Yachtie
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Joined: 1/18/2012
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FR - for the whole story
President Barack Obama knows who is the boss: the bond market.
"Ultimately, what matters is: What do the people who are buying Treasury bills think?" the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation's debt.
Even with the U.S. budget deficit down by more than half since 2009 as a percentage of the economy, the Congressional Budget Office says the government this fiscal year will need to borrow an average of almost $11 billion each week. That's why Obama is so sensitive to what investors will tolerate.
"The market is the final arbiter of any policy, the ultimate barometer and enforcement mechanism," says Russ Certo, a managing director at Brean Capital LLC in New York. "The market holds risk-takers and policy makers accountable."
The yield they demanded at the Oct. 8 auction of four-week Treasury securities almost tripled from a week earlier, Treasury Secretary Jack Lew highlighted in testimony before the Senate Finance Committee yesterday. The government was forced to pay 0.35 percent for four-week borrowings, up from 0.12 percent.
"The one market that is behaving more as if a 2008 event is around the corner is the T-bill market -- one must wonder if this is the proverbial canary in the coal mine," David Rosenberg, chief economist at Gluskin Sheff in Toronto, wrote to clients this week.
Investors' sudden awareness of the danger in Washington also can be seen in the difference between what banks pay to borrow from each other and the yield on one-month U.S.government debt. This so-called TED spread turned negative this week for the first time since Bloomberg began collecting such data in 2001, meaning investors regard banks as a better credit risk than the U.S. government.
Modern financial markets are tougher opponents. Clinton took office in January 1993 determined to stimulate the economy with fresh spending to create jobs. Instead, his advisers warned that he risked a bond-market meltdown unless he first focused on cutting the deficit, which had reached 4.7 percent of gross domestic product, its highest level in six years.
Under Clinton, the yield on the 30-year Treasury fell to a low of 4.7 percent in October 1998 from a peak of 8.2 percent in November 1994, while the budget deficit turned into a surplus.
"That strategy worked for Clinton," said Rob Shapiro, who helped draft the president's economic plan and is now chairman of the Washington advisory firm Sonecon Inc. "It produced the longest boom on record."
The $11.9 trillion market in outstanding Treasury securities has more than doubled since mid-2008, when the government ramped up borrowing amid the financial crisis. Almost half that amount is held by foreign investors; an additional $2trillion is held by the Fed.
The government is on track to borrow $7 trillion more over the next decade, according to the Congressional Budget Office.
As a percentage of the economy, the deficit is expected to bottom out at 2.1 percent in fiscal 2015 before resuming its uphill climb, CBO says. Under current law, debt held by the public would exceed annual output by 2038. The budget office in a recent report said such outsized borrowing would be unsustainable, another reminder of creditors' power.
"The bond market calls the shots," says Robert Reich, a professor of public policy at the University of California at Berkeley who was secretary of Labor under Clinton. "All eyes are on the bond market right now."
The yield on T-Bills has no where to go now. Clinton had room to move; 8.2 to 4.7%.
Hell, how much lower can they go today, and there is no boom in sight. Remove QE and T-Bills go up.
Get the picture?
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“We all know it’s going to end badly, but in the meantime we can make some money.” - Jim Cramer, CNBC
“Those who ‘abjure’ violence can only do so because others are committing violence on their behalf.” - George Orwell
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RE: United States Debt... or the Elephant in the Room - 
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