The Wall Street Journal reports about the unintended cost of the bailouts.
(emphasis mine) [my comment]
Unintended Cost of the Bailouts
By RICHARD BARLEY
The gap between government- and corporate- bond yields is starting to contract, but not as policy makers would like.
Rather than corporate-credit yields falling, making it cheaper for companies to borrow, most of the change has come from government yields rising instead.
Since the start of the year, 10-year bond yields in the U.S., Germany and the U.K. have jumped, with the bulk of the move coming last week. On Friday alone, 10-year German bund yields rose 0.15 percentage point to 3.25%, accounting for half of the 0.30-percentage-point rise this year. That is despite a half-percentage-point cut in interest rates.
That partly reflects the way government bonds are being used to finance financial-sector bailout plans. The distinction between credit and sovereign risk is blurring as losses that would otherwise be taken by the private sector are reallocated to the public sector.
That change is visible in the credit-default-swap market, where the cost of insurance against default is now an appreciable proportion of government-bond yields.
In the U.K., 10-year credit-default swaps are indicated around 1.35 percentage points, or 36% of the 3.67% yield available on 10-year gilts. Before the financial crisis, sovereign credit-default swaps traded in single digits.
The recent rise in yields also reflects supply fears. Barclays Capital estimates government-debt issuance in the U.S., euro zone, U.K., Japan and China will rise to $3.2 trillion in 2009, pushing debt to gross-domestic-product ratios to record postwar levels.
The market could [will] balk at the huge issuance, particularly in the U.S., which is slated for $1.8 trillion of new paper [it will be closer to 3 trillion]. That will test the appetite of foreign buyers, including official institutions such as central banks that held $1.94 trillion of Treasury debt as of November 2008, $323 billion more than a year earlier.
Added to that is competition from newly created government-guaranteed bank debt.
Citigroup on Friday raised $12 billion, the largest deal so far. There are concerns about the liquidity of this paper, but the yield pickup is substantial, 1.05 percentage points more than U.S. Treasurys on the fixed-rate portion of the Citi issue.
Rising Treasury yields have a silver lining. A steeper yield curve should allow banks to earn a spread and encourage them to lend. But the Federal Reserve, under Chairman Ben Bernanke, will dwell more on the clouds.
With U.S. housing still in a mess, the central bank will be far more worried about the impact of rising Treasury yields on the mortgage market. Last week, data from the Mortgage Bankers Association showed 30-year mortgage rates rising 0.35 percentage point.
The Fed already is acquiring agency and mortgage-backed debt to try to reduce mortgage spreads. But expect more talk of buying long-dated Treasurysv [it will be more than talk as treasuries keep falling], as it tries to force down consumer borrowing costs.
My reaction: This was to be expected. The government can't buy up trillions in toxic debt and guarantee trillion more without there being serious consequences. Treasuries will likely keep falling until the fed steps in to put a floor under them.
When the fed does start its purchases of treasuries, it will get really interesting. Gold prices are likely to explode, despite every attempt to contained them.
On the topic of precious metals…
I got an email from David pointing out that silver forward rates have gone negative again (backwardation):
Silver is in backwardation again and has been for over a week. This backwardation is worse in terms of negative price and how many months out it goes than the previous backwardation at the end of last year. Why is nobody talking about this? Any comment?
For more on why backwardation in precious metals is important, see