Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else

[Joanne98]

As everyone is engrossed by assorted groundless Christmas (and other ongoing bear market) rallies, and oblivious to the debt monsters hiding in both the closet and under the bed, Zero Hedge has decided it is about time to present the ugliest truth faced by our 'intellectual superiors' and their Wall Street henchman who succeeded in pulling off Goal #1 for 2009 - the biggest ever bonus season (forget record bonuses in 2010... in fact, scratch any bonuses next year if what is likely to transpire in the upcoming 12 months does in fact occur).

If someone asks you what happened in 2009, the answer is simple - two things. There was a huge credit and liquidity crunch, and then there was Quantitative Easing. The last is the Fed's equivalent of band-aiding a zombied and ponzied corpse, better known as the US economy. It worked for a while, but now the zombie is about to go back into critical, followed by comatose, and lastly, undead (and 401(k)-depleting) condition.

In 2009, total supply of all USD denominated fixed income, net of maturities, declined by $300 billion from $2.05 trillion to $1.75 trillion. This makes sense: the abovementioned crunches stopped the flow of credit from January until well into April, and generally firms were unwilling to demonstrate to the market how clothless they are by hitting the capital markets until well into Q2 if not Q3. What happened was a move so drastic by the Fed, that into November, the worst of the worst High Yield names were freely upsizing dividend recap deals (see CCU) - the very same greed and stupidity that brought us here. Luckily, so far securitization and CDOs have not made a dramatic entrance. They likely will, at which point it will be time to buy a one-way ticket for either our southern or northern neighbor, both of which, in the supremest of ironies, transact in a currency that will survive long after the dollar is dead and buried.

Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

Continued>>>.
http://www.zerohedge.com/article/brace-impact-2010-private-demand-us-fixed-income-has-increase-elevenfold-or-else

CHARTS AT LINK

[enlightenment]

1. I have a feeling that all that is horrible - but I don't have the

technical knowledge to understand what I'm reading. Could someone please translate the gist of the article? I think I grasped the "oh, SH*T" part, but what are net issuances and a fixed income classes?

Thank you.

[w4rma]

3. Meaning: $300 billion of income that used to go to regular Americans from unsubsidized businesses

is is now coming from the U.S. Treasury through government subsidized businesses. Also, the wealthiest people in the world (not necessarily Americans, but the insiders who run Wall Street) are pocketing an extra $300 billion this year and are on course to pocket more next year. That money would have gone to regular Americans, but is instead being stolen from the U.S. Treasury.

The very wealthy aren't giving back to American society. They are cannibalizing it.

[enlightenment]

7. Thank you.

One day I may learn the language of economics - or maybe I'll just stick with the social sciences!

[Yupster]

5. It means our defecit has hit critical mass

There are not enough people in the world to lend us the $ 150 billion we need to borrow every single month.

Do you know anyone who has their entire paycheck spent just to pay credit card bills every month when they get paid? That's getting to be where we are as a nation. Paying interest on the debt is growing to be a larger and larger slice of the budget pie. That means there won't be any money for anything else - the programs you like and the ones you don't like.

And this is all with historically low interest rates. Wait till they start going up. Boy will the s__t hit the fan then.

To use a family analogy. We used to be a family making $ 50,000 a year and spending $ 54,000 a year. That's bad but you can do it for a while borrowing on your 401 (k) and such. Now we're a family making $ 48,000 a year and spending $ 90,000. You just can't do that for long.

[enlightenment]

6. Thank you.

I knew it was bad . . .

[roamer65]

9. I think the Fed debt monetization will go into high gear in 2010.

They will have to buy up all the unwanted Treasury paper, plus the paper the Chinese are dumping. They have no choice but to monetize the debt. They cannot risk a "failed" Treasury auction. Expect massive M1 money supply growth in 2010.

The dollar will take it on the chin this coming year.

[girl gone mad]

13. Now we get into the law of very large numbers..

which is why I think Krugman, Cheney et al are wrong when they say deficits don't matter. At some point the math simply doesn't work any more.

I have another issue with Krugman's interpretation of Keynesianism, which I may write about this week if I get time. In a nutshell, Keynes believed that in order for government stimulus to be effective, government should move quickly to reduce spending during economic booms, something which didn't happen over the last 30 years. Even while the private sector became overheated, our government kept raising the debt ceiling. In this area, I think Clinton acted more responsibly than others. Unfortunately, Bush went crazy running up the deficit for wars, a huge new government agency, poorly designed tax cuts, stupid money gift stimulus checks, etc. As a result, we are now quickly testing the limits of government intervention.

[Yupster]

14. That's why Keynsian Economics doesn't work

The idea is government spends big and cuts taxes during bad times and raises taxes and cuts spending during good times.

The raising spending and cutting taxes happens during the bad times, but the spending cuts and tax increases never happens during the good times, so what you end up with is what we got. Huge, impossible defecits with the government saying we have to spend even more.

[Joanne98]

11. Fixed income assets

Fixed income analysis is the valuation of fixed income or debt securities, and the analysis of their interest rate risk, credit risk, and likely price behavior in hedging portfolios. The analyst might conclude to buy, sell, hold, hedge or stay out of the particular security.

Fixed income products are generally bonds issued by various government treasuries, companies or international organisations. Bond holders are usually entitled to get coupon payments at periodic intervals until maturity. These coupon payments are generally fixed amounts (quoted as percentage of the bond's face value) or the coupons could float in relation to LIBOR or another reference rate.

The demand for fixed income products comes from banks, insurance companies, pension fund companies, endowment organisations, External Government Treasuries, individual investors like retirees and widows who need regular fixed cash in-flow.

The Fixed Income Analyst covers the term structure or yield curve analysis too. This is in simple terms, analysing all bonds issued by the same entity for different maturities (like US Govt 2yr bond, 10yr bond, 20 year bond). Such analysis enables one to understand the pricing differences between maturities comparable inter-market bonds (like Eur 2yr, 5yr and 10yr bunds)

The approaches for analysing fixed income products are broadly as follows: Fundamental approach; Technical Approach; relative value Approach.

http://en.wikipedia.org/wiki/Fixed_income_analysis

[BeatleBoot]

2. What does "Quantitative Easing" mean?

And why would someone capitalize the term?


:shrug:

[roamer65]

8. "Quantitative easing" is a fancy buzzword for debt monetization.

From wikipedia, a decent definition:
"In the United States, and in many other countries, the government does not have the right to issue new currency to pay its bills – it must instead finance the deficit by issuing new bonds and selling them to the public to acquire the necessary money to pay its bills. However, if these bonds do not end up in the hands of the public, the only alternative is for them to be purchased by the central bank. For the bonds not to end up in the public hands the central bank must conduct an open market purchase. This action by the central bank increases the monetary base through the money creation process. This process of financing government spending is called monetizing the debt.<1> Monetizing debt is a two step process where the government issues debt to finance its spending, the central bank purchases the debt from the public and the public is left with high powered money."

The preocess is inheritently inflationary.

[DJ13]

4. This is what happens when you try to fix a consumer led recession

by propping up the top of the income ladder.

Its the old financial saying, you cant fix a pyramid crumbling at the base by putting fresh stones on top.

[northernlights]

10. between the hyperbole and the technobabble, I *think* what he's saying

(and PLEASE somebody correct me...in English...if I'm wrong) is that there is no country left willing and/or able to purchase our debt (buy treasury bonds) and so next year the fed will be forced to either:

1. raise interest rates -- and spark major inflation -- or

2. engineer a stock market crash to drive people out of stocks and into...ta!da!...bonds.

Which makes me doubly-glad I refused, absolutely refused, to join my companies 401K plan when they pre-emptively enrolled me with 2 weeks to find the hidden in plain sight "opt-out" phone number. It sucked up 30 very valuable minutes of my time...shortly before final exams to boot...but was ultimately a very entertaining (for me) and educational (for the poor CSR on the other end) phone call.

[DemReadingDU]

12. I think both will occur

:(