US Bond market in focus as the Debt Ceiling returns ( drop dead date September 2 ) , rising bond yields putting the lie to the quaint notion that the deficit isn't rising at its usual and customary rate ? Goldman says no tapering by the Fed just yet ....

Ceiling suspended: US takes on $300bn in new debt after hitting $16.7 trillion

May 20, 2013

Print Version

Source: RT

America’s ticking debt bomb has been reset. Washington has suspended the debt ceiling, setting a date, and not a concrete dollar sum as a deadline, an unprecedented first in US history.
Citing ‘extraordinary measures’, the US Treasury has further delayed tackling America’s debt, and will wait until Labor Day, September 2nd, to revisit the burgeoning crisis. The ceiling has been lifted, and the Treasury has promised it will keep cash pumping into government spending programs beyond the debt limit through a series of emergency cash tools.
“It will not be until at least after Labor Day” when Washington will have reached their full borrowing capacity, Treasury Secretary Jacob Lew, told CNBC television on May 10th.
Until then, the Treasury will borrow money to mend any gaps between government spending and revenues, adding to the already $16.7 trillion debt.
On Friday, the Treasury Department announced it will suspend sales of State and Local Government Series loans (SLGS) until further notice. The suspension applies to demand deposit and time deposit securities.
In the last four months, the US has accumulated $300 billion in debt. The Congressional Budget Office forecasts that the federal deficit will be $642 billion in FY13.
Full story here.

http://market-ticker.org/akcs-www?blog=Market-Ticker&page=2

To The Media: Stop Sucking Obama On The Debt

This is completely out of hand.  The media continues to cite the so-called "expectation" that Treasury will run "only" a $600-odd billion deficit this year, and they cite this as source:

This shows ~$488 billion in operational deficits from October 1st to April 30th.
There's a problem with this number however -- it does not reflect reality.
In other words it is a bald and intentional lie.
This reflects the truth:

What is that?  It's simply a reproduction of the Debt To The Penny series.  The first column is the public debt, the next is Social Security and Medicare (mostly), the third is the total and the last is the month-to-month change (which is, of course, simple arithmetic.)
What we see is that since September 28th 2012 (the last business day for which this was reported) there has been a net $762.6 billion of new debt added to the Federal balance sheet, not $488 billion.  
Oh, and for those who are keeping track Social Security and Medicare are almost $90 billion in the hole this fiscal year thus far.
In addition, April was not a net surplus month.  January was close, and that's frequently the case because January is corporate tax payment month.
Remember that this fiscal year included debt ceiling games; it is thus grossly distorted unless you look at the cash statement.
At the current run rate over the four calendar months we have in the bag thus far the run rate for deficits on a cash basis this year is $1.188 trillion.  For comparison last year was $1.210 trillion, which is indistinguishable.
From 9/28/2012 to the end of April on a fiscal year basis the run rate is $1.307 trillion.
This data is trivially able to be reproduced by anyone who cares, which leads me to conclude that the press is on its knees collectively and individually blowing Obama even as his DOJ is monitoring their emails and otherwise screwing them.
Incidentally, if you're curious, in calendar 2011 the cash-basis deficit was $1.198 trillion.
In other words this will be the third year running, at present rates, with nearly-identical cash-basis fiscal deficits of about $1.2 trillion ($1,200 billion) dollars.
Don't ever kid yourselves folks on borrowing folks -- nobody borrows money they don't intend to spend in the immediate future, and all the accounting games and tricks (such as temporarily robbing various funds in the Treasury that are supposed to be, for example, TSP accounts in government bonds) are eliminated when you look at the cash statement.


http://www.businessinsider.com/bond-market-horror-movie-this-summer-2013-5

ANALYST: The Past Two Weeks Were A Preview Of The 'Horror Movie' Coming To The Bond Market This Summer

Matthew Boesler | May 18, 2013, 6:38 AM | 907 | 1

• inShare3
• Email
• More

Shutterstock

Over the past few weeks, attention in financial markets has once again turned to the prospect of the Federal Reserve tapering back its monetary stimulus, spurred on by public speeches from Fed presidents and articles from WSJ reporter Jon Hilsenrath, who is viewed as close to the central bank.

As concerns that the Fed may begin exiting the bond market this year have risen, investors have unloaded bonds, causing a swift back-up in interest rates.

Of course, if that sort of thing happens when there is merely talk of tapering stimulus, investors rightfully wonder what would happen if the Fed were to actually begin tapering.

Société Générale fixed income strategist Vincent Chaigneau writes in a note to clients that "this was just a sneak preview of the horror movie that we see coming out this summer: a nasty Treasury sell-off."

Here's Chaigneau:

Less, not more QE. Two weeks ago in the FI Weekly, we thought it was premature to be aggressively short, but we presented trades that were most appropriate to position early for a sell-off. The sell-off did come early. Economic data has improved since the 3 May employment report. This has pushed forward short-term rates higher. 10y UST have sold off disproportionately ... highlighting the impact of the Fed exit debate. Fears that the Fed would soon taper QE have returned, causing a harsh bear steepening.

But no Fed turn just yet. The WSJ’s article from Hilsenrath on the Fed mapping exit from QE3 refocused minds away from the dovish interpretation of the FOMC statement, where the Fed said it could do more or less QE. Even a dove like Williams is starting to talk about tapering QE this summer. Still, in our view, the Fed is only doing an early check of the market’s function reaction. The lesson: the market is sensitive; managing a smooth exit won’t be easy for the Fed. It will have to exit eventually, but there is no hurry: inflation has been subdued, and Q2 is still going to be a weak quarter for growth. 

The data calendar is very light in the week ahead, but Wednesday promises to be exciting: we’ll have both Bernanke testifying before the Joint Economic Committee on the economic outlook and the Fed Minutes (we’ll see if they had a bias towards more or less QE)...

We don’t think Bernanke will strongly lean on the side of “less QE” just yet on Wednesday, though there is a (small) risk that the recent Fed’s leaks and talk are aimed at preparing the market for somewhat hawkish Minutes. In all, we don’t see 10-year UST yields breaking above the key 2.09%, or even 1.98% resistance over the coming weeks.

Chaigneau says SocGen is "very bearish" on Treasuries going into year-end – the French bank forecasts 10-year government bond yields will rise to 2.75% by the end of 2013.

http://www.zerohedge.com/news/2013-05-17/debt-ceiling-back

The Debt Ceiling Is Back

Submitted by Tyler Durden on 05/17/2013 17:28 -0400

• Ben Bernanke
 
• Bond
 
• Debt Ceiling
 
• default
 
• Excess Reserves
 
• Fannie Mae
 
• Freddie Mac
 
• Medicare
 
• Obama Administration
 
• Primary Market
 
• Reality

While many may not recall that the US has been without an official debt ceiling for the past three months, or even that it has a debt target ceiling, the bonus period agreed upon in January to let the nation rake up some $400 billion in addition debt in the past few months, officially runs out tomorrow, May 19, when the debt limit will be restored to its previous level plus the debt that was incurred in the interim, which means around $16.735 trillion in total debt as of yesterday, plus the amount incurred today, excluding the debt not subject to the cap which is about $30 billion. And since no grand bargain is forthcoming in a world in which official governance is now almost universally in the hands of the world's central bankers and out of the hands of the theatrical career politicians, it means that the next deadline in the endless US debt ceiling saga will be the day when the extraordinary measures to extend the debt ceiling run out.

Such a deadline will likely be hit in just over three months. As the WSJ reports:

Mr. Lew said the Treasury would be able to use the same extraordinary measures that the department deployed during the last debt-ceiling standoff at the start of the year. Those include halting investments in government worker retiree funds and drawing down some accounts.

“Treasury is not able to provide a specific estimate of how long the extraordinary measures will last,” Mr. Lew said.

But because of strong tax receipts and billions of dollars in dividend payments from mortgage giants Fannie Mae and Freddie Mac the U.S. will be able to continue borrowing–and paying all of its bills–until after Labor Day, Mr. Lew said.

September 2 happens to be a rather interesting day: just after the August Jackson Hole symposium where Bernanke will be famously absent, and just before the September FOMC meeting at which the Fed may (or may not) announce it is tapering QE (and when according the current run rate, the S&P should be roughly in the 1800 ballpark).

The song and dance is well-known:

If the Treasury exhausts the extraordinary measures and Congress doesn’t raise the debt limit, the government would be forced to fund its operations with the cash it has on hand, potentially putting Social Security, Medicare, military salaries and other payments at risk.

“The global economic leadership position enjoyed by the United States rests on the confidence of Americans and people around the world that we are a nation that keeps its promises and pays all of its bills, in full and on time,” Mr. Lew said.

Republicans have argued that the Treasury could prioritize to ensure that the government doesn’t default on bond payments. Mr. Lew rejected such an option, saying it would be “unwise, unworkable, unacceptably risky.”

Mr. Lew said that the Obama administration would not negotiate with Congress over the debt ceiling.

The good news is that as a result of an acceleration in government receipts and modest slowdown in spending (however temporary), the immediate cash needs of the government are lower, even though they once again pick up in the last quarter of fiscal 2013 (July-Sept), when marketable borrowings are expected to increase by a fresh $223 billion. The other issue of course is that without the Treasury creating "collateral" (read government debt to fund a deficit) which the Fed can monetize and expand bank reserves in the primary market, the Fed risks to become far too dominant a holder of Treasurys which it would then have to buy from the secondary market, and in the process eliminate even more liquidity from the market. This means that implicitly, Congress will be given a green light to spend away at will, even as Bernanke rages, very theatrically, against the will to generate sound fiscal policy. Bernanke's whole spiel is to create as many billions in excess reserves as he can thus pushing stocks, pardon the "wealth effect" as high as possible, for which he desperately needs a profligate Congress.

Which brings us to the bad news, namely that while many expected a bipartisan compromise on the debt ceiling to be quick and easy, especially in the aftermath of the GOP humiliation from the end of 2012 and early 2013, the events of the past week, which have seen scandal after scandal unfold in the Obama camp, have drastically changed the equation, and suddenly the resurgent GOP may once again play hardball with both the president and the democrats, at just the time when some are starting to throw around the "I" word. And if there is anything that the Obama camp would want to avoid, it is another debt ceiling fiasco at a time when all plates are full as is.

Does that mean a replay of August 2011 is in the cards? It would be oddly symmetric. And yet, that would presuppose that the GOP and the democrats truly have divergent agendas, when in reality both parties are eagerly willing to spend as much as possible in the name of "the people" and both are eager fans of a government that is as big as possible.

And finally, we now live in a day and age when the legislative and the executive are sorry shadows of their former selves, and the only true branch of government, is the monetary (in other words Wall Street). And Wall Street will only let the market drop when it is well and ready, and when it is confident it  has transferred enough paper wealth into hard assets, and not a moment sooner.

http://www.zerohedge.com/news/2013-05-17/goldman-issues-qa-tapering-says-not-yet

Goldman Issues Q&A On Tapering: Says "Not Yet"

Submitted by Tyler Durden on 05/17/2013 10:32 -0400

• Ben Bernanke
 
• Budget Deficit
 
• CPI
 
• Federal Deficit
• Goldman Sachs
 
• goldman sachs
 
• Gross Domestic Product
• Initial Jobless Claims
 
• Jan Hatzius
 
• Joint Economic Committee
 
• March FOMC
 
• Market Conditions
 
• Philly Fed
• Reality
 
• Recession
 
• recovery
 
• San Francisco Fed
• Testimony
 
• Unemployment
 
• Wall Street Journal

On one hand we have bad Hilsenrath sending mixed messages saying the Fed may taper sooner (with good Hilsenrath chiming in days later, adding it may be later after all), depending on whether HY bonds hit 4% YTM by EOD or mid next week at the latest. On the other, even resolute Fed doves are whispering that a tapering may occur as soon the summer, so in a few months, and halt QE by year end. Bottom line - confusion. So who better to arbitrate than the firm that runs it all, Goldman Sachs, and its chief economist Jan Hatzius, who issues the following Q&A on "tapering." His view: "not yet." Then again, Goldman is the consummate (ab)user of dodecatuple reverse psychology, so if Goldman says "all clear" the natural response should be just as clear.

From Goldman Sachs' Jan Hatzius:

Q&A on Fed Tapering: Not Yet

Q: What are your forecasts for the future of the Fed’s QE program?

A: We expect continued purchases at a $85bn/month pace through 2013, followed by a gradual tapering process toward zero that starts in 2014Q1—presumably announced at the December 2013 FOMC meeting—and ends in 2014Q3. This is based on our forecast that real GDP will grow 2% in Q2/Q3 and 2.5% in Q4, the unemployment rate will fall to 7.3% by the end of 2013, and core PCE inflation will edge up a bit to 1.3% year-on-year by Q4.

Q: How do you see the risks around this central forecast?

A: Roughly evenly balanced between an earlier and a later move. It is likely that the FOMC will want to announce the first reduction in the pace of QE at a meeting followed by a press conference, so that the Chairman can explain the context of the decision. The next four press conferences are scheduled for June 19, September 18, December 18, and March 19. In our view, a tapering announcement is highly unlikely for June 19, possible for September 18, most likely for December 18, and also possible for March 19 (or potentially even later). All of this will, of course, depend first and foremost on the output, employment, and inflation data.

Q: Have you increased your probability of an early tapering step—say, before the September meeting—over the past few months?

A: No. Such a step would imply a hawkish shift at a time when the incoming information has, if anything, pushed in the other direction. As of the March 19-20 meeting, it seems that the median committee member believes that “…if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end.” We believe that “later in the year” means no earlier than the July or—more likely if a press conference is required—September FOMC meeting.

Since the March meeting, economic activity has, on balance, disappointed expectations. Although the weakness in the employment and retail sales reports for March was reversed in the reports for April, the US manufacturing sector continues to slow, with declines in industrial production in April and the NY Empire State and Philly Fed reports in May. Moreover, the latest spike in initial jobless claims raises at least some questions about whether the downward trend in claims that was previously evident is still in place.

Perhaps more importantly, inflation has continued to fall in recent months. Following the lower-than-expected April CPI report, we estimate that the core PCE index slowed to 1.0% year-on-year in April. Although other indicators of the underlying inflation trend have been consistent with slightly higher inflation, our core inflation “tracker” now stands at an estimated 1.3% for April, clearly below the 2% target.

Q: So you don’t read much into the recent increase in press and market chatter about tapering?

A: Not really. A significant part of this chatter seems to be based on an article by Jon Hilsenrath in the Wall Street Journal on Friday evening. But although the headline “Fed Maps Exit from Stimulus” sounded dramatic, the article itself contained little new information on the key question, namely the timing of any tapering moves. It merely stated that ”some” Fed officials "can envision" taking the first step toward tapering soon. This has been clear for many months; in fact, “some” Fed officials have been uncomfortable with the program from the get-go and would of course like to end it as soon as possible.

Q: But didn’t the Hilsenrath article provide quite a lot of information about the shape of the exit process, i.e. the likelihood that the sequencing of the QE tapering will be very sensitive to economic conditions?

A: Again, not really. The FOMC has been trying for a while—going back at least as far as the March press conference and continuing through the May 1 statement—to convince market participants that the tapering process will be less "deterministic" than many have been thinking. The purpose is probably to reduce the extent to which market participants would extrapolate forward a small reduction in the QE pace at one meeting into additional reductions at subsequent meetings.

But even this point needs to be qualified. In our view, Fed officials have an incentive to portray the tapering process as less deterministic than it is likely to be in reality. Uncertainty about whether an initial tapering step foreshadows additional steps at subsequent meetings would probably keep the initial tightening in financial conditions more limited. This would be desirable from the Fed’s perspective. For this reason, we would take the FOMC’s signals on this issue with a grain of salt.

Q: Where does the recent Fedspeak fit in?

A: We have not received a lot of new information since the May 1 statement, which was quite similar to the prior March 18 statement. Perhaps the most interesting update came from a speech on May 16 by San Francisco Fed President Williams. He remains less enthusiastic about continuing the QE program than we would have expected a few months ago: "[A]ssuming my economic forecast holds true and various labor market indicators continue to register appreciable improvement in coming months, we could reduce somewhat the pace of our securities purchases, perhaps as early as this summer. Then, if all goes as hoped, we could end the purchase program sometime late this year." This was only slightly softer than his remarks on April 3: "[A]ssuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer. If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year."

Ultimately, however, it is the leadership whose signals will carry the most weight. We are therefore particularly focused on the upcoming testimony by Chairman Bernanke to the Joint Economic Committee of Congress on May 22. We expect a somewhat softer message than that from President Williams.

Q: Some commentators argue that the rapid decline in the federal budget deficit may prompt the Fed to taper earlier than they otherwise would have done. Do you agree with this?

A: No. This argument seems to be based on the implicit assumption that the purpose of the QE program is, at least partly, to finance the federal deficit. Fed officials would take strong exception to this notion. In fact, if we accept the notion that QE affects financial conditions and economic activity mainly via the stock of securities held, rather than the flow of issuance absorbed, there is no obvious link between the size of the deficit and the pace of asset purchases. A smaller deficit could call for a smaller QE program if it was mainly due to a stronger economy; but it could likewise call for a larger QE program if it was mainly due to greater fiscal drag. In practice, it is probably due to a combination of both factors, and we do not believe that it has substantial implications for Fed policy.

Q: So what could get Fed officials to increase the size of the QE program, either through a later beginning to the tapering process (say, March 2014) or a higher run rate of purchases?

A: Such a decision would probably be due to a combination of weaker job market data and lower inflation. We think that the hurdle for increasing the size of the purchase program is significantly higher. It would probably require either a clear downturn in the economy with a renewed risk of recession or a substantial decline in core PCE and CPI inflation as well as inflation expectations. But the hurdle for pushing out the date of the initial tapering may not be that high. If the labor market and economic recovery remained a little more sluggish than our forecast and underlying inflation trends moved any lower than the current 1¼% rate, we believe that the start date would move into 2014, with an announcement at the March meeting or later.

Q: Will they taper Treasury or mortgage QE first?

A: We think they will disproportionately taper the Treasury purchases, as there is a widespread belief that the stimulative per-dollar effect of MBS purchases is larger. According to the March FOMC minutes, “[a] few participants felt that MBS purchases provided more support to the economy than purchases of longer-term Treasury securities because they stimulated the housing sector directly.” Although the minutes also note that “a few preferred to focus any purchases in the Treasury market to avoid allocating credit to a specific sector of the economy,” the former group is likely to be closer to the views of the FOMC leadership.