Thursday, April 29, 2010

Treasuries: "Size Buyer now a Size Seller"

From Bruce Krasting:
The Social Security Trust Fund released some data today. There are some conclusions and observations to be drawn. But first, for the history buffs, I want to show you a “Tipping Point”. I think the exact date was March 3rd or 4th. It was sometime in the 1st Q of 2010 that the SSTF went negative since Greenspan fixed things in 1983.

In March the CBO came up with a forecast for the fiscal year at a $29B deficit. I look at things on a calendar year basis. My number for the year is -$50 billion in cash flow (excludes interest). The components:

Payroll Tax: $640b
Tax on Income: $24b
Total in: $664b

Benefits: $703b
R.R. Ex.: $5b
Adm: $6b
Total out: $714b

Net Decrease in Cash: $50 billion

The significance of this is that the US Treasury will have to fund this shortfall. They will have to sell an additional $50b of debt into the public market. This $50b has nothing to do with what we call the deficit. This is money we have to borrow in addition to the deficit.

In prior years the SSTF has generated big cash surpluses. This cash was invested in Treasury securities that had an average life of 8 years and maturities ranging out to fifteen years. The TF was a great place to sell bonds. Their big appetite for long duration securities helped fund our deficits and extend the average life of our debt profile. But not any longer. That ‘tipping point’ is the first step on the way to a very steep staircase....MORE