US treasuries- A Screaming Buy?

[BigFatWhale]

With 2-year US Treasuries yielding 4.3%, is it a good time to invest in this "safe haven" given the current turbulence?

There are several factors we have to consider where we touch on this in our article.

More importantly, would be the sovereign risk that we have to factor in.

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https://thebigfatwhale.com/us-treasuries...aming-buy/

[weijian]

A few thoughts:

(1) Looking at absolutes, like total debt is quite meaningless. A better way is to actually look at the debt-to-GDP ratio. Granted the US debt-to-GDP ratio has doubled from 60% (1990s-2000s) to 120% (all thanks to GFC2008 and Covid19) but if one compares it with other countries, it still looks relatively favorable. The last time the US had its debt-to-GDP ratio exceeding 100% was way back in WW2. If we looked at what happened subsequently, the way to address this debt is quite obvious. On hindsight, are we at the inflexion point where inflation starts to reduce this ratio?

US public debt-to-equity ratio: https://fred.stlouisfed.org/series/GFDEGDQ188S
Public debt-to-equity ratio of different countries: https://bigthink.com/strange-maps/debt-to-gdp-ratio/

(2) Towards the end of the article, you talked about "sovereign risk". 3/6 month US Treasuries are considered risk free by the Omaha Oracle and so I think it is safe to assume longer term treasuries are not far behind. The US has the baddest/strongest military force and most dynamic citizenry in this world. There are not enough reason/s I can think of to qualify that the Little Red Dot has lower sovereign risk. But based on the way you described it, I think you are actually referring to exchange rate risk. And yes, this FX risk is real.

That been said, I am not an economist (nor inspire to be an armchair critic of the policy makers). So do take what I said with a pinch of salt! But what is for sure as my role as an OPMI, what is screaming (in my face) are not any sort of bonds, but equities!

[CY09]

For US to grow until its GDP to debt ratio moves below 50%; in my view, its close to impossible.

In the two decades which resulted in this, the US was experiencing a +5% annual growth or more. At its current state, its difficult because of the law of large numbers.

In my view, the US is funding its deficit by issuing more and more bonds for its policies in putting more money to its citizen's pockets, veteran benefits and unemployment benefits. If I am a political leader who is rational and free from diplomacy constraints, I would start reducing my country's purchase of US treasuries because what I am doing is using my country's funds to fund USA in cushioning the cost of living crisis at their country. I rather use these amount to help my own people or defend my currency from further depreciation.

To Bigfatwhale: Is japan reducing their treasury holdings, I didnt see this data, its quite significant given that Japan is a major ally.

[BigFatWhale]

I guess the move away from the gold standard has led to the loss of discipline in monetary policies. They are trigger-happy with QE and issuances of debt as there is a lesser need to be accountable whereas getting past the term on a bright note is more of a priority. So current debt levels might not be sustainable and there could be a huge reset.

After saying that, the chances of the US defaulting are almost nil as they can print their way out of trouble. The implications would be your treasuries might be worth less when compared to a relatively stable currency bond.

Japan has been reducing their treasuries but this could be more of a move to defend against the fall of the Yen to an all-time low against the US dollar. Here is a link to an article on this:

http://www.businesskorea.co.kr/news/arti...xno=100835

[CY09]

As you rightly said then pointed out, your first 2 points are contradictions.

US dollar is the medium for transactions and the reserve currency hence US default is prevented. China has been actively trying to get third world nations to use the RMB as a reserve currency and contract details to be denominated in RMB; but let's be real, with a political leader who behaves like a dictator, has poor foreign economic relations (examples of Sri Lanka) and persecutes a region of its own minorities, people are worried. No doubt the economy is strong. But until it acts like a deomcratic government in a liberalised capitalist economy, it wouldn't even rise to be the No 2 reserve currency.

On the topic of a liberalised capitalistic, the current world order was built by USA post World War II as they were seen as the saviour of the world from evil forces. While USA is currently on the decline, the estabished world order by them has secured them. They are technologically advancing and protecting other nations, so their relevance is not greatly diminshed. And with it, the effect of economic distrust is reduced.

With President Xi securing his third term, I doubt USA will decline in the next years. The current China Premier is probably the worst on the foreign stage since Chairman Mao and this prevents the current world order from being dislodged because the major players (other than Russia) do not trust him.

[BlueKelah]

As you rightly said then pointed out, your first 2 points are contradictions.

US dollar is the medium for transactions and the reserve currency hence US default is prevented. China has been actively trying to get third world nations to use the RMB as a reserve currency and contract details to be denominated in RMB; but let's be real, with a political leader who behaves like a dictator, has poor foreign economic relations (examples of Sri Lanka) and persecutes a region of its own minorities, people are worried. No doubt the economy is strong. But until it acts like a deomcratic government in a liberalised capitalist economy, it wouldn't even rise to be the No 2 reserve currency.

On the topic of a liberalised capitalistic, the current world order was built by USA post World War II as they were seen as the saviour of the world from evil forces. While USA is currently on the decline, the estabished world order by them has secured them. They are technologically advancing and protecting other nations, so their relevance is not greatly diminshed. And with it, the effect of economic distrust is reduced.

With President Xi securing his third term, I doubt USA will decline in the next years. The current China Premier is probably the worst on the foreign stage since Chairman Mao and this prevents the current world order from being dislodged because the major players (other than Russia) do not trust him.

IMHO USA power has peaked already. Yes "Eurodollar" market is still the most traded however USD has slowly lost its share of reserve currency percentage this decade as major trading blocs like BRICS are slowly but surely migrating to their own platform. 

Ray Dalio's Principles for Dealing with the Changing World Order video is worth a watch. https://www.youtube.com/watch?v=xguam0TKMw8

USA empire is now in decline for sure, just a matter who can step up. China has very bad demographics now ala Japan 1990s so unlikely to take over anytime soon by itself but if you add up BRICS nations GDP they should be able to rival USA as a trading block, and as for reserve currency not sure about BRazil but RUssia/China/India/South africa all have SHITLOADs of gold. IF there is a currency reset basically you'll see USD down the drain and weaken significantly vs the other GOLD backed currencies as evident by how resilient the ruble is, even stronger than it was before the war vs the USD all becoz of the "gold peg" 

I have great expectations and anticipation of the new Moscow gold standard as well as the new BRICS currency that they are working on, it will stop the rampant manipulation on COMEX/etc... China does have the fintech with digital currency / CIPS payment system and UnionPay to rival Americans. Even EV wise they are now more ahead with the transition. 

Majority of manufacturing supply chains run through China, if you want your goods on time you may be forced to join in the new BRICS currency trading. And if you want your OIL from OPEC you will have to trade in BRICS currency. Americans now running down the SPR at alarming rate, and Biden is raiding it further to try and lower inflation.  

I dont think business wise regime type is a concern as you can see USA froze all those Russian assets like a totalitarian regime lol, that definitely got many neutral countries thinking twice about their US reserves exposure. 

IMO Xi and Putin are same want to be king forever, of course this type of regime will have some oppression/corruption to a certain degree, but still both countries and their allies are still economic powerhouses even if their military looks weaker than the west's

We shall see how FED deal with recession which they have somehow avoided now in 3Q. 

[BlueKelah]

For US to grow until its GDP to debt ratio moves below 50%; in my view, its close to impossible.

In the two decades which resulted in this, the US was experiencing a +5% annual growth or more. At its current state, its difficult because of the law of large numbers.

In my view, the US is funding its deficit by issuing more and more bonds for its policies in putting more money to its citizen's pockets, veteran benefits and unemployment benefits. If I am a political leader who is rational and free from diplomacy constraints, I would start reducing my country's purchase of US treasuries because what I am doing is using my country's funds to fund USA in cushioning the cost of living crisis at their country. I rather use these amount to help my own people or defend my currency from further depreciation.

To Bigfatwhale: Is japan reducing their treasury holdings, I didnt see this data, its quite significant given that Japan is a major ally.

Japan had to reduce treasury holdings to defend the Yen recently, but past year has been going from 1319B to 1230level and then to 1199 in August. Its likely even lower now i think last intervention was earlier this month. 

China initially also reduced since war started but  recently added back a bit to stabilise around 970Billion. I think they have too much trade surplus no where else good to park lol...

Data till AUgust
https://ticdata.treasury.gov/Publish/mfh.txt

[Dosser]

US treasuries are currently yielding 3.9% for the 10-year, while US T-Bills are at 4.45% for the 6 month. For the longer dated treasuries there is the potential for price appreciation if interest rates fall, or for losses if rates go up further. T-bills can just be held to maturity to avoid the risk of loss of capital. For Singapore investors there is an additional exchange rate risk. The USD has been on a tear upwards, but trends always change eventually.

For simply parking cash in Singapore while the stock market is adjusting to new economic realities I prefer Singapore government T-Bills. Latest auction of the 6-month resulted in a 4.19% interest rate:

https://www.channelnewsasia.com/singapor...88-3028411

4.19% is a lot higher than any deposit rates that I have found locally, and I was happy to have placed a successful bid. A 6 month horizon allows me to re-evaluate where I want to place my money within a reasonable time-frame. I do, however, leave a significant proportion of my dry powder as cash in case of a 1987 type crash.

[CY09]

There is yield curve inversion going on- which correlates to recession.

As mentioned, the Fed has two policy tools to utilise: (i) interest rate hikes, which affects the short term rates more than the long term and (ii) QE/QT which affects the tail end (long term).

What happened (in my view) is that the Fed overdid in utilising (i), without balancing with more of (ii) deployed. This resulted in the yield curve inversion and possibly recession. The Fed has done only 1 QT hike as compared to multiple rounds of I/R increasel rightfully it should have been balanced out with a corresponding increase in QT. This is now destabilising US and the entire global market.

Of course, Jerome Powell has a PHD in economics, while I have an A level distinction in it; so do take my view with a pinch of salt. But what I think is that recession will come and the Fed will have to pivot because it has overdone it