Japanese Economy Falls Off Cliff: Who Else Is Able To Buy US Treasuries?

The Japanese economy is falling of a cliff as its GDP is contracting at a rapid pace. The declines in both Japan and China are coming at a terrible time; the contraction is taking place at the same time that we are trying to inflate the US economy. We’re trying to inflate the world economy by issuing more debt. The only way to do this is to have foreign buyers who are willing and able to buy the debt. The contractions in Japan and China affect the “able” part as there will be less surplus dollars to buy our debt. The day of reckoning is coming fast.

March 12 (Bloomberg):

Japan’s economy contracted at the fastest pace since 1974 last quarter as exports, output and business spending collapsed. Gross domestic product shrank an annualized 12.1 percent in the three months ended Dec. 31, less than the 12.7 percent reported last month, the Cabinet Office said today in Tokyo. The median estimate of economists was for a 13.4 percent decline.

I am fearing a large and rapid selloff in the bond market. It will happen quickly and unexpectedly. Most likely it will happen as a result of a failed US Treasury auction. The bid-to-cover ratio of the 10-year auction taking place Wednesday was 2.14. That was one of the lowest bid-to-cover ratios this year on the 10-year auction.

I checked last year’s 10-year auctions and found that 2.14 was the 4th lowest of 15 “10-year” auctions. The 3 lower auctions in 2008 were grouped under the 10-yr auctions, but the maturities were 9year/1m, 6y/7m, and 6y/10m. I’m not sure why the Treasury considers them to be 10-year auctions when the maturity date is less than 10 years. More confusion.

In any event, continue to watch the bid-to-cover ratio when the auctions are reported. It will help to provide some insight into the level of demand for our bonds at low rates.

Subscribe by RSS Subscribe by Email