Wednesday, June 10, 2009

Bond Market Update

AlphaNinja - As noted yesterday, the short-term treasury auction went off well, but investors demanded about 36% higher yield to buy our debt.

-It's getting more "real" by the day. Meaning that the threats of investors shifting money out of treasuries is no longer just a threat. The WSJ reports:

"Russia's central bank said Wednesday it plans to reduce the proportion of foreign-exchange reserves it invests in U.S. Treasury bonds as Moscow continues to bemoan the dollar's status as a global reserve currency."

The entire basis of the "we can run huge deficits in troubled times" argument rests on the belief that the USA, and treasuries, will remain the "reserve currency" - the safest place in the world for money to be stashed. Russia, China and others have previously harped and complained about our deficits, but at some point it will be too much for them, and they'll have to look elsewhere.

US Treasuries will only retain their status as "reserve currency" if we remain the best best among a sea of troubled options. But while Europe is awaking from decades of "socialism-light" policies, the USA is massively expanding the government, while harming the private sector - the private sector being the ONLY way to service the interest payments on the debt that has become the lifeblood of our nation.

WSJ reporting that, (thank God!) the European high-yield bond market is gradually re-opening. Uhh, "gradually" is right - look at the pittance that has emerged:

European junk bond spreads (% above government bonds) have narrowed to 14.64% from 23.26% late last year. Not getting overly excited, the WSJ continues:

"That is reassuring for European private-equity groups facing a wave of debt refinancing in 2012. But it doesn't necessarily mean support for buyouts, which typically carry a single-B rating. That depends partly on the economy allowing high-yield companies to expand out of their debt-laden capital structures. For the first time in many months, though, private equity can dare to hope."

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