As mentioned in my earlier blog regarding the potential rise in World Interest Rates, it is interesting to note from this Chart that the Yield of the 30 Year Treasury Bond has risen back to the levels experienced at the beginning of the year 2008. This is despite the fact that the Federal Reserve Interest Rate is still kept at 0.25% per annum, having fallen from 5.25% since July 2007.
Chart is reproduced, Courtesy of StockCharts. Com.
In July 2007, the 30 Year Treasury Bond Yield reached a peak of 5.408%. It then fell to a low of 2.518 % in December 2008. However, since the beginning of Year 2009, the 30 Year T-Bond Yield has risen steadily, to a high of 5.066 % before correcting to 4.308 %, which is still relatively high, compared to the Fed Interest Rate.The Daily Chart provides a more detailed view of the bottoming out, and the subsequent rise since the beginning of year 2009.
Chart is reproduced, Courtesy of StockCharts. Com.
What does all this mean? In my opinion, it is evidence of a dislocation between the Interest Rate Policy of the Federal Reserve, who want to keep Interest Rates artificially low, to stimulate economic growth, and the Real World Situation, which is fast reflecting a fast weakening demand for US Government Treasury Bonds, in the wake of fast increasing Supply of such Government Bonds.Will the US Government relent to Higher Fed Interest Rate by end of 2009? To me, the answer lies in the Supply & Demand for US Treasury Bonds, particularly those held by Foreign Investors, rather than Domestic American Investors.
We note that based on US Government Statistics as at 31st March 2009, there is a total of US$ 4.4 Trillion due to be repaid by 30th June 2009, unless it is successfully rolled over.
Furthermore, there is a total of US$ 1.8 Trillion where the Debt Service is Unknown. I am not sure why the US Treasury Department is unable to classify its own Debt Obligations properly, but that's what it has declared to the world, i.e. the classification of this US$1.8 Trillion is UNKNOWN. In my opinion, any Debt that cannot be classified as Long Term, has to be classified as DUE IMMEDIATELY, since, if there were no repayment terms discussed, theoretically, the Debt could be recalled at any time.
Thus, the total Debt that is already due as at 30th June 2009, stands at US$ 6.2 Trillion. Exactly how this Gross External Debt which is already due for repayment will be settled, is unclear.
Furthermore, there is a total of US$ 1.8 Trillion where the Debt Service is Unknown. I am not sure why the US Treasury Department is unable to classify its own Debt Obligations properly, but that's what it has declared to the world, i.e. the classification of this US$1.8 Trillion is UNKNOWN. In my opinion, any Debt that cannot be classified as Long Term, has to be classified as DUE IMMEDIATELY, since, if there were no repayment terms discussed, theoretically, the Debt could be recalled at any time.
Thus, the total Debt that is already due as at 30th June 2009, stands at US$ 6.2 Trillion. Exactly how this Gross External Debt which is already due for repayment will be settled, is unclear.
What seems clear is that if the Lenders are not happy to roll over the Debt, then, the US Government will have no choice but to repay this amount immediately. This should result in a devaluation of the US Dollar, as the US Government does not hold sufficient International Reserves or Gold Reserves to repay the Loans that have come due.
Should the Lenders agree to roll over the repayment, then, there will not be a Currency Devaluation Issue.
Given that the risk of default has risen, and the fact that the US Government has ignored International Investor Community concerns that it is printing Excessive Amounts of Money, I would agree to a Rollover on only a portion of the Debt, and only if the Interest Rate is much higher than what it is currently prevailing.
Possibly this explains why the 30 Year T-Bond Bill has been rising so rapidly, despite the stagnant Fed Rate remaining at a ridiculously low level of 0.25% per annum. How the Fed intends to attract Bond Investors to buy Short Term T-Bonds at such a low rate on a sustainable basis, is a real wonder.
Given that the risk of default has risen, and the fact that the US Government has ignored International Investor Community concerns that it is printing Excessive Amounts of Money, I would agree to a Rollover on only a portion of the Debt, and only if the Interest Rate is much higher than what it is currently prevailing.
Possibly this explains why the 30 Year T-Bond Bill has been rising so rapidly, despite the stagnant Fed Rate remaining at a ridiculously low level of 0.25% per annum. How the Fed intends to attract Bond Investors to buy Short Term T-Bonds at such a low rate on a sustainable basis, is a real wonder.
In any case, it looks like we are on the right track for Higher Interest Rates Worldwide, within the next two years.
Best wishes,
Ooi
Note: - Interest Rate Yield goes up when the Demand for the Bond goes down, or alternatively, when the Supply of the Bond goes up, which causes the Price to fall, as investors are more motivated to sell than to buy. When Price of the Bonds goes down, the Yield of the Bond goes up.
In the current situation, China is starting to sell down on its Treasury Bonds, and thus, the US Government is facing a double whammy of higher supply (US Government printing more money), and lower demand (Foreign Investors selling). This situation cannot persist for long without some significant negative consequences, of either rapidly rising interest rates, or a currency devaluation, or even both.
In this regard, it would be advisable for the US Government to exercise much more stringent fiscal prudence, instead of thinking of spending even more, with a 2nd Stimulus Package. Whenever the US Government proposes to spend, the Lenders face an even greater risk of a Currency Devaluation, and thus, this policy discourages a stable currency exchange rate.
In the current situation, China is starting to sell down on its Treasury Bonds, and thus, the US Government is facing a double whammy of higher supply (US Government printing more money), and lower demand (Foreign Investors selling). This situation cannot persist for long without some significant negative consequences, of either rapidly rising interest rates, or a currency devaluation, or even both.
In this regard, it would be advisable for the US Government to exercise much more stringent fiscal prudence, instead of thinking of spending even more, with a 2nd Stimulus Package. Whenever the US Government proposes to spend, the Lenders face an even greater risk of a Currency Devaluation, and thus, this policy discourages a stable currency exchange rate.
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