Posted on 08/29/2019 6:41:08 AM PDT by C19fan
Treasury Secretary Steven Mnuchin said ultra-long U.S. bonds are being considered by the Trump administration, according to Bloomberg News.
“If the conditions are right, then I would anticipate we’ll take advantage of long-term borrowing and execute on that,” Mnuchin said in the Bloomberg News interview on Wednesday.
The 50- or 100-year bond idea recently gained popularity in the Treasury but was considered as early as 2009, according to the report by Bloomberg. Issuing long-term debt would alleviate the pressure on taxpayers to stymie the almost $1 trillion annual budget deficit and could mean returns to pension funds despite falling yields.
(Excerpt) Read more at cnbc.com ...
The Fed has to be standing there and scratching their head....they didn’t expect that trick to come out of Trump’s basket.
Just make "our" DC legislators promise to balance the budget for those 10,000 years. <^..^>
All empires last forever—everybody knows that! ;-)
The canaries are getting nervous.
L
How dare you say that?! We have PhDs with big brains and really big computers making all the right decisions about centrally-planning our economy. It didn't work for the Soviets, but it will work for us, because CNBC told me it would.
Cool. Can’t wait to re-finance with a 100 year mortgage.
Treasury skewed strongly toward short term (2, 5, 7-year) maturities during the Obama administration, ostensibly to take advantage of historically low rates for bonds with such short terms, but ultimately shamefully because of the screamingly obvious risk that the rates for all new bond issuances (including 10, 15 and 30) would at some point in the near future revert to historical norms, leaving the federal government having to spend an obscenely huge and annually growing fraction of its revenue on interest payments on the national debt.
Grownup Trump knows better than to leave his beloved countrymen in the lurch upon his departure from office in January 2025. Interested to see how Treasury proceeds with this plan. Seems wise but to gain maximum value out of the initiative we should probably pair it with an equally innovative mechanism to force fiscal sanity upon the spending side of the ledger. I’d say “good luck with that” but Trump does tend to surprise...
Didn’t they call it the 5%?
Providentially, such ultra long term bonds will also help to lock in the dollar as the world’s reserve currency while helping to raise interest rates by sopping up liquidity.
“ helping to raise interest rates by sopping up liquidity”
Could you elaborate or be more specific on this part of your comment? Not sure I understand the terminology or the cause and effect assertion. Not that what you’re saying is not correct tho. The first part of your comment was certainly insightful.
The only way I would touch very long term, 50 or 100 year bonds was if they were backed with gold.
My dad had a pile of them, trusting the gov.
In most cases, the dollars are soon recycled by the Treasury as government agencies spend them, so the net effect is usually nil. The Treasury has a large staff of analysts who try to assure that this is so if that is what the Treasury intends. They monitor the value of the dollar and of US debt and interest rates. When needed, the Treasury will buy or sell assets to protect against imbalances or unexpected movements.
What if the Treasury sells bonds and holds on to the dollar proceeds instead of releasing them to be spent by government agencies? When they do that, the stock of money in circulation -- the M1 money supply -- is reduced. Or, to put it casually, the Treasury has sopped up liquidity. The usual result is to move interest rates upwards as dollars become more scarce and their owners can extract a higher interest rate in return for lending them.
The opposite is also true. When Treasury on the net buys its debt in return for dollars, it is injecting dollars and dollar liquidity into the financial system and economy. Plausibly, the Treasury may create new dollars so the net effect is to create new demand. If done on a large enough scale, this tends to juice up inflation.
Forgive me for injecting terms I’m sure you know well (QE/QT), but they will help me understand your perspective better down the line.
Quantitative easing is the Fed clicking vast amounts of U.S. dollars into existence and immediately using that money to purchase debt on the open market (i.e., the “secondary market”). For example, in 2008 and during the years that followed, the Fed embarked upon an astonishing campaign of being the buyer of last resort, employing the nakedly manipulative tool of Quantitative Easing to purchase objectively crappy and risky (that is, until the moment the Fed stepped in to prop up prices and thereby artificially stabilize this niche market) agency debt that among other distinguishing characteristics was NOT backed by the full faith and credit of the U.S. Government (as U.S. Treasury bonds of 2-, 3-, 5-, 7-, 10-, 15-, and 30-year maturites all are).
Thus we were presented with a garish display of buying power on the part of a specially-empowered private bank which, when used, “expands the balance sheet” of that entity. What could be a less fear-inducing and more soporific event to the unwashed masses, a bigger euphemism, that the Fed saying: “Oh, don’t mind us, we’re just expanding our balance sheet over here...”.
The Fed could go on to say:”Can’t you see now? There’s nothing to worry your pretty little heads over. Be good little children and go use the brand spanking new new U.S dollars we just infused into the ailing secondary debt market to buy an equivalent number of units of a debt asset that is marginally higher on the total-crap-to-gold-standard scale of quality, over and over and over again, until the prices of the entire spectrum of debt asset classes are propped up to our liking.”
Quantitative tightening, by comparison, is the whole process in reverse. It’s the Fed receiving back, in cold hard cash, at the expiry of a bond, the principal or nominal amount on the face of thst bond (e.g., $10,000), and instead of instantaneously going out and purchasing an unexpired bond in the same amount on the secondary market, unclicking that $10,000 sum back out of existence, thus completing the life-cycle of that particular $10,000 sum. In other words: “Don’t worry your big red head, Orange Man Bad, we’re just contracting our balance sheet back to the size it was before. We’re seriously not trying to torpedo the magnificent economic growth you’ve been working so hard to facilitate!”
As I see it, the latter is an example of raising rates by sopping up excess liquidity.
Now as I imagine it, the Treasury beginning to gradually issue new gold standard 50- and 100-year maturity bonds in the primary market as various and sundry units of 2-, 3-, 5-, 10-, 15- and 30-year T-bills come to the end of their terms and expire/mature, no quantitative easing or tightening is taking place. The overall size of the debt market stays the same. It’s just that the average length of T-bill terms inches higher over time, and the U.S. government does itself a solid favor by locking in marginally lower and lower interest rates over time as the huge number of units of principal previously locked up in higher-interest-rate short term debt (thank you Obama) gradually migrates over to lower-interest-rate long term debt.
As I see this latter process, undertaken over time by the Treasury Secretary, it is NOT an example of raising rates by sopping up excess liquidity. Am I correct?
As for long terms bonds, the world's demand for both dollars and prime quality US Treasury debt has increased over time and will continue to increase due to the growing US and world economies and lengthening lifespans and working careers. That being so, issuing ultra long term US Treasuries in good times is a way to accomplish several objectives: sop up potentially destructive dollar liquidity that is now parked in negative interest rate accounts; capture some of the projected long term increases in dollar and US debt demand in order to help finance current US spending; and balance out the supply of Treasuries of various maturities.
I think that above all, the Treasury, the Fed, and the world's major central banks do not want the holders of dollars and other currencies now held in negative interest rate accounts to go on the prowl for a decent rate of return and thereby disrupt the world's equity and currency markets while squandering value.
For example, in the 1980s, Japan's economy was roaring along and her banks were stuffed with dollars held at dismal interest rates. Looking for better returns, Japan's banks went on a lending spree and imprudently financed foreign and domestic real estate purchases at escalating high prices. In nominal terms, a square mile of downtown Tokyo was even said to be worth more than the entire state of California.
As the old saying goes, what cannot last does not last. By 1990, Japan's banks were broke as domestic and foreign real estate values returned to historic norms and imprudent loans could not be serviced by the borrowers. The effects of this so-called balance sheet recession continue to this day, compounded now by Japan's demographic crisis and other issues like foreign competition in manufacturing and the damage done by the Fukashima reactor meltdown.
My guess is that the holders of long term deposits at negative interest rates were consulted as to why they were not buying any of current US Treasury offerings. They probably responded that the maturities currently offered were not long enough. The Treasury's team of analysts were then tasked with capturing this market in a way that would maximize US financial and economic gains.
As much as we see looming dangers and worry over America's future, the record of the last century is that we meet our challenges and go from strength. For the US to be able to consider the sale of ultra long term bonds is a sign of strength.
Moreover, the Fed and Treasury performed better during the recent financial crises than is commonly understood. They avoided the mistakes that caused the Great Depression and now, with the pro-business Trump in office, we have boom times that by some measures exceed those of the Reagan era. Japan and the Eurozone do not come across well by comparison.
Excellent, thx!
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