Dollar/T-Bond Death Dance

Things are not looking good for the USG and its citizens. This past weeks events seems to have established  the slo-mo collapse of the US Treasury bubble, and the initiation of the long-awaited descent of the dollar. Here are the key factors.

• March 18 – the Fed announces intention to buy $300 billion of long bonds.
• To date, it has purchased only $100 billion.
• The amount of debt the USG has to finance for 2009 is between $2.5 & $3.0 trillion. So far, the treasury has sold only about $1 trillion.
• April 27 – The Fed bought $7 billion of bonds. The bid to cover ratio was 3:3. May 20, the Fed bought $7.4 billion on $45.7 billion offered, a 6:1 cover ratio. Essentially, the number of bonds offered for sale doubled.
• Gold and silver are reflecting increasing fear of USD denominated assets.
• May 18 – China and Brasil have made a deal to dump the dollar as exchange currency between those two nations. If we ever had any doubts about China’s intentions, now we know.

As for all the hoopla about S&P threatening to cut the UK’s credit rating, and translating that to the US, I don’t buy it. No US rating agency is going to slap Uncle Sam down, not a chance in hell.

Next week is likely going to be a moment of truth for both the Fed and Treasury as the later intends to offer up $101 billion in what is probably the largest weekly auction ever. If the auction doesn’t go well – and many doubt that it will – it is highly probable that the Fed will step in as buyer as last resort. Either way, the bloom will be off the rose and the future of the dollar all but assured. It will only be a question of how fast the USD tanks. Note that despite the horrible state of the UK, the GBP has not crashed, nor gone into a nose dive, so I wouldn’t take any bets on the USD doing the same.

The greater risk is that of the USG being cut off on its credit spree. Now, that’s a bet worth taking.