Massive debt issuance in the U.S. and elsewhere
This contribution comes from Marc Chandler of Brown Brothers Harriman, one of my favourite currency strategists. His latest missive highlights the huge amount of debt being issued by sovereigns. It is not just the United States.:
Much of the supply angst on Wall Street appears aimed at the US Treasury, which due to the bailouts and fiscal plans, are in the process of issuing billions if not trillions worth of debt. However, there are two other sources of supply that may exacerbate the challenges to smoothly absorb the offerings. That said, a UK and German sovereign auction have failed this year, but no Treasury auction has.
Foreign sovereigns and companies have issued $180 bln of dollar denominated debt thus far this year. Last week, South Korea issued its first dollar denominated bond in more than two years. Hutchinson Whampoa sold its first dollar denominated bond in about six years. The local currency market, not very deep or broad to begin with, as many countries in the region run current account and budget surpluses, has lost what interest there was, with issuers returning to the dollar market, that they know so well. Without a deep and broad sovereign market, which provides a benchmark, corporates often lack interest.
All told, reports suggest that overall US investment grade bond sales have amounted to a bit more than $400 bln this year, a record pace.
The US benchmark 10-year yield is off 7 bp today, helped by Federal Reserve purchases today and the heavy tone in equities. Over the past month, the 10-year yield is off 3 bp. Since the start of the year, the US 10-year yield has risen 64 bp. German bund yield, by comparison has risen 28 bp YTD and 17 bp in the past month.
Many investors and observers are concerned about the inflationary implications of the expansion fiscal and monetary policies. Yet inflation expectations remain lower in the US than in the eurozone and UK. Using the five year, five year forwards, which Fed and ECB officials have cited, US inflation expectations are just below 2%, while the eurozone (using France as the proxy is near 2.7%, and the UK is just below 4%.
You should note that Marc’s comments mean that any dollar weakness from excessive debt and a weak economy will not necessarily be manifest in currency markets but might appear in commodity markets. This is one reason the dollar, which I see as a weak currency longer-term, is holding its own.