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Monday, September 21, 2009

The Safe Haven????? - A Long Comment

Over the weekend Bloomberg.com had a short article about the international market in US Treasury bonds.  It seems, Bloomberg implies, the world can't get enough of US Treasuries, no matter what the maturities are. 

The most recent statistics would seem to confirm this. Holdings in China are up 10% since the beginning of this year. Central bank purchases worldwide have also increased. But so has a lot of private purchases, much institutional.

Some Europeans are perplexed by this. Unhedged purchases in the Euro since March,  would have resulted  in losses over 10%  in Treasury maturities longer than 10 years.

People interviewed in the Bloomberg article gave several reasons why the buying of Treasuries still continues. The main one seemed to be the anticipation of low inflation in the US.

But no one appeared to mention what may be an obvious reason  for all this Treasury mania.

A safe haven.

 Safe haven from what? Possibly a general worldwide stock market collapse. As mentioned elsewhere on this site, US Treasuries have really become the world's de facto international currency. Having  actual dollars in currency, means that you have to keep those dollars in a bank account. Perhaps the smarter investors worldwide still have doubts, concerning the stability of the banking system.

Well if they don't, they should.

According to several economists < noble laureate Joe Stiglitz among them in a Bloomberg interview >, the US banking system is in "worse shape" then it was a year ago. If anything the risk in financial firms has increased.

As for the Treasury securities markets, in less than a year the US government has issued over $2 trillion of new debt, much of it in higher yield maturities. If you're outside the US, owning this junk is a losing proposition. The US dollar will to continue to depreciate, with governments praying for a slow decline. The real inflation rate, not what the gov tells you in rigged statistics, may alone cause a negative return after subtracted from 3.5% or less ininterest rate yields.. .

So why else would anyone want to hold this losing asset, unless they thought  it was the only place to park  money until the deluge arrives.

How bought gold? Well the successful hedge fund manager John Paulson evidently thinks this is a good idea, based on the amount of gold his funds hold. Also bear in mind that 25% to 50% of these Treasury purchases are by Central Banks. The US Federal Reserve has the largest gold holdings in the world. Might a stealth deal be done with countries like China, on the surface buying Treasuries, only to  be exchanging them back sub rosa  for gold with the Fed. It would only take a bookkeeping entry, nothing more. < And remember, Bernanke has proposed and done crazier things. >

Could this possibly be a reason the Fed is so adamant about not divulging in detail its' transactions?

Or has Guido had too much vino already?

Only time and a Guido hangover will answer this.

"Go ahead, Ben. Pick it up. It's only money. It don't know who you are." - From the 1946 movie Body and Soul

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