7/23/12 – 3:06 PM – More Barron’s / Pomboy Insight

You may remember that I said that in 2011 the US Federal Reserve bought 61% of all newly issued US Treaury debt. Part of that was to increase demand in order to push bond prices higher and thus interest rates lower. But, the other part of that is to offset sharply lower demand from countries buying all this US debt.

To quote Stephanie Pomboy in this weekends’d Barrons Interview, “At the peak of the housing bubble and globaization nivana, foreigners absorbed 82% of Traesury issuance, today it’s 26% . . . We have over $1 trillion annualy in Treasury isuance, and our foreign creditors are buying $300 billion . . . Well, they’re now recycling dollars into hard assets [gold, real estate, commodities].”

What does that mean for the future? To me, it means that unless the Federal Reserve continues to do quantitative easing programs that buy up a great deal of this Treasury issuance of bonds to pay for deficit spending, the demand will be low compared to the supply and that means lower Treasury prices and higher interest rates on US government debt. That would of course adds to the deficit in terms of more interest expense, especially since much of the issuance has been at short maturities that must be recycled often and so interest rates on that debt would re-set quickly.

You think Pres. Obama got handed a bad situation when he took office? Mitt Romney might inherit a worse problem than has been reported (see my last post) plus a real problem with financing the deficit, should he be elected.