A Shot Across the Bow

by Larry Levin

Last week a news flash came and went - practically unnoticed. The world's fifth-largest pension fund will no longer buy US Treasuries because yields are too low. The move signals what could be a big shift by financial institutions away from US government debt into higher-yielding assets. South Korea's National Pension Service (NPS), which has $220 billion in assets, said on Wednesday it wanted to broaden its range of overseas investments.

So that begs the question, "What if this sentiment was to spread?"

"It is difficult to buy more US Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot," said Kwag Dae-hwan, head of global investments at the NPS. "We need to diversify our portfolio away from US Treasuries and we find asset-backed securities and corporate debt more attractive because of wider credit spreads."

The yield on two-year US securities was 1.77% in Asian trading last week, well below yields of 5% in June. The rate recently fell below 1.5% after several interest rate cuts by the US Federal Reserve.

A manager at the NPS's overseas investment team said: "The Fed continues to cut interest rates. We are still making profits from the Treasuries that we bought in the past but we think we'd better dispose of them and had better buy higher-yielding European-government debt."

The Korean decision "is symptomatic of the times and the problems that the US is facing," said David Cohen, head of Asian economic forecasting at Action Economics in Singapore . "This is the sort of pressure the US is facing after running this big current account deficit for years. Lots of people have said it's unsustainable."

"What if this sentiment was to spread?" US Treasuries would fall in price, which would steadily increase interest rates and there would be nothing the Federal Reserve could do about it. Maybe that's exactly what America needs? It just may force our "leaders" to finally address some of the basic problems with the economy and financial system, stop the continuously growing deficit spending, and fighting enormously expense wars. The government can not raise taxes enough to pay for the deficit, off-balance sheet expenses, etc. and if they can not borrow, something will have to change. I wonder if real spending cuts will be considered.

The US dollar is also raising the eyebrows of our (current) friends. Central banks from 16 Asian countries said last weekend at a meeting in Jakarta that they might invest more of their $1-Trillion of official reserves in one another's sovereign bonds instead of US Treasuries, given the dollar's volatility.

Real Time Trading Signals*for

Trade Date: 3/28/08

E-Mini S&P Trades*
(before fees and commissions):


1) VA buy @ 9:10am at 1333.25 = -2.00 & -2.00

2) VA sell @ 10:50am at 1334.00 = +2.50 (1 lot)

3) Engf sell @ 11:40am at 1330.00 = +2.00 (1 lot)

4) IDVA sell @ 12:05pm at 1329.25 = +.50 (1 lot)

5) PP buy @ 2:05pm at 1321.75 = -.75 (1 lot)...+.25

E-Mini Russell Trades*
(before fees and commissions):


1) Buy @ 9:14am at 693.4 = b/e & b/e...b/e


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