財經觀察 2099 --- Update on U.S. Debt and Fed Assets

Update on U.S. Debt and Fed Assets by Rolfe Winkler, CFA

Public Debt Outstanding is approaching $11.3 trillion…

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…and fears about this growing debt burden helped drive the dollar to a 4-month low today. Bigger contributors to the dollar’s fall included comments from the Bank of Japan, which said it wouldn’t prop up greenbacks. Also, S&P’s new “negative” outlook for UK sovereign debt had Bill Gross commenting that “eventually” the U.S. will itself lose its AAA-rating. In response, Tim Geithner pledged to reduce U.S. debt. This is consistent with Obama administration double-speak on the deficit. Its actual policy is to blow out the deficit before getting serious about reducing it.

Also today, the Fed released its latest balance sheet, which shows continued purchases of Treasurys, agency MBS and agency debt…

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The Fed is committed to buying $1.25 trillion of MBS, $200 billion of agency debt and $300 billion of longer-dated Treasurys in order to liquefy credit markets, though recently released meeting minutes suggest the Fed may buy more.

Over the last two weeks, its holdings of Treasurys, MBS and agency debt increased $26.4 billion, $64.7 billion and $4.9 billion respectively.

Despite these purchases, the yield on Treasurys (as measured by the 10 year bond) reached a new high for 2009: 3.3%.

Geithner pitches the rise in Treasury yields as good news, saying it indicates increased risk tolerance among investors. The trouble with his argument is that rising Treasury yields put upward pressure on other interest rates, like 30-year mortgages. Those rates can’t be allowed to rise because it would put more downward pressure on house prices.