This, if a continuing trend, would signal a trend in the (long-anticipated) rise of long term bond rates -- the "solution" to the conundrum Fed Chariman Greenspan has been commenting on for some time - the flattening of the yield cure -- the rise in short term rates (that the Fed can highly influence) while long-term rates (upon -- which fixed mortgage rates are based -- and the periodic adjustment in ARMS are pegged) are flat or declining
Steadily rising mortgage rates may be trigger for housing price deflation --- (the bursting of the housing bubble) given that it has contorted itself to such unsustainable levels. =========== Foreign Investors Lose Appetite for Treasuries as Deficit Rises ListenListen Nov. 14 (Bloomberg) -- The U.S. government is growing more dependent on investors from abroad just as their appetite for Treasury securities is waning. Overseas investors, who own half of all U.S. government debt, bought 14 percent of the $79 billion in benchmark 10-year notes auctioned this year, down from 21 percent in 2004, Treasury Department data show. Bidders including foreign central banks purchased a smaller percentage of the $44 billion in three-, five- and 10-year notes the Treasury sold last week than they did a year ago. A drop in demand may extend the slump that pushed Treasury yields to the highest this year, raising the government's borrowing costs to finance a $319 billion deficit. The U.S. will borrow a record $171 billion from January to March, about double the amount this quarter, to help pay for relief efforts after Hurricanes Katrina and Rita. ``I'd wait before buying because there is still more upside for yields,'' said Masayuki Yoshihara, a Tokyo-based investor who helps manage the equivalent of $25 billion at Sumitomo Life Insurance Co., Japan's fourth-largest life insurer. Investors ``are cautious about buying too aggressively right now with yields rising so quickly,'' he said in a Nov. 10 interview. The yield on the benchmark 10-year note rose to 4.68 percent on Nov. 4 from 3.98 percent on Sept. 1, just after Katrina struck the Gulf Coast. The yield, which moves inversely to the note's price and is used to help determine corporate and consumer borrowing costs, ended last week at 4.57 percent. Foreign Participation Foreign investors bought about 21 percent of the $218 billion of two-year notes auctioned this year, down from 31 percent in 2004, according to Treasury data. They also purchased about 21 percent of the $154 billion of five-year notes sold by the Treasury, compared with 30 percent last year. The figures don't include the results of last week's sales, which will be released in December. Indirect bidders, a larger group that includes U.S. institutional investors, foreign central banks and overseas investors, bought 34.9 percent of the debt sold. The percentage is down from 47.4 percent at the quarterly auction of three-, five-and 10-year notes a year earlier. ``Foreign buying is a very important source of demand for Treasuries and the market is concerned by evidence that it is waning,'' Joseph Di Censo, a bond strategist at Lehman Brothers Inc. in New York, said Nov. 11. ``This would obviously put upward pressure on yields. The Treasury will always be able to finance the budget deficit. The real question is at what cost.'' Foreign investors increased Treasury holdings by 9 percent this year, compared with more than 23 percent in each of the past two years. The current pace is the lowest since 2001, when net purchases rose 2.45 percent. `Haunting' Deficit Overseas investors owned $2.06 trillion, or half the $4.11 trillion in tradable Treasuries as of August, up from less than 40 percent three years ago and 34 percent in 2000. Debt strategists have credited foreign investors with keeping U.S. yields in check as the budget deficit ballooned to a record $412.8 billion in fiscal 2004 ending Sept. 30 and the Federal Reserve raised interest rates 12 times. Since 2002, foreign purchases have reduced 10-year Treasury yields by 19 basis points, according to Banc of America Securities LLC. A basis point is 0.01 percentage point. ``You can't build in these constant deficits without having them come back to haunt you,'' said Richard Fisher, president of the Federal Reserve Bank of Dallas, on Nov. 3 at Harvard University in Cambridge, Massachusetts. Japan, the largest foreign owner of Treasuries, cut its holdings of the securities this year to $684.5 billion in August from last year's peak of $699.4 billion in August, according to the latest Treasury data. An update on international demand comes in two days with the Treasury International Capital report for September. The median forecast of three economists surveyed by Bloomberg is that net purchases of stocks, bonds and other financial assets slowed to $70 billion from $91.3 billion in August. `Better Places' There's little incentive to invest in U.S. debt with inflation accelerating and the Fed forecast by most economists to keep raising rates into 2006, said Don Quigley, co-manager of the $209 million Julius Baer Total Return Bond Fund in New York. ``The better places to go are overseas,'' said Quigley, who invests around the world. ``The Fed has really wanted to get ahead of inflation and stay ahead of it. You're going to see higher yields.'' Quigley's fund is up 3.1 percent over the last 12 months, the best among 23 similar funds, according to data compiled by Bloomberg. Quigley on Nov. 7 said he prefers German government debt to Treasuries even with yields on U.S. 10-year notes exceeding bunds by about the most in six years. The median estimate of 63 economists surveyed by Bloomberg this month is for the Fed to raise its target rate to 4.75 percent by mid-2006. In June, the estimate was 4 percent. `Good Value' Treasury yields are the highest among the Group of Seven nations, which may help temper sales by foreign investors. The 10- year Treasury yields 105 basis points more than the German government security with a similar maturity. The difference, or spread, reached 123 basis points last month, the widest since July 1999. ``Treasuries are pretty good value,'' Douglas Roberts, who helps oversee $117 billion at Standard Life Investments Ltd. in Edinburgh, Scotland, said Nov. 9. ``I would recommend getting in at these levels.'' The rise in the U.S. dollar to a two-year high against the euro and yen may work against Treasuries, said William Prophet, an interest-rate strategist at the securities unit of UBS AG, Europe's biggest bank by assets. Gains in the currency make it more expensive for foreign investors to finance their purchases of U.S. debt. ``We have seen some Japanese accounts shunning dollar assets,'' the Stamford, Connecticut-based Prophet said Nov. 9. ``Foreign investors look at purchasing U.S. assets as two pieces: buying dollars and then buying the securities. If one of these pieces gets too rich, then the transaction becomes less attractive.'' The Fed's daily average holdings of Treasuries for foreign central banks and international accounts has climbed just 2 percent in 2005, after rising by almost 25 percent each of the last two years and 14 percent in 2002. ------------------------ Yahoo! Groups Sponsor --------------------~--> Get fast access to your favorite Yahoo! Groups. 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