Thursday, February 16, 2012

Why Demand For Treasuries Will Remain High

Back in December, the Financial Time's Alphaville showed us a chart from the Credit Suisse 2012 Global Outlook that should probably have generated more attention than it seem to have received. It explains a lot about the situation for US debt issuance.

There, in a nutshell, we have the single biggest reason why we can offer Treasuries at a negative real yield. Pair that drop in safe assets with the knowledge that many banks are required to maintain a certain amount of safe collateral. Their need for such safe assets hasn't dropped, but the supply of such assets has imploded far below what they need. This is a recipe for voracious demand for US Treasuries.

The supply of alternative safe assets isn't likely to expand much anytime soon, since trust in MBS issues evaporated. At worst, we can reasonably expect to be able to sell as many Treasuries as we might want at very low rates for a long time to come. Most likely, we can reasonably expect to continue selling Treasuries with a negative real yield for a good while longer. That means that for the foreseeable near to mid term, investors and banks will continue paying us (after accounting for inflation) to hold their "safe" money for them.

There is no debt crisis looming for the United States. None whatsoever.

See also Cardiff Garcia's "The decline of “safe” assets".

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