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Excerpts from Bloomberg:

Vigilantes Sidelined as Growth Tops Deficit Among Treasury Swap Investors

The worst performance by Treasuries since the second quarter of 2009 reflects prospects for faster U.S. economic growth rather than concern that rising budget deficits will drive investors away from government debt.

While the average yield on Treasuries rose to 1.89 percent from 1.42 percent at the end of September, according to the Bank of America Merrill Lynch Treasury Master index, the price of credit-default swaps tied to U.S. debt declined to 41.5 basis points from 48.4 basis points at the end of September, Bloomberg data showed. The dollar rose 1.5 percent against an index of currencies of six major U.S. trading partners.

The drop in swap prices and the greenback’s strength shows bond vigilantes aren’t ready to punish the U.S. for its spending. Pacific Investment Management Co. and JPMorgan Chase & Co. raised their growth forecasts after President Barack Obama agreed to extend George W. Bush-era tax cuts as reports show gains in retail sales, manufacturing and consumer confidence.

“More than anything else, it’s a growth story,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “From the fiscal stimulus to the monetary stimulus to the tax extensions, it’s the belief that the U.S. government is all in.”

Serious Situation

Since the end of the Clinton Administration in January 2001, outstanding marketable Treasury debt has almost tripled to $8.75 trillion from $2.98 trillion. Most of the increase in borrowing has come since the start of the financial crisis in July 2007, when outstanding tradable U.S. government securities totaled $4.4 trillion.

The budget situation is serious,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 18 primary dealers. “You’re seeing it in the steepening of the yield curve. You should be paid more to take each additional year of U.S. credit risk.”

The gap between two- and 10-year Treasury yields, known as the yield curve, has widened to 2.70 percentage points from 2.08 percentage points at the end of September, about the lowest since April 2009.

The tax-cut agreement between Obama and Republicans in Congress brings budget concern much closer to the point where it will become pressing, Misra said. “It seems there’s no political will to control the deficit,” she said.


Before us today is a classic example of willful denial of reality. "It's a growth story" - what hogwash! How can a rational human being get excited about 2 or 3% GDP growth when the federal deficit continues to grow at 9% of GDP? Send this analyst back to grade 1 to learn subtraction. How can we consider a $3000 return on $9000 investment something to cheer about? The one item this individual got right is that the US government is all in - but it is all in with a pair of deuces in this game of poker being played by the bond vigilantes.

A big prize to Ms. Priya Misra. She is the one person in this article that seems to grasp the gravity of our situation. The yield curve is rising and has become quite steep - this is our clue that trouble is coming.
From our 2011 Forecast, we know that trouble in the bond market will begin in Europe, hence the rising CDS prices in Europe including Germany. Yes, CDS prices have dropped slightly in the US, but that is no reason for complacency. By having the reserve currency, the bond vigilantes have just given the US more rope to hang itself. Will congress be wise and rein in the budget? It seems unlikely as Ms. Misra points to the lack of political will.

What happens if we don't rein in the budget?

As a nation we will begin a new fashion sensation.


  1. This is why I enjoy this Blog so much PW.

    The truth always prevails. I'll be honest PW I thought about selling my Silver and Gold positions ( Physical ) today, and then I read this post...I'll keep what I have as Fiat is not worth the paper it is printed on.

    Thanks as always.



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