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Foreign Disinvestment, Bond Yields, and Bond Trafficking   June 15th, 2009
All kinds of strange things in the bond market       


More observations...

Reports are stating that in April, $53.2 billion in capital left the United States. That's $53.2 billion that will not be available to help finance a private sector recovery or to provide funds for President Obama's massive deficit spending.

U.S. net international capital flows dropped to negative $58.4 billion in April, the Treasury Department reported Monday. Foreign central banks bought $5.2 billion in U.S. assets on net, while the foreign private sector sold $58.4 billion. China reduced its holdings of U.S. Treasurys by $4.4 billion to $763.5 billion. Japan reduced its holdings by $800 million to $685.0 billion, while holdings in the Caribbean banking centers fell by $8.9 billion to $204.7 billion. Holdings in the U.K. rose by $24.6 billion to $152.8 billion.

There's no good news here. Just as the U.S. government is trying to borrow unprecedented amounts of money, dollars are actually leaving the U.S. economy. This again reinforces the problems we are having in finding enough money to borrow and further explains why we have to print money.

This highlights strange movements in the U.S. Bond market. Last Wednesday the 10-year U.S. bond spiked to 4.000%--not surprising given all the debt being issued by the U.S. Government. However, over the last few days the yield has dropped to its current 3.71%. With a net outflow of capital this seems to be a strange retreat in yields--if not due to outright market manipulation, it's probably due to the fact that 4.00% is a high enough yield to get more players interested in buying U.S. bonds which then has the effect of increasing demand for the bonds and actually driving yields down. But that cannot last forever.

This sets up an interesting situation going into the next meeting of the Federal Reserve next week.

There had been speculation about having the Federal Reserve print more money with the supposed purpose of keeping rates down. Discussion of this possibility became extremely prevalent in the financial press in the first week of this month as interest rates started spiking after May 27th, 2009. The narrative was that the Federal Reserve would most likely announce an increase in its bond purchases (i.e. printing money) with the intent of keeping rates down.

But if rates continue to fall--or remain stable around 3.75%--then the argument for the Federal Reserve to print more money to lower rates becomes a lot weaker. If the Federal Reserve prints money when rates are already stable or falling, it's going to look a lot more like they're simply printing money to monetize Obama's deficit spending--which is what I stated in March is what I believe is the real reason for printing money.

So the Federal Reserve meeting next week is going to get more interesting, as well bond yield movements in the next week. There is no question that yields and interest rates must go up in the long-term, but market manipulation by the Federal Reserve is the wildcard that can radically change everything in the short-term. It's hard to make solid investing decisions when the government, through the Federal Reserve, is flooding the market with what amounts to Monopoly money.

In possibly-related news, there is a report that over a hundred billion dollars in U.S. bonds were possibly seized in an arrest in Europe that would be a strange case of bond trafficking.

A pair of Japanese citizens have been detained by Italian financial police in Chiasso on the Swiss-Italian border after being found with $134 billion of US bonds.

A report by an Italian daily said that the two Japanese citizens were carrying 249 U.S. Treasury bonds worth $500 million and 10 Kennedy bonds and other US government securities worth a billion dollars each.

This story, if accurate, has the potential to be very interesting. What is a pair of individuals doing with $134 billion in U.S. bonds in denominations that are generally issued not to individuals but to central banks?

It seems like the bonds probably aren't forgeries: what kind of idiot would forge billion-dollar instruments? Who would they sell such large bonds to? And would they expect to have the forgery of such large denominations not be verified by the buyer? And if the bonds aren't forgeries then does that mean some foreign central bank(s) was trying to unload a large number of U.S. bonds under the radar?

Considering the increasing need for the U.S. to borrow money and the possibly odd downward fluctuations in bond yields, the potential discovery of $134 billion in bonds being transported in an undisclosed fashion in Europe is, at the very least, curious.

As an aside, if the bonds that were seized by Italian customs are found to be legitimate, the penalty for transporting that quantity of financial instruments without disclosing them to customs would be $38 billion. Apparently, in that case, the $38 billion would be used to help Italy pay down its public debt. Not a bad catch for Italy!

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