one with the US Federal Reserve, it’s a marriage type of relationship: it is a do or die relationship.

In my article World Stands At Brink Of Credit Breakdown, I write I am more concerned about asset deflation, than I am concerned about price inflation. Yes, I am more concerned about a rising 10 Year Interest Rate, $TNX, and a rising 30 Year Interest Rate, $TYX, from deleveraging out of US Government bonds, ZROZ, EDV, TLT, caused by China retribution for being labeled as a currency manipulator, as seen in the Flattner ETF, FLAT, falling, and the Steepner ETF, STPP, rising; and about disinvesting out of World Government Bonds, BWX, and Emerging Market Bonds, EMB, caused by debt deflation, that is, falling world currencies, DBV, and falling emerging market currencies, CEW. The 10 30 Yield Curve, $TNX:$TYX, is steepening, opening the door for bond vigilantes to start capital depletion of US Treasuries. The world is passing through peak credit as is seen in total bonds, BND, falling lower. Lee Adler writes in Financial Sense Foreign Central Banks Selling US Treasuries At Unprecedented Levels. And Tyler Durden reports 30 Year Bond Prices At Record Low Yield As China Flees, Direct Purchases Soar.

I am concerned about investors in US Treasury bond funds, as yields rise, then the value of the funds will fall. Debt deflation, that is deflation, in the US Treasury Bond funds, is coming soon.

And I am even more concerned about Money Market Funds, MMFs as they are between a rock and a hard place: the managers want safety and need safety, but are ever seeking yield to maintain customer base, which exposes them to buying high yield French bank debt. I see the very real possibility, as US Treasury yields continue to increase caused by a flight by China, that the MMFs wil break the buck and that there will be a run on the MMFs.

Mr Kruger continues “Demand from U.S. banks has also underpinned Treasuries. Customer deposits at U.S. lenders have exceeded loans since December 2008, reaching a record $1.61 trillion in September, Fed data show. The wider gap and the deteriorating U.S. economy is prompting banks to buy Treasuries, according to Akira Takei, general manager of the international fixed-income investment department at Mizuho Asset Management Co. in Tokyo. Banks’ holdings of Treasuries and government-related debt totaled $1.67 trillion last month, approaching the record $1.69 trillion reached in May.”

“There’s potentially substantial demand for Treasuries” which will emerge over time, said Takei, whose company manages the equivalent of $43 billion. “Bank lending is clearly not rising, whereas deposits keep coming in, and most funds are parked in cash.”

Mr Kruger started his article by relating “International central banks are selling the most Treasuries since the credit crisis began just as institutional investors load up on U.S. government bonds.”

“The Federal Reserve said its holdings of U.S. government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 billion in the last seven weeks, the most since August 2007. At the same time, bond mutual funds are adding Treasuries, banks have increased their holdings 45 percent in the past five years and the Fed has added $656 billion to its balance sheet this year.”

“Rather than a referendum on the U.S.’s $1.3 trillion budget deficit and rising debt burden, sales by foreign policy makers may have more to do with supporting their currencies after the Brazilian real weakened 9.8 percent and Taiwan’s dollar lost 4.7 percent against the U.S. dollar since June. With economists forecasting inflation slowing to 2.1 percent in 2012 from 3.1 percent this year and the Fed’s commitment to keeping interest rates near zero, investors say the demand that pushed government bond yields to record lows last month will be sustained.”

I comment that the Milton Friedman Free To Choose floating currency regime died in September as the US Dollar, $USD, rose and the world’s currencies, DBV, and emerging market currencies, CEW, and commodity currencies, CCX, turned lower with copper, JJC, and the Chinese Financials, CHIX. The Copper Bubble finally burst as I wrote In China They Relied On Ponzi Credit.

The Australian Dollar FXA, The Euro, FXE, The Mexico Peso, FXM, The Canadian Dollar, FXC, The Indian Rupe, ICN, The British Pound Sterling, FXB, the Swedish Krona, FXS, The South African Rand, SZR, The Swiss Franc FXF, The Brazilian Real, BZF, The Japanese Yen, FXY, The New Zealand Dollar, BNZ, and the Russian Ruble, FXRU, all turned lower on exhaustion of Quantitative Easing, European Sovereign Debt angst, and on competitive currency devaluation, largely from the bursting of Copper Bubble. I provide this Finviz Screener for those interested in establishing a portfolio of tradeable currencies.

Mr. Kruger provided an important fact: “International central banks are selling the most Treasuries since the credit crisis.”

I relate that the central banks many have been using the proceeds buying currencies. If this is the case, they were catching a falling knife, as world currencies are likely going in a death spiral lower together. The banks should have been short sellers, and captured gains. And then as the currency wave up began on October 1, 2011, closed out and taken profits, and then gone long and stayed long until now, that is at least until October 14, 2011.

The global investment tectonic plates have shifted as on July 11, 2011, investors became aware that a debt union had formed in the EU, and sold out of the European Shares, VGK, and the European Financials, EUFN, and then on August 11, 2011 became aware that in China they placed their faith in ponzi lending. This can be seen in the ongoing Yahoo Finance chart of VGK, EUFN, and CHIX

Chinese banks are a financial black hole. Belinda Cao and Michale Patterson of Bloomberg write Chinese banks’ bad debt may hit 60% of equity capital, Credit Suisse says. Loan losses at Chinese banks may climb to levels equivalent to 60 percent of their equity capital as real-estate companies and local governments fail to repay debts, according to Credit Suisse Group AG.

Nonperforming loans will probably increase to 8 percent to 12 percent of total debt in the "next few years," causing losses amounting to 40 percent to 60 percent of Chinese banks’ equity, Hong Kong-based analysts led by Sanjay Jain at Credit Suisse wrote in a research report dated Oct. 12. Jain cut 2012 and 2013 profit estimates by as much as 25 percent and maintained an "underweight" rating on the industry.

Chinese bank stocks have tumbled this year, sending the MSCI China Financials Index down as much as 43 percent, amid growing concern that slower economic growth will spur bad debts after a three-year credit boom. The retreat sent price-to- earnings ratios on bank stocks to record lows and prompted the government to begin buying shares in the four biggest lenders this week.

And in the western world Harry Wilson of the Telegraph reports RBS the 'most vulnerable' bank in Europe, say Credit Suisse analysts. Royal Bank of Scotland is the "most vulnerable" bank in Europe and could be forced to raise £17bn in new money to shore up its capital ratios, more than any other major European lender, according to analysts at Credit Suisse.

The state-backed bank is already 83pc owned by the taxpayer and would likely face full nationalisation under the scenario set out by Credit Suisse, which estimates RBS might face a capital shortfall of £16.9bn in a new round of Europe-wide industry stress tests. "RBS appears to be the most vulnerable although the company has said that the methodology, especially the calculation of trading income, is especially harsh for them," said Credit Suisse. RBS declined to comment on the Credit Suisse note.

And Lauren Tara LaCapra of Reuters reports Fitch downgrades UBS, puts other banks on review

I relate that international central banks will be unable to stem the ongoing competitive currency devaluation which is due to global soveign debt angst, inflation destruction, unwinding yen carry trade investing, and the failure of China’s ponzi credit system with its reliance on copper as collateral. I see the major global banks BSBR, ITUB, BBD, BMA, BBVA, BFR, IBN, HDB, WF, UBS, RBS, STD, DB, LYG, seen in this Finviz Screener and this ongoing Yahoo Finance Chart, falling strongly lower.

Basic material stocks and small cap stocks in carry trade investment countries, such as BHP, KROO, VALE, BRF,COPX, ECH, KOL, will be turning lower. As will the US Small Caps, the Russell 2000, IWM, which are highly dependent upon credit funding to buy inventory, cut checks, and meet payroll.

It’s very likely that the US Dollar is seeing a soon coming bottom and will be rising from 76 or 75, as the European Sovereign Debt Crisis goes viral, possibly as soon as October 23, 2011 as Catherine Bremer and Jan Strupczewski of Reuters reported on October 15, 2011, G20 tells euro zone to fix debt crisis in eight days and Liz Alderman of the NYT, in Europeans Struggle Toward Debt Solution quotes France’s finance minister, François Baroin, saying “The results of Oct. 23 will be decisive.” So there is likely to either be a debt fix or a debt collapse; I believe the latter.

I relate that In 1974, the 300 hundred of the world’s elite met as the Club of Rome, and presented regional economic government as the solution for the chaos that would come from deleveraging and disinvesting that comes with the failure of Mr Friedman’s Free to Choose dream. Their Clarion Call, has been heard by globalists such as Angela Merkel and Nicolas Sarkozy, who in their August 2011 Communique, called for a true European economic government.

Sovereign armageddon, that is a credit collapse and global financial breakdown, will come out of Gotterdammerung, the clash of the gods, that is the European leaders and the investors together with the rating agencies. This will result in the loss of national debt sovereignty, and extinguishment of state fiscal spending capability.

Sovereign crisis requires a sovereign solution. One Leader, the Sovereign, and his banker, the Seignior, will arise to speak for and to the Eurozone, which will be transformed into a Federal Europe, as leaders meet in summits and wiave national sovereignty, and implement a Fiscal Union, empower the ECB as a bank, and develop a common European Treasury. Seigniorage, that is moneyness, will no longer be based upon debt, but rather will be based upon the diktat of structural reforms, austerity measures and debt servitude; people will be amazed by this, and place their faith in it, and give it their full allegiance.