CNBC Guest Blog

Published: Monday, 26 Oct 2009 | 1:04 PM ET

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Andrew Busch
Global Finance Strategist
BMO Financial Group

Bloomberg carries an interesting analysis of the looming shift of US Treasury issuance for 2010.  "After selling $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year bonds by 40 percent over the next year to $600 billion...". 

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As everyone knows, this week ends the Federal Reserve's $300 billion QE program of monetizing the US government debt by purchasing US Treasury securities.  The US Treasury is going to auction this week $123 billion in new note debt this week alone.  After the Fed stops their MBS QE program at the end of Q1, we'll see a how interest rates respond without the Fed distorting it.  

Distorting the distortion is the fact that US households have become more risk averse.  After the collapse of the markets last fall, this is the result.  However for the US Treasury, this is a very good thing as these same cautious investors want to own more "safe" investments.  Namely, US Treasury securities.  At the end of Q2 2009, households held $605.9 billion vs only $240 at the end of Q4 2008.  Large commercial banks have also increased their holdings as they moved from a net seller of $26 billion in 2008 to a net buyer of $81 billion at the end of 2009 second quarter.  

With stocks moving up over 50% from the lows, you have to wonder if this has decreased the appetite for US Treasury securities for both households and commercial banks in the current quarter.  On top of this, the US Treasury is going to increase their duration at the same time that the Fed is dropping their QE programs.  This should translate into a steeper yield curve and higher cost of funding the US government—which means more borrowing to fund the deficit. 

Very soon, Congress has to increase the debt limit and this will be increase attention to the problem.  The upcoming November 6th G20 Finance Ministers meeting will bring sharper focus as they begin to hash out the process of financial "peer review" proceedings.  With an unsustainable 2009 $1.4 trillion fiscal deficit and a $1 trillion 2010 deficit likely, the US will be the poster child for government spending addiction.

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him here and you can follow him on Twitter at http://twitter.com/abusch .

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