Posted on 11/02/2013 9:43:32 PM PDT by Vince Ferrer
The one thing to emerge from the debt ceiling crisis has been to highlight the short-term debt focus. Every Thursday the US government has had to sell $100 billion of new debt rolling over short-term with 3 month bills. This may have helped to bring down long-term rates and it reduced the interest expenditures, but it has introduced extreme vulnerability to a sudden loss of lenders’ trust as lawmakers debate whether to raise a cap on public borrowing.
U.S. Treasury will unveil its new borrowing strategy that will signal the shift in interest rates has arrived. The extreme short-term debt can trigger default within days or weeks around one of these debt ceiling debates placing more power in the hands of the Tea Party. The Obama Administration is counter-acting with starting to shift the debt long-term to reduce Treasury need to raise $100 billion to repay short-term debts on a weekly basis.
The Treasury will now shift the U.S. government’s reliance on short-term debt, which increased dramatically ever since Clinton began to shift it to reduce interest expenditures to balance the budget. Under the new program (see Op-Ed WSJ below), the Treasury plans to start selling 2-year floating-rate notes at regular auctions beginning in January. The yield on the new notes will float according to market conditions. Hence, we will begin to see longer-term rates start to rise.
When interest rates are low, it was so irresponsible to buy back 30 year bonds and issue short-term bonds. Years from now the cost of this strategy will be shown to be in the billions of dollars. It is criminally negligent. Anything short-term to help to re-elect the disaster-in-chief.
When interest rates were going down, it made sense to switch to shorter term bonds. When interest rates are going up, it punishes us just as much as it formerly benefited us. Remixing back to longer term bonds while rates are still low delays the effects of the interest rate increases. We are only going from 30 day to 2 years though. We need to be selling more 10 year bonds too.
Can I think of this as like trading in my 3.5% 30yr mortgage for a 0.25% 2-month mortgage so I can get access to more spending money? Lol, and as if I don’t care about the long term effects because I’m planning on leaving my husband in 3 years at election time?
We are starting to see the world’s largest failed experiment in Kensian economics.
The Fed will not allow interest rates to rise, no matter how much inflation they have to put into the system.
The Fed does not completely control interest rates. Government bonds are auctioned off, and rates are determined by the free market. If people lose faith in the government's ability to pay, or that there are better investments elsewhere, they will have to offer higher rates of return to attract investment.
The debt ceiling is not the only line in the sand, the real line in the sand is when the US offers bonds for sale, do buyers show up and buy? If there are no buyers, then the game is over. The US must offer a competitive rate for that to happen.
For a generation at least, government bonds have been perceived as less risky, and consequently have been able to offer interest rates at a discount to corporate bonds. If the perception switches and people fear investing in governments are more risky, they will have to offer higher rates of return to attract investors.
Yes, but the dems with the help of the MSM will blame the repubicans for all high interest ever to come. It does not matter if O caused the financial toilet he did.
They will get a thousand miles of story from all this.
The low information voters will not pay attention to the facts, but then they never do. That is the main reason they elected O... twice.
You can't sell what people won't buy.
True, which is why eventually, interest rates will go up. Because the Fed can't force people to buy Treasury bonds of any maturity. The Treasury will have to offer competitive rates.
Free market? That market where trillions of dollars in bonds are bought by the Federal Reserve?
Agreed. Too high and the US govt won’t be able to pay the interest on the debt.
Agreed. Too high and the US govt won’t be able to pay the interest on the debt.
We HAVE a winner! You hit the nail flush on the head. Drove it home in one concise stroke. Moreover, the goober mint doesn’t have to worry about buyers for it’s bonds. If no one else will the goobermint will buy them.
The house of cards is very near a total collapse.
I hope that I can sell my house before rising interest rates make that nearly impossible. Tougher applicant screening and loan qualification has already knocked out 4 people who were interested in buying my house.
Hell, if I get to approve my own refi in this scenario, then I’d like to renegotiate my terms down to 0.01%. More playing money:)
Who’s the smart peeps calling them out on this three card monte and raining on the parade? We must be dangerously close to some big cliff if they’re willing to let long term rates go up before 2014 elections.
“Government bonds are auctioned off, and rates are determined by the free market.”
RFLMAO. You lost me at the term “free market”.
“Free market”?
How does one compete with the fed printing money at will?
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