Analyzing Federal Debt held by Foreigners

As U.S. treasury yields (TBT, TLT) are starting to spike upwards, investors should pay more attention to this new trend. To help investors monitor U.S. treasury yields I'll point out another interesting correlation between U.S. debt held by foreigners and U.S. bond yields. We will see they are inversely correlated. If foreigners sell U.S. bonds, bond yields will go up.

The total public debt consists of two components:

1) Debt held by the public which is $US 11.177 trillion today.
2) Intragovernmental debt which is $US 4.783 trillion today.

The sum of these two is almost $US 16 trillion. The debt held by the public is increasing very rapidly, while the intragovernmental debt is stable.
Of these two components, the first one can be held by foreigners.

To see the foreign holdings you can go to this site: Treasury.gov.

Table 1: Foreign holdings of U.S. treasuries

Avondale Asset Management has recently updated the percentage debt that foreigners held on in April 2012. They put up chart 1: Percentage of Publicly Traded Federal Debt Held by Foreigners.

Chart 1: Percentage of Publicly Traded Federal Debt Held by Foreigners

To read the full analysis, go here.

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U.S. Second Quarter GDP Growth Slows Down

Today the second quarter GDP numbers came out. Real GDP growth slowed down to 1.5% from 2% in the first quarter (Chart 1).

Chart 1: U.S. GDP Growth

This is a significant drop in GDP growth and is conform with the slowdown in the U.S. PMI of which I talked here. As the U.S. PMI went below 50 for the month of June 2012, we can expect a further contraction in GDP growth in the months ahead of us.  This bad news increases the odds of further quantitative easing from the federal reserve to prevent an entire collapse in GDP as we saw in 2008.

To see more about zero hour debt, read the analysis here.

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Composition of Fed Balance Sheet Indicates Low Interest Rates For Eternity

I have been talking a lot about the federal reserve balance sheet. But what is it composed of? And how did it evolve higher?

Chart 1 gives the composition. You can see that QE1 and QE2 were mainly bond purchases (light brown area). QE3 should be another round of bond purchases and should expand the light brown area again.

Second, the spike in 2008 was mainly lending to financial institutions at the time of the banking collapse. This lending has been paid off in 2010.

But the most interesting part is the mortgage backed securities area in brown. In that period, congress passed the Emergency Economic Stabilization Act of 2008, which authorized the Treasury to purchase mortgage-backed securities. As a consequence, the brown area increased in size at the same time when lending to financials decreased. That means that the federal reserve has bought approximately $US 1 trillion of mortgage backed securities in an attempt to support the housing market. It didn't do much to the housing market. New home sales and housing starts were flat, but the housing market index improved a bit though.

I will point out the importance of convexity to make my case of lower interest rates in the foreseeable future.

Chart 1: Federal Reserve Balance Sheet

To read the analysis go here.

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U.S. debt jumps by $US 75 billion overnight

U.S. debt jumped $US 75 billion overnight, which is a pretty big jump. Total U.S. public debt jumped from $US 15.781 trillion (28-Jul-2012) to $US 15.856 trillion (29-Jul-2012). The debt ceiling of $US 16.7 trillion is coming closer and closer.

Historically, the biggest jumps were $US 154 billion overnight on 31-Dec-2010, $US 166 billion on 30-Dec-2009 and $US 166 billion on 29-Jun-2010. Average jump in debt is $US 3.5 billion.

Chart 1: Total U.S. Public Debt

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Euro Strength Finally Manifested

I have been monitoring the euro versus U.S. bonds versus S&P.

U.S. bonds have been very volatile, one day they go up and the other day they go down. There is no consistency whatsoever in U.S. bonds (green triangles). The euro has been relatively flat against the U.S. dollar, but it posted the biggest increase since I started monitoring it the previous month (blue dots). I hope this will be the first sign of euro strength, which means commodities could start rising. The S&P started to go down lately, but today it was pretty bullish.

There is no decoupling yet: when the U.S. dollar goes down, stocks go up.

Chart 1: Monitoring of EUR/USD VS. 10 Yr US Bonds VS. S&P

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Velocity of MZM slowing down

In one of my previous articles I monitored the velocity of MZM, to see if treasuries were likely to go up or down. The new numbers of velocity of MZM are out today at 1.434 (Q1 2012), down from 1.451 (Q4 2011). To see what this means for your portfolio, go to: Velocity of MZM going down.

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U.S. Budget Deficit Worsens

I previously dissected the U.S. deficit HERE. Citing that the U.S. budget deficit is increasing at enormous speeds.

Today, reported on Bloomberg, the U.S. budget deficit widened to almost 200 billion in March. Extrapolation brings us to more than 2 trillion in budget deficits in 2012 compared to 1.4 trillion in budget deficits in 2011.

That's a 40% increase in budget deficit year over year. Hyperinflation is on the horizon.

Link: http://www.bloomberg.com/news/2012-04-11/u-s-budget-deficit-widened-to-198-2-billion-in-march.html

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