Friday, March 27, 2009

Treasury Financing Falters

Wednesday was an interesting day in the treasury financing market. The five year auction was a disaster and the 30 year treasury bond lost more than two percent of its value in a single day. The malaise of the US treasury market followed on the heels of the failure of a British gilt (their equivalent of treasuries) auction. The British auction on Wednesday failed to get a "cover" bid, which means there were fewer bids a the auction than securities offered for sale. Where is this headed?

This year, the US Treasury will sell three times as much debt, an estimated $ 2.5 trillion, as has ever been sold in a single year in US history. Wednesday's auction suggests their could be big trouble ahead. It is increasingly clear that there is serious doubt about the financial stability of the US government. The Chinese chief economic minister alluded to this prospect two weeks ago, when he decried the incredible level of deficit financing planned by the Obama Administration. Even the Democratically controlled Congressional Budget Office has sounded the alarm about the Obama budget and its potentially disastrous effect on the credit standing of the US government.

Ironically, in its purported effort to deal with an over-leveraged economy, the Obama Administration is seriously risking a US bankruptcy. Such an eventuality can no longer be ruled out. If the British default on their national debt, which is now a real possiblity, all eyes will turn to the US Treasury financing. It is now distinctly possible that the new administration is on a clear path to national bankruptcy. Watch the treasury auctions as they attempt to sell all of this paper.

One way out is for the Federal Reserve to buy much, much more of the debt. Ultimately, however, the result will be the same -- a flight from the dollar, a flight from US treasuries, and eventually the bankruptcy of the US government. This would have been an impossibility just six months ago, but the Obama budget plan makes a national bankruptcy an ever more likely possibility.