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  • Foreign Governments Dump US Debt At Record Pace

    I have been traveling the last few days, so I will reprint two of the more interesting articles I ran across in the last week. We’ll start with an article from CNN which confirms that numerous foreign governments are unloading US Treasury debt at a record pace.

    This includes China, the largest holder of our debt, which became a huge seller of Treasuries last year. We will also look at some of the reasons why foreign central banks are dumping Treasuries, many like never before.

    We will finish today with a new report from the Economist Intelligence Unit which has a list of the nine largest risks facing the world today, and how likely each of them is to happen. It is an interesting report, although I would have a few other risks to add to the list.

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  • Is The US Treasury Market Rigged? Some Say Yes

    The last time federal regulators took a hard look at how Wall Street banks and brokers trade US Treasury securities – the largest bond market on the planet by a longshot – a little company called Google Inc. was just starting out.

    That was 1998, and the technological leaps since then – including ones that are now transforming bond markets – have left government regulators in the dust. In particular, executives from three of the biggest market-making firms in Treasuries say an electronic bait-and-switch tactic known as “spoofing,” – which is already the focus of a manipulation allegation at a major futures exchange – needs to be investigated in cash Treasuries (OTC, etc.) and related futures.

    Rules first enacted in 1986 that have gone virtually untouched since then are allowing certain high-tech firms to outmaneuver less-savvy rivals and are manipulating bond prices. They say a lack of cohesive regulation and technology to monitor “high-frequency traders” is making the world’s biggest government bond market more dangerous for everyone.

    Today I am reprinting an eye-opening article that appeared in Bloomberg/Businessweek on December 11 on the subject of manipulation in the Treasury market. Since then, I’ve seen no one else touch it. I’ve googled this subject dozens of ways… and very little on this topic comes up.You can read it yourself, and I think you will find it very interesting and troubling.

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  • Why The Fed Needs You To Sell Your Bonds

    Today I will attempt to explain why longer-term interest rates have fallen significantly this year when almost everyone expected rates to rise. This discussion focuses on the fact that there is a shortage of Treasury securities in the marketplace today, especially in maturities of 10 years or longer. The shortage is due to a combination of factors that I will discuss below.

    The bottom line is that when Treasuries are in short supply and demand is strong as it has been this year, buyers bid up the prices of these securities. When bond prices go up, yields fall. This is why the Fed would like investors to sell their bonds to help solve the shortage.

    It is doubtful that this trend of lower interest rates will continue if the economy continues to gain momentum. This should be an interesting letter for those of you who own bonds and pay attention to interest rates.

  • Will The Bond Mania End Ugly?

    Since the stock market bottom in March 2009, the S&P 500 Index has almost doubled. That’s a gain of apprx. 100% in three years. Yet investors have been dumping stock mutual funds like they’re the plague over this same period. It is impossible to know where the millions of investors that have redeemed from stock funds over the last several years put all of their money, but it is clear that a lot of it went into bond mutual funds.

    Over the past several years, we have seen a stampede into bond funds, and especially US Treasury bonds funds. Investors around the world are seeking the perceived safety of US bonds. Many probably don't realize that bonds can be just as volatile as stocks, and sometimes more so. When interest rates do move higher, bond investors will experience losses - how severe we don't know.

    The Fed says it's committed to keeping short-term rates interest rates low through late 2014. Yet with the yield on the benchmark 10-year Treasury Note now below 2%, it is hard to see rates moving much lower. If you are overweight in bonds, now may be a good time to take some profits and lighten up. We have a professionally managed bond program which can invest either long or short, in addition to the convertible bond program offered by Wellesley Investment Advisors.

    At the end of today's letter, I'll show you a brand new presidential election poll from Rasmussen that is very surprising, at least to me. Rasmussen did a poll with a three-man race - Obama, Romney and Ron Paul as an Independent - and guess who wins by a comfortable margin? You may be as surprised as I was.

  • Debt Ceiling Battle: Tax Hikes or Spending Cuts?

    On Monday, May 16, the US government officially exceeded the national debt ceiling of $14.3 trillion. Nothing much happened, of course, because Treasury Secretary Geithner had already announced that the Treasury Department could implement various emergency measures to fund the government and avoid default until around August 2.

    Since most Americans have no idea what these emergency measures are, I thought it might be interesting to briefly discuss them. Basically these emergency measures include robbing cash from various government trust and pension funds to keep the US from defaulting on its debts and day-to-day obligations. You may be surprised at the many ways Treasury Secretary Geithner has to keep the government running until the debt ceiling is raised.

    On the subject of raising the debt ceiling, the battle lines have clearly been drawn among Republicans and Democrats, including President Obama. Republicans vow that there must be at least $2 trillion in spending cuts in order to raise the debt ceiling from $14.3 trillion to $16.5 trillion. Democrats, on the other hand, want to raise taxes on the “rich” and on the five largest oil companies.A huge fight lies ahead between now and August 2.

    Finally, both houses of Congress are quietly planning to vote on a straight-up bill to raise the debt ceiling without any spending cuts and without any tax increases. Both houses expect the "clean" debt ceiling vote to fail unanimously with no "yes" votes on either side. They all want to tell their constituents back home that they voted "no" on raising the debt ceiling. In their minds, this will pave the way politically for both sides to compromise. How dumb do they think we are?

    Before getting into the debt ceiling saga, let's first turn to the latest economic reports which continue to show that the recovery is slowing down.

  • CBO: U.S. Debt Crisis On The Horizon


    The non-partisan Congressional Budget Office (“CBO”) released a very troubling new report in the last week of July. The new report is entitled “Federal Debt and the Risk of a Fiscal Crisis” and warns that we will face financial calamity if we do not get our massive budget deficits under control.

    The CBO report points out that the national debt, which was 36% of the gross domestic product three years ago, is now projected to be 62% of GDP at the end of fiscal year 2010 on September 30. And it continues to ratchet up every year thereafter, even in the CBO’s “baseline” (more conservative) projections.

    The CBO specifically warns that our out-of-control deficits could lead to the ultimate debt crisis when buyers of Treasury securities lose faith in the government’s promise not to default on these most trusted financial instruments. No kidding!

    I have been writing about the perils of increasing our national debt year after year since back in the 1980s when I criticized President Ronald Reagan for doing so, and every president since him. The concern was that in 20-30 years, the ultimate debt crisis would come. Guess what: it’s now been 20-30 years, and even the CBO now warns that the day of reckoning is on the horizon.

    This week, I’ll summarize the latest CBO report. After reading about it, you need to think seriously about how you will protect your assets when the day comes where US Treasury securities are no longer trusted – think sharply higher interest rates! This will be a continuing theme in the weeks and months ahead.

    But before we jump into the latest troubling CBO report, let’s take a quick look at the latest economic reports, most of which have not been favorable. It has been several weeks since I wrote about the economy specifically, so let’s get caught up.