The United States is the SAFEST asset in the world.  Period.

Therefore, the U.S. government's debt carries no default risk.  Period.


These two facts are very important when trying to understand Financial Markets & Institutions, the class that I will teach beginning on December 1 (my mother's birthday!).

The amount of the U.S. debt can be found anytime from the Treasury Department's website and by clicking here.  The total amount as of today (November 11, 2008) is $10,622,166,941,631.68.  That's $10.6 trillion if there are too many digits for you to recognize easily.

OK - first a few more basics - The U.S. produces around $14 trillion of goods and services (Gross Domestic Product - actually nominal GDP is $14,429.2 billion from the latest new release, click here) and so the Debt/GDP ratio is only 73.6%.  The number is not very high at all, relatively.  Income is great (even if declining, that is recession) and consider also all of the assets in the United States and like real estate, the U.S. IS a very safe asset to own a loan against!  Period.

So EVERYBODY in a financial crisis wants to own at least some of the safest asset in the world!!  Well DUH, you say!!  grin

So here's the latest news today from Bloomberg.com:

Treasuries gained after the government's first sale of three-year notes in 18 months attracted stronger-than-forecast demand.

Yields on two-year notes fell to an almost eight-month low. The $25 billion auction drew a yield of 1.8 percent, below the 1.867 percent average forecast of six bond-trading firms surveyed by Bloomberg News. Treasuries earlier rose as U.S. stocks retreated, boosting demand for government debt. Today's sale was the first of three this week totaling $55 billion, the biggest quarterly refunding in more than four years.

OK - so this is a REFUNDING which is very key to note!  The Treasury is NOT issuing new debt (borrowing more) but refunding the old debt!!!  Like a roll over of your loan and reissuing at new interest rates.

Interest rates are at almost all time lows and so this is a great time to refinance!!!  Thus the U.S. government's borrowing costs will go down (interest on the debt).  Again, GREAT!

“It was pretty obviously a very strong auction,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 17 primary government securities dealers required to bid at Treasury sales. “It indicates that strong demand remains for short-end Treasuries and the Treasury's not yet being penalized for increasing supply significantly.''

Yes, the U.S. is going to keep borrowing more - remember the financial crisis?  $700 billion?  I knew you could!

Benchmark two-year note yields dropped 8 basis points, or 0.08 percentage point, to 1.25 percent at 2:09 p.m. in New York, according to BGCantor Market Data. That was the lowest since March 17. The 1.5 percent security maturing in October 2010 rose 5/32, or $1.56 per $1,000 face amount, to 100 15/32.

Yields on the benchmark 10-year note fell 4 basis points to 3.75 percent, below their 200-day moving average of 3.79 percent.

The bonds trade immediately (are bought and sold) thus changing the price.  The Treasury department only deals with 17 "primary government securities dealers" as stated above (one of which used to be Lehman Bros.) so anyone else who wants some of these bonds must buy from those 17 dealers.

Note that anytime the price of a bond goes up (the quantity demanded is greater than quantity supplied) then the interest rate falls.  The price-interest rate inverse relationship is key to understanding bonds.

Also note that the 10-year note is trading at below its 200-day moving average.  That means that interest rates are still falling (again indicating perhaps strong demand in these low risk securities).

Indirect bidders, a class of investors that includes foreign central banks, bought 36.1 percent of the notes sold today, the most since May 2005, when they purchased 40.3 percent. Investors bid for 3.07 times the amount offered, the most since May 1998.

Another key point is that foreign central banks, the Federal Reserve Bank of other countries, are buying up these highly liquid bonds.  Yes, you probably own some too - indirectly - through a money market asset, a Certificate of Deposit, or the bank in which you have your savings has many of these safe securities!!!

The U.S. revived the three-year note to help pay for the Treasury's $700 billion bank-rescue plan and fund a budget deficit projected to widen from last fiscal year's $455 billion as the economy shrinks and tax receipts slow. The Federal Reserve and the Treasury today enhanced a rescue package for American International Group Inc., almost doubling to $150 billion an initial bailout in September, as the insurer burns through cash.

The government plans to sell $20 billion in 10-year notes Nov. 12 and $10 billion in 30-year bonds Nov. 13 as part of its quarterly refunding, the biggest since February 2004. The Securities Industry and Financial Markets Association recommended trading close at 2 p.m. in New York and stay shut worldwide tomorrow for the U.S. Veterans Day holiday.

A holiday tomorrow, YEAH - oh, wait, I live in Shanghai, that's right! Grin!

One last note - a prediction by Stiglitz:

It will take at least 18 months to turn around the U.S., even if President-elect Barack Obama "does everything perfectly,'' Columbia University Professor Joseph Stiglitz, a Nobel Prize-winning economist, wrote in the Washington Post yesterday. The Treasury will begin holding talks with Obama's transition team this week on various programs, a spokeswoman said.