The View From 1776

Another Straw In The Inflationary Wind

Inflation may be encroaching earlier than expected upon the President’s budget.  Investors, at home and abroad, already are worried about the disrupting impact of the President’s proposed massive increases in Federal deficit spending as he works to extend socialistic management of the economy by Washington bureaucrats.

The Wall Street Journal, in its March 25th edition, reports:

China has voiced concerns about its dollar-denominated assets in recent weeks as the U.S. government prepares to bring a mountain of new debt to market to finance its economic-recovery plans. The Federal Reserve said last week that it will buy longer-term Treasury securities to keep borrowing costs low, but light demand for government paper could fan interest rates, possibly complicating the U.S. recovery…

Arthur Bass, a bond-futures trader at the brokerage firm Newedge USA in New York, said that he saw Wednesday’s Treasury sell-off as a continued correction from the rally last week after the announcement of the Fed’s plans. He said that Wednesday’s humdrum auction clearly contributes to the declines and that participants should be on the lookout for inflation over the longer haul. But he doesn’t believe that such a trend is imminent quite yet.

“The main issue right now is that there’s just a lot of supply out there,” said Mr. Bass. “The Treasury is selling a lot more than the Fed is buying.”

The weak U.S. auction came after a sale of U.K. government debt Thursday failed, the first failed auction of conventional U.K. government bonds since 1995. Like the U.S., the U.K. is hoping to sell a large quantity of new debt as it looks to stimulate its economy, but there are signs that investors are balking.

The fear is an “inability to control interest rates by governments, which is the next unintended consequence of the huge printing, and is coming earlier than expected,” said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.