- The US bond markets have had a rough few months, with
an intense bout of heavy selling that started in mid-June knocking government
debt prices sharply lower.
-
- But the markets are already considering the prospect
of an even gloomier future.
-
- Many market participants say more selling is on the cards,
this time led by foreign investors.
-
- Over the past decade, foreign investors have been gathering
up increasing amounts of US debt securities.
-
- Foreigners now own one-third of the US Treasury market,
up from one-fifth eight years ago, according to Merrill Lynch.
-
- In recent years, Asia has become the most noticeable
buyer of Treasury debt. Japan is the largest holder of Treasury securities,
owning some $442bn at the end of June, followed by the UK with $123bn and
mainland China with $122bn.
-
- Lehman Brothers says the Asian region now accounts for
some 39 per cent of international purchases of US bonds, nearing the 43
per cent owned by Europe.
-
- In an environment where bond prices are falling and the
US government's financing needs are increasing - the Treasury will issue
a record amount of debt this quarter to help fund its large budget deficit
- these large foreign holdings are starting to raise some concerns.
-
- Economists say that the US relies on foreign purchases
to help finance its current account deficit, which runs at some 5 per cent
of GDP.
-
- For some time, a happy equilibrium has existed between
the US and Asia. The US buys Asian exports, and Asian countries use income
from the sale of their exports to buy US assets to help prevent their currencies
from rising against the dollar.
-
- However, investment managers have begun to realise that
this equilibrium is unlikely to last forever, particularly if bond yields
remain low and the US continues to put pressure on Asian countries to revalue
their currencies.
-
- Last week, Bill Gross, the chief investment officer at
bond fund Pimco, the largest bond fund in the US, expressed fears that
China could start a bond market rout.
-
- "Since [China's] monthly trade surplus of $10bn
plus with the US implies a $120bn annual addition to its dollar reserves,
there will come a time when their hundreds of billions, if not half a trillion
or so, in holdings of US notes and bonds look a tad too risky," he
told investors in his September investment outlook.
-
- "In turn, the hundreds of billions that the Japanese
and other Asian countries have been buying in order to keep their currencies
competitive with the Chinese yuan (renminbi) and the US dollar will be
subject to a sanity check as well."
-
- Fixed-income strategists do not expect Asian central
banks to start selling immediately.
-
- But they are considering the pressure any foreign selling
could put on the bond markets if it comes amid a big increase in debt supply.
-
- "It could weigh on an already heavy market,"
said Amy Falls, head of global fixed-income strategy at Morgan Stanley.
-
- The government may also be hard-pressed to find replacement
buyers for its debt if Asian investors do sell.
-
- "It's very important to maintain central bank demand,"
said Ethan Harris, chief economist at Lehman Brothers.
-
- "There's nothing close to that kind of demand from
private borrowers."
-
- There are already signs that overseas investors have
become less enamoured of US debt.
-
- Foreign investors have been selling the so-called "agency"
debt issued by mortgage financiers Freddie Mac and Fannie Mae following
an accounting scandal at Freddie Mac.
-
- There is currently some $186.6bn in agency debt securities
held in custody for foreign accounts at the Federal Reserve, down from
$189.8bn on June 4, before the scandal broke.
-
- This debt is a popular alternative to Treasury securities
because investors believe agency securities hold an implicit guarantee
from the US government due to Freddie and Fannie's special status as "government-sponsored
enterprises".
-
- http://news.ft.com/servlet/ContentServer?pagename=FT.com/Story
FT/FullStory&c=StoryFT&cid=1059479617516&p=1012571727088
-
- _____
-
- Asian debt withdrawal threat to US deficit By Jenny Wiggins
in New York Published: September 7 2003 19:01 | Last Updated: September
7 2003 19:01
-
- Economists fear that Asian investors, who are the largest
foreign owners of US Treasuries, may cut their holdings of US government
debt, withdrawing a key source of financing for America's large current
account deficit.
-
- The worries have been fuelled by recent sharp falls in
the price of US government debt.
-
- Weakness in the US Treasury market could make Asian investors
"less willing" buyers of debt securities, said Marcel Kasumovich,
head of G10 foreign exchange strategy at Merrill Lynch.
-
- He said there had already been a "noticeable shift"
downwards in the amount of debt issued by mortgage financiers Freddie Mac
and Fannie Mae being bought by foreign investors.
-
- Asian investors have piled into the US Treasury markets
in recent years, helping to push Treasury prices high and interest rates
low. China, Japan, South Korea and Hong Kong owned a combined total of
about $696bn in Treasuries at the end of June, up from $512bn in December
2001, according to data from the US Treasury.
-
- Asian countries use the income they receive from exporting
goods to the US to buy American assets, which helps keep their currencies
weak compared with the dollar. This helps keep the price of Asian goods
down in the US.
-
- But in recent months, as investors have become more optimistic
about an economic recovery, they have begun to sell Treasury debt, sending
government bond prices down.
-
- Political pressure on Asian governments to alter their
exchange rates could also prompt selling. The US Treasury would like Beijing
to abandon its fixed currency regime because it is concerned that China
is keeping its currency low to support exports.
-
- However, if China and other Asian countries were to allow
their currencies to strengthen against the US dollar, they would have less
need to own US assets.
-
- "It could mean Asia pulls out of US markets,"
said Ethan Harris, chief US economist at Lehman Brothers.
-
- If Asian countries were to reduce their holdings of American
assets heavily, they would remove a key source of finance for US investment
spending, potentially requiring the government to rely more on sparse domestic
savings.
-
-
- http://news.ft.com/servlet/ContentServer?pagename=FT.com/Story
FT/FullStory&c=StoryFT&cid=1059479617509&p=1012571727088
-
- _____
-
- Russia and Saudi Arabia signed 5 year Oil Agreement
-
- posted by ewing2001 on Tuesday September 02, @10:36AM
from the AP dept.
-
- Russia, Saudi Arabia Sign Oil Agreements
-
- Guardian -Tuesday September 2, 2003
-
- MOSCOW (AP) - Russia and Saudi Arabia - the world's largest
oil exporters - signed oil industry cooperation agreements Tuesday during
a landmark visit to Moscow by the Arab kingdom's ruler.
-
- The two sides also were expected to take up the sensitive
question of whether rebels in the secessionist republic of Chechnya receive
funding from Saudi charities.
-
- Crown Prince Abdullah, who met with President Vladimir
Putin, is the first Saudi head of state to visit post-Soviet Russia. A
Saudi crown prince last visited in 1932.
-
-
- After talks, Russian and Saudi energy ministers signed
a five-year agreement on cooperation in the oil and gas industry. The deal
also calls for joint ventures in oil and gas exploration and scientific
research, according to the text released by the Russian Cabinet.
-
- Russia is the world's second-largest oil exporter behind
Saudi Arabia.
-
- The two countries were also expected to address the situation
in Iraq and the Middle East peace process. Riyadh hopes the visit will
strengthen Russia's support for Arab causes, particularly the Palestinian
issue.
-
- http://new.globalfreepress.com/article.pl?sid=03/09/02/2145230
-
- _____
-
- TIME magazine on US/Saudi relations:
-
- For many in the U.S., including in the halls of government,
patience with the Saudis is running thin. "More and more people are
saying, 'It's time to sit on the Saudis; it's time to hit them hard,'"
says a State Department official. Frank Gaffney, a conservative foreign-policy
analyst, has some ideas on how to do that: "You put them on notice
that this kind of behavior is completely unacceptable. You can break off
diplomatic relations, you can impose economic sanctions, and you have,
ultimately, the option of seizing the oil fields militarily if you have
to."
-
-
- That's easy to advocate when you're not in office. The
hard-liners in the Bush Administration, most of them neoconservatives,
would like to put greater pressure on the Saudis to reform, but they don't
go so far as to propose regime change. The fall of the House of Saud is
too scary to contemplate, because any alternative regime would probably
be more regressive. It's one measure of the essential conservatism of the
Saudi people that their country, despite the lack of freedom, produces
very few political refugees. By Saudi standards, the Saud regime is liberal.
"If you want to marginalize the Saudis, cut them off and turn your
back on them, you are simply inviting another Taliban type of regime,"
says Ambassador Jordan.
-
- For that reason, it seems unlikely that the Bush Administration
will adopt a tougher policy toward Riyadh. While the neocons have won
most of the internal debates so far in this Administration, this time
they are fighting without their powerful godfather, Vice President Dick
Cheney, on board. Cheney's pragmatism on Saudi Arabia is informed by
his experience as an official in the Nixon Administration in 1973, when
the Saudis protested U.S. support for Israel by embargoing oil sales to
the U.S. for five months, causing the worst gasoline shortages in U.S.
history. From Cheney, Secretary of State Colin Powell, National Security
Adviser Condoleezza Rice and, significantly, his father, President Bush
is hearing a singular line from his most important foreign policy advisers:
that he must engage with the Saudis, work with them to bring about change
and not alienate them. Indeed, when President Bush spoke to Abdullah for
20 minutes by phone last week, say U.S. and Saudi sources, he went out
of his way to compliment the Prince on Saudi Arabia's efforts to combat
terrorism.
-
- http://www.time.com/time/magazine/article/0,9171,1101030915-483269,00.html
|
