One of the lead stories at Bloomberg this morning is an article about foreigners shying away from “financing the US government”. And the conclusion of this article is that it could mean higher interest rates in the US. Is this conclusion the right one though, and how should you respond as an investor? I have some thoughts on that below....
Harrison opines that Bullard's view of Fed policy will likely prevail.
Credit Writedowns
If foreigners are dumping Treasuries, how should you respond as an investor?
Edward Harrison
5 comments:
"Bullard is saying that the Fed will have to do some of the policy normalization by shrinking its balance sheet if it is to avoid the spectre of a flat curve."
Maybe they really are stuck... can only go 0.25% increase annually...
March will reveal a lot in this regard...
Positive yielding sovereign debt is welfare proportional to wealth so who cares if some foreigners decide they don't want anymore welfare from US?
Moreover positive yielding US sovereign debt bribes foreigners NOT to buy our exports! But we have slack in our economy and need to export more (because jobs)!
So, bottom line:
Why should we (the US) care?
AA,
You may effectively get your wish anyway if the Fed is stuck...
Lets see what Yellen says this week as far as tipping what they
are going to do in March...
idk if Trump would ever let them get away with reporting losses or negative equity... he would probably go ape shit....
The only reason people (individuals, pension funds, corporations, etc.) buy treasuries is because they pay a rate higher than cash at the Fed and they are safe. This discussion is based around the fluctuation in value during the term of the bond. If you hold the bond to maturity the investment is safe, so it applies only to people chasing interest rates, intending to sell the minute they see a higher rate somewhere. For small investors (up to a few million), they can spread their money around to stay under FDIC cap at private banks.
Regarding the dumping of treasuries, if every one who holds government bonds wanted to sell them, the fed could buy them all, and the interest would go to the federal government. The cash from the sale to the bondholders would just be a debit to their cash account at the Fed. It would be there for whatever purpose they wanted. This includes foreign holders of our debt. If they exchanged it on the open currency market for their own currency or another country's, the dollar would go down, and our exports to those countries would increase. Imports to us would become more expensive so it would move jobs back to the US. Isn't that what we're trying to do? Most of the spending represented by the national debt is for foreign wars. That's what we need to stop. Why do we have to raise taxes for everything we really need, and not for war? Think about it . .
Smart comment, Elwood.
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