Worrying turmoil shook the US debt market this week. Are we experiencing the beginnings of a return to printing money?
Very tight bond issue
The debt issuance ($112 billion) went very badly this Thursday. The US Treasury found itself forced to accept a higher borrowing rate than anticipated when issuing 30-year debt.
“The 30-year bond auction was frankly bad”said the chief investment officer at Bleakley Financial Group.
THE “primary dealers” (the very large banks) which buy the securities not absorbed by the investors had to accept 24.7% of the securities offered. That is to say, more than double the average of 12% recorded over the past year, we can read in Barron’s.
The 30-year yield ended Thursday at 4.777%, 0.12% higher than Wednesday’s close. Knowing that rates increase like this when demand is low. Rates increase so that the debt finds a buyer.
This laborious debt issuance has not gone unnoticed. It ended eight consecutive bullish sessions on the American stock market (S&P500).
Another thing that raised eyebrows: China’s largest bank was unable to participate normally in the auction due to a ransomware.
Ransomware that prevents you from buying US debt… Before talking about it, a few reminders about US debt.
Into the workings of debt
U.S. Treasury bond auctions are used to finance U.S. government debt. There are different types of bonds:
- Bonds with a duration of less than 1 year (T-Bills)
- Bonds with a duration of less than 10 years (Notes)
- Bonds with a duration greater than 10 years
- Inflation-backed bonds (TIPS)
These different types of bonds are commonly grouped under the term “Treasury bills”. These auctions are regular. There are around 300 per year. The United States issued bonds with a total value of more than 18 trillion dollars in 2023. That is 32% times more than last year, by the way.
This is the FICC (Fixed Income Clearing Corporation) which organizes these auctions. Investors (banks, investment funds, etc.) must announce the quantity of debt they wish to purchase at a rate decided in advance by the Treasury. These offers are accepted first. If this is not enough to absorb everything, the primary dealers come into play.
For example, suppose the Treasury wants to raise $10 billion in 10-year bonds bearing a rate of 4%. And let’s say that investors announce that they want seven billion, no more.
The Treasury first accepts these seven billion and then goes to auction for the remaining three billion.
Let’s imagine that the Treasury receives the following offers:
- 1 billion at a rate of 3.8%
- $1 billion at 3.99%
- $1 billion at 4.05%
- $1 billion at 4.1%
The offers with the lowest rate will be accepted first until the necessary three billion are obtained.
And the fact is that it is a very bad sign when there is a significant gap between the rate requested by the Treasury and that offered by the very large banks.
Chinese warning shot?
Everyone knows that the BRICS regularly increase pressure on the United States by threatening to abandon the dollar. So we could one day see a serious split. And it is at the level of US debt auctions that this will be seen first.
The turmoil on the US debt market this Thursday was most likely caused by the lack of demand from the third largest bank in the world, the Industrial and Commercial Bank of China (ICBC) which is one of the primary dealers of the FICC.
It is through this bank that a large part of the Asian demand for American debt passes. However, the bank was the victim of ransomware this Thursday. The hacker group Lockbit paralyzed the bank’s computer systems during the US Treasury bond auction.
“ICBC is a major member of the FICC, so this is certainly a major concern, and potentially an impact on the liquidity of US Treasuries”said an executive at another major bank that clears U.S. Treasuries.
“It is extremely rare for a bank of this size to be affected in this way”said cybersecurity expert Allan Liska at Financial Times.
A question comes to mind given the times: Wouldn’t this ransomware be a political warning shot?
The running times
6 trillion dollars. This is the amount of U.S. bonds that will mature over the next year. So much money that the US government doesn’t have. It will therefore be necessary to issue new bonds to repay the old ones. This is called rolling the debt in the jargon.
But there is a catch. The old bonds had a yield of around 1%, while the new bonds will have a yield of 5% or more.
The United States is caught in a debt spiral which will be worsened by dedollarization which reduces the demand for dollars and American debt.
Sooner or later, this drop in demand will cause the dollar exchange rate to fall. This will result in inflation and/or reductions in imports. In other words, the Americans will have to tighten their belts.
America is living beyond its means and that is why a new rating agency is threatening to strip it of its AAA rating. Moody’s placed the country under negative outlook this Friday.
Reasons given by Moody’s:
- The risks of deterioration in the solidity of American public finances have increased.
- Budget deficits will remain very large.
- High rates worsen deficits in the absence of a reduction in public spending.
And given that Washington is financing two wars to try to preserve its imperial monetary pre-squares, there is cause for concern. It is also difficult to see how the Fed could avoid restarting its printing of money sooner than we think.
The physical limits of the planet no longer make it possible to have GDP growth equivalent to that of the debt, this will result in inflation.
The already painful inflation will worsen. Bitcoin is not rising because of the ETF, but because the United States is insolvent. To the wise.
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