Monday, September 26, 2005


Most readers know that the Author spends a good deal of time writing about interest rates and the conundrum of why long-term interest rates are so low relative to short rates. (This interest rate predilection is also evidence that he lives a life that is very dopamine-deprived.) Two reasons, really.

1. Interest rates measure the cost to use money. The cost of money drives the cost of nearly everything else. Especially so in the US where Americans are indebted for everything.

2. The Author likes saying or writing the word “conundrum”. David Letterman was disappointed when former Amy Fisher boyfriend Joey Buttafuco went to jail. Letterman feared he could no longer say the funny name “Buttafuco” when the Fisher-Buttafuco story fell out of the news. Similarly, the Author fears the day he will no longer be able to use conundrum. Maybe if we changed the name of the interest rate paradox from “The Conundrum” to “The Buttafuco”, we could please both Letterman and the Author.

In the September 23rd edition of John Mauldin’s newsletter, “Thoughts from the Frontline”[i], Mauldin quotes several sources regarding the insatiable demand for US Treasuries. And he also refutes the speculation that central banks were divesting their US assets and diversifying into EUROs (European Common Market debt instruments).

During 2004, foreign investors purchased 98.9% of all US Treasuries issued. 89.2% of all Government Agency debt was purchased by foreigners, as were 42.8% of corporate bonds. After the second quarter of 2005, the US owes the rest of the world $5.2 trillion dollars more than what it is owed to it by others in the world. Mauldin cites John Williams of Gillespie Research for this information.

The demand by foreign central banks for US debt is nearly insatiable. This, as the Author has often alluded, helps keep bond prices high and interest rates low. This cannot last forever, but it has outlasted the predictions of more than a few economists.

Gillespie also makes the statement that central banks are not price sensitive. Apparently not, if they will buy 10-year bonds for less than ½ a point higher than six-month bills. The Author suspects that there is more going on here, however, and will address that in a future post. It is a phenomenon that has been called “The Greenspan Put”.

Stay Tuned in the Desert of the Real!



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