Each month, the US Treasury holds a week-long auction of US notes and bonds to foreign investors and the Fed.  In the past two years alone, there has been a record increase in monthly amounts of debt auctions from $18 billion to $44 billion a month.  But this is still nothing compared to this week’s record issuance of US debt instruments.

This week, the  US Treasury is issuing a record $123 billion in US bonds and notes to whoever wants to buy.  Yesterday, for example, saw the auction of $7 billion in 5-year TIPS.  The Fed only has room to buy about $1 billion more, so it will largely fall upon private investors and the rest of the market to pick up the slack.  China is expected to continue to buy, although in gradually lesser amounts than before.

How To Get Ready For Double-Digit Inflation

US Debt Auction Sizes Will Increase Into 2010, Put Pressure on USD

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According to Michael Pond of Barclays Capital, the Treasury “prides themselves on being consistent issuers” and auction sizes will likely increase marginally going into mid-2010.

Since the supply is expected to increase, will demand be able to keep up? Pond sees private demand stabilizing and even shrinking.  Given that the Fed will no longer be buying, there is real concern that the demand won’t be enough.

Moreover, with an improved global economic outlook next year, more investors will be looking for places they can get a higher return on their money than in the US dollar-denominated instruments.

Pond estimates the Fed rates will make it to 1% by the end of 2010, but it is not clear how much this will do for improving US dollar strength in the near term considering the amount of outstanding debts.  Furthermore, the weaker US dollar may be good for exports, but much of these gains are eaten back up again in the relative cost of oil, which, because it is priced in USD, costs more as a result.

USD Conflicts With Status As World Reserve Currency

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One of the major reasons central banks keep buying US dollars is because oil is traded in dollars, and oil is a key ingredient in the global export trade.  You might want to check out some of the updates I’ve been keeping on these developments below:

Zhou Xiaochuan’s Proposal For World Reserve Currency is Accepted by UN (March 29, 2009)
U.S. Dollar Up For Debate At G8 Meeting (July 5, 2009)
Supracurrency Coin Proposed As New World Reserve Currency (July 12, 2009)
China Diversifies Reserves As Part of “Going Out Strategy” (July 29, 2009)
China’s Biggest One-Day Loss of the Year (August 18, 2009)
World Bank: Don’t Take USD Reserve Status for Granted (Sept. 27, 2009)
Sucre, New Latin American Currency To Replace USD for Trade (Oct. 19, 2009)

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