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Who's Buying All the Treasury Bonds? And Why?   (March 20, 2006)

Here's an honest-to-goodness mystery for you: Who's snapping up all the hundreds of billions of U.S. Treasury bonds which get auctioned off every quarter, And why are they plunking down such vast sums of real money for such lousy returns?

The chart on the right further deepens the mystery. It seems that every time government buying (the blue line--mostly from China and Japan) dries up, threatening to create a crisis in the bond market, then lo and behold, mysterious "private buyers" (the red line), mostly based, it seems, in secretive off-shore banking centers like the Cayman Islands, step up and suck up billions of dollars of the U.S. bonds being auctioned off.

Before we get too deep in the mystery, let's cover a few basics of the Treasury market:
  • The Treasury has to find buyers for the bonds. There is no Plan B.
  • If there's no takers at the current interest rates, then they raise the rates being paid on the bond until buyers appear.
  • The Federal Reserve only sets the short-term interest rate; the long-term rate is set by the bond market auction.
  • That means the interest rate set in the bond auction immediately resets the interest rates of mortgages and other loans.

    So if nobody steps up to buy the Treasuries being autioned off, then interest rates will rise--quickly. And what happens to the debt-crazed American economy if mortgage rates (and other loan rates) rise quickly? Recession, because the entire U.S. economy has been supported by rising consumer debt and cash pulled out of housing via mortgage re-finances.

    OK, let's get back to the magic appearance of huge "private money" every time our trading partner nations start to get queasy about loading up on yet more U.S. debt. (Recall that Japan already holds over $1 trillion in U.S. Treasuries, and the Chinese government has nearly $700 billion.)

    Let's start by asking, who has hundreds of billions of dollars accumulating every year? China? Nope. Japan? Nope. Europe? Nope. Russia? Nope. The Mideast Oil Exporters? Bingo! A couple of questions come immediately to mind. First: why would the Arab nations want to hide their purchases of U.S. bonds by slipping the money through off-shore banks? And second, why would they be timing their purchases to support the U.S. bond market, insuring low interest rates continue for the debt-mad American consumer?

    It doesn't take much moxie to suspect the Mideast bankers are hiding the purchases to avoid angering the "Arab Street," i.e. the uneasy mass of citizenry who blames the U.S. for all the region's ills. No leader wants to be asked, "Why is our national treasure being handed to the Americans to support their corrupt lifestyle?" Better, by far, to ease the cascading billions into off-shore private banks and make the purchases from there, real secret-like.

    Some people speculate that this massive buying originates from hedge funds, and no doubt some of it does. But hedge funds are notoriously fickle investors--buy today, sell tomorrow. Yet the Treasury market has remained remarkably stable. If anyone were dumping a hundred billion dollars' of U.S. bonds, the market would quickly reflect that dumping. Since nobody's selling, it can't be all hedge funds. Furthermore, the amounts of money being dumped into Treasuries exceeds even the grasp of the largest hedge funds.

    So then we have to ask: why are the Mideast oil barons buying American bonds? One could claim that it's for safety. Perhaps--but why time the purchases so perfectly to support the U.S. economy? The better answer is: If the U.S. economy goes into a tailspin, the price of oil will plummet along with it. As cash-starved consumers tighten their belts, demand for gasoline and jet fuel drops--triggering lower oil prices.

    That's true, and a very powerful argument. But I also wonder--and I have yet to read this supposition anywhere else in the media--if it isn't a Sunni quid pro quo: we'll fund your war in Iraq indirectly by buying up all your Treasuries, as long as you protect the Sunni minority in Iraq from the Shiite majority.

    Farfetched? Not at all. Suppose the wealth of the U.S. was held by a small coterie of pragmatic Pentacostal Christians of the sort whose beliefs inform their worldview and their actions. Wouldn't they funnel money to a government which was protecting a Christian minority from a potentially devastating civil war? I think there is no question that such a spiritually-based leadership would have absolutely no qualms about doing exactly that.

    Would the players want such an arrangement to become public? Of course not. It would be handled in a thoroughly "wink wink, nudge nudge" manner. It makes sense to me, and perhaps this is one reason why the U.S. won't be leaving the Iraqi Sunnis (only 20% of the population) to twist in the winds of civil war. Recall there's no love lost between the Iranian Shiites and the Arab Sunnis, and you have the makings of a carefully cloaked Grand Master Strategy board. Are Treasuries part of the game? Well, why wouldn't they be? there's no bigger pieces right now than oil, Iraq and an increasingly fragile U.S. economy.


    copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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