Treasuries and Tax Revenues:Model Portfolio Update

• Gregor Macdonald
• January 13th, 2010

The grinding gears of falling tax revenues and increased supply of treasuries are finally coming to pass, here in early 2010. When both the stimulus and the financial crisis were young, it was possible to imagine that increased savings by Americans and then an eventual recovery in the economy would arrive just as the situation was starting to worsen again, one year hence. Well, we are now one year on. And extend and pretend is not working. Alas, there is simply not enough capital flowing through the economy now to price in any outcome other than another year–if not two years–before federal and state taxpayers can once again make a dent in budgets. The recently released report on the States from the Nelson Rockefeller Institute was helpful in understanding the situation. More broadly, the flow-through from the collapse in commercial real estate is also now starting to hit tax revenues, and it would appear that many cities, towns, and capitals are about to enter another round of payroll reduction.

The result is that the pipeline of capital needed to support gargantuan treasury supply continues to dwindle. This is why a number of analysts have begun to wonder who in fact is buying a large portion of US treasury supply, as it becomes more challenging to explain from where on the planet the capital is emanating. Leaving aside such sleuthing, we knew that not only had foreigners shortened duration last year along the treasury curve, but that starting later in the year they were reducing their participation as well in treasury auctions. This is yet one more reason why, earlier this week..(this article continues for subscribers through the membership gateway, on the right side of this page)

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