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January 29, 2010

Who's Buying All These Treasuries? (Part 2)


To follow up on my writing Wednesday, I did some research online as to who has been buying US treasuries. I read several articles which dealt with the debt situation, but found a really good article that discussed treasury debt.

The group that wrote the linked article above surveyed their readers among the different groups of treasury buyers and asked them if they could increase their holdings by 200 percent in 2009 (to reflect the increase in debt issuance) and almost all said no. The investment group warned its clients that the bubble forming in the treasury market could burst. But as they noted, there have been no failed auctions and no huge spikes in interest rates despite nobody new buying treasuries.

The treasury bulletin revealed that $1.9 trillion in treasury debt was issued in 2009 and comparing this to the $300 billion per year under the Bush Administration, one must wonder, who is buying all these treasuries? Let us focus on explaining this debt. According to treasury, using three quarters of data (annualized):

-$300 billion was purchased by the Federal Reserve

-$700 billion was purchased by foreigners

-$700 billion (annualized) was purchased by "Other Investors"

"Other Investors" seemed to have the liquidity to buy $600 billion in treasury bonds despite the fact that they only purchased $90 billion in 2008.

According to Treasury and Sprott Asset Management, other investors are comprised of "individuals, government-sponsored enterprises (GSE), brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, individuals and other investors." The article above rightly asked who of that group managed to have $600 billion extra to invest in the Treasury market? I used common sense to try to recall who among my group of friends has purchased treasury bonds in the past year and nobody responded to my inquiry on who bought treasuries.

The team turned to the Federal Reserve for more specific data on "Other Investors." GSE's, banks, businesses, brokers bought $100 Billion in treasuries. The rest went to something called the "household sector." The article summarized:

1. Foreign and international buyers, who purchased $697.5 billion.
2. The Federal Reserve, which bought $286 billion.
3. The household sector, which bought $528 billion to Q3 – which puts them on track purchase $704 billion for fiscal 2009.

The household sector increased its portfolio in treasuries by 35-fold in 2009. If true, this is bad for many Americans because instead of investing in the stock market, which went up 60% from March to December of last year, bought an estimated $700 Billion in assets that gave a return of 2%.

Back in the article, the authors added something that shows the American consumer may in fact have not bought the treasuries. The "household sector" actually represents a "catch-all" where if the Fed does not know who bought the treasuries, they just throw that number in "households." So, the Treasury sold $700 Billion in bonds in 2009 to “your guess is as good as mine.” Is this responsible governing?

For an opposing viewpoint,
This guy believes that households are really buying all this treasury debt.

As Treasury rates were moving up (relating to Part 1 of this article), on January 14th, a large anonymous investor entered the market and began buying huge amounts of treasuries at high prices pushing rates down. Who was this person? There was speculation that hedge funds were hedging against another position. This is absurd because "hedging" involves taking a small counter-position against another investment. In order to hedge with buying $10 to $20 billion in treasuries, the position that is being hedged against needs to be at least $120 billion! I highly doubt somebody put that large of a position against the treasury market.

I believe that once again, Rick Santelli got it right. Fannie and Freddie have entered the market with their newly found buying power and began buying up Treasuries with government money to not only hold down mortgage rates, but interest rates as a whole. Rick Santelli explains the situation here (low quality video).

That leads me back to the phantom buyers of $700 billion in debt in 2009, who is this phantom buyer? I think we all know the answer to that question and Rick Santelli points to the likely culprit in the above video.

In conclusion, I am going to reference the cliff notes in the Sprott Asset Management's letter to investors:

"The Federal Reserve’s policy of Quantitative Easing is failing. The US budget is ludicrous,

spending is out of control, spending promises are out of control, the world knows it - and we

know it. For all the pundits who see the economy improving over the next year, we invite you

to explain to us how this debt crisis will resolve itself without significant turmoil. We’ve

tabulated the numbers above - and they do not lie.”

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