Before embarking on a succinct review of interest rates by type of security, one must make a remark.
The dominant positions of the two pillars of marketable debt assume that the shift of foreign investors to short-term debt results in higher long-term debt (T Notes and/or T Bonds).
We can note on the T bonds of 29 years and 11 months and thirty years, a tendency to increase interest until April and a significant decline from May which is accentuated from August 2010.
The T. Notes are also experiencing similar evolutions: interest rates rise for Treasury bills of various maturities, then they move downward from April-May and then fall sharply after August.
We then understand what the Treasury’s policy was. To slow the rise in interest rates on the T. Bonds and Notes, the Treasury has reduced net issuance and has contributed to the volume of T. Bills. Hence a deconsolidation of the financing of the federal debt. It is probable, but it is not certain, that more of the debt has been entrusted to the social funds.
The abundance of T. Bills did the rest, while the 4-week, 13-week, and 26-week T. Bills showed marked variations in evolutionary evolution, such as T. Bonds and Notes. There is one exception: T. 1-year-olds who are at the break of the short time (- one year) and the longer time of T. Notes. Trust in treasury bills appears to confirm strong doubts about the state of the US economy at 12 months. This doubt is in line with the uncertainties of the US economy in the short term.
Our analyzes receive through the rates a beginning of confirmation; Long debt rates have been influenced by the growing weight of private investors preferring short debt. There is, however, a paradox: how to explain that the interest rates of the long debt (T. Bonds and Notes) have not flamed. How to explain that these rates are moving downward. The answer is simple: since August, the FED officially has the program to buy Treasury bonds by replacing the securities of agencies (debt and real estate securitization products or RMBS) expired, securities of Fannie Mae, Freddie Mac and Ginnie Mae she bought from January 2009 in order to avoid a Crash on the first two securitization bonds of them while supporting the real estate market through the third business development. This treasury bill purchase program was worth 400 billion in purchasing capacity in August 2010, it has just been increased to $ 1000 billion in purchasing capacity in November for the next 8 months.
The action of the FED since the spring of 2010: the creeping debt crisis
The Fed did not hide wanting to buy Treasury bills to ensure the consolidation of debt at reasonable interest rates. We know why she is doing this program, the foundations of the financing of the market debt discover the existence of a risk on the investments of T. Notes and T. Bonds, that is to say, a threat to the policy of consolidation of debt at sustainable interest rates. The FED pre-empted this risk by acquiring a massive buying capacity (+ $ 100bn per month) allowing it to absorb new long-term debt issues under investment hedging conditions and the level of remuneration. that she can administer.
But we can also report on the inflection of the policy of the FED-Treasury couple in August 2010. The correction of the level of interest on the issues of spring 2010 was carried out by the ordinary methods of the FED: Open Market operations consist of selling old Treasury bonds to provide the means to buy new ones without modifying the volume of the good inmates by one iota. The primary dealers were also put to use to organize a privileged purchase channel administered between the FED and the very high bank.
Nevertheless, developments in purchases of foreign treasury bills led the FED to raise its level to such a level that it was necessary to cut the cards in August 2010 and assume an open policy of intervention of the FED. It is the announcement of the substitution of Treasury bills for agency assets which was the first step in the monetization of the Treasury debt.
Then came the November announcement of $ 600bn of additional purchase. We believe that this intervention is the translation of a real deterioration of the financing conditions of the federal debt. The insincerity of one-off corrections was no longer sufficient to conceal problems with debt financing during the problematic consolidation phase.
The Fed’s intervention is therefore due to a creeping debt crisis that is all the more worrying since the growth of the budget deficit has been reduced at the same time as the growth of the financial debt since the beginning of 2010. This slowdown resulted in a poor performance of GDP in 2010.
The Fed has intervened to address the growing difficulties of financing the volume of the long federal debt. There has been a creeping crisis of debt financing manifested by the privilege granted by private investors to the short-term debt, the distrust concerns the ability of the US to repay their debt in the long term. Rating agencies may continue to argue that the US market debt is solid. Private investors, the FED and the Treasury showed by their shares that they had very strong fears about US sovereign debt.
More than the evolutions of the GDP explaining the prudence of the foreign investors, it is, therefore, the management of the sovereign debt with reasonable levels of remuneration which is in the eye of the cyclone. Everything seems calm, but all around the debt, the US economic depression is growing and threatening.
The stake of the FED policy goes far beyond the impact on the growth of US sovereign debt financing conditions: weighing on the level of remuneration of treasury bills – deemed safe – it influences the full range of interests affecting credit to businesses and individuals; this credit is distributed by the banks or by the financial market.
Against all appearance; We are not today in a problem of control of interest rates to promote recovery by revitalizing private credit via the control of interest rates. The problem is that of sovereign debt risk in relation to artificial growth. Private credit is down, public credit is the only one to drain to his masses of capital. And it is the drainage that has been a problem since the spring. We must not confuse the politics of tomorrow – the level of interest in private markets – with the problems of the day: the sovereign debt crisis.
In this perspective, the $ 1,000 billion dollar easing is not intended to improve liquidity in a financial market; cash is abundant because of the contraction of the credit. QE2 has an uncertain efficiency for one simple reason: it serves a policy that can not be declared.