Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Greenspan's Bond Market Conundrum Bites Back

Interest-Rates / US Bonds May 02, 2008 - 01:22 PM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis Article"...If Washington and the US consumer can't borrow cheap at the long end, then they'll just go to the short end for cheap money instead..."

WHAT'S A CENTRAL BANKER to do?


Despite slashing the cost of short-term loans since last summer, the Federal Reserve has yet to dent the cost of longer-term finance.

Which is a real problem for the Treasury and Congress alike.

To date, fully 3.25% of Fed cuts have knocked only 1.5% points off 10-year US bond yields; thirty-year bond yields are barely 0.6% lower.

So while Ben Bernanke's big fix for the housing market has failed to squash longer-term mortgage rates, it's also failed to reduce interest rates for the government, too. It also represents an ugly return of the Greenspan Conundrum.

"The broadly unanticipated behavior of world bond markets remains a conundrum," admitted the Maestro to the House of Representatives in official testimony in early 2005.

But lucky for him, the bond market then was keeping rates cheap. Indeed, the yield on 10-year and longer-dated US Treasury bonds stayed near their multi-decade lows – first reached when Greenspan slashed the Fed funds rate to just 1% in the summer of 2003 – as he began "normalizing" short-term Fed rates from that record bottom.

No one on Capitol Hill complained, therefore. Longer-term finance then cost less than shorter-term loans. And with US Treasury debt heading for $9 trillion and more, what politician didn't want easier terms from the bond market?

Whereas today, in sharp contrast, it's longer-term debt that's become more expensive.

Once again, the Fed can't move long-dated yields; but now the cost of paying for Washington 's spending stands well above overnight loans. And the size of Washington 's spending only keeps growing. Won't the bond market play ball?

Pretty please?

"Over the last several months, changes in economic conditions, financial markets and monetary and fiscal policy have impacted Treasury's marketable borrowing needs," notes Anthony Ryan, assistant secretary for financial markets at the US Treasury.

"Financial market strains have impacted the real economy and the nation has experienced lower economic growth, lower receipts and increased outlays."

What to do? Thirty-year US bonds now yield fully 3% more than short-term Treasuries. Last time this premium for long-term borrowing got so high, the US government decided to stop issuing 30-year bonds altogether. It only re-introduced them in late 2006, taking advantage of Greenspan's Conundrum to lock in 30-year loans at below-short-term rates.

Put another way, "Just what will the Fed do if 10-year Treasury yields keep rising?" as we asked here at BullionVault at the start of June 2007.

"Well if Washington and the US consumer can't borrow cheap at the long end," we guessed in Gold & the Bond Market Panic , "then they'll just have to go to the short end for cheap money instead. The Fed can take care of that.

"By slashing the price of overnight money, it will let the US government shift the weight of its obligations out of 10-year and long-dated bonds into shorter-term debt – the classic structure of borrowing for any banana republic."

And now – surprise, surprise! – the US Treasury says it's bringing back one-year T-bills, last seen at the end of 2001. "The administration said [Wednesday] it would begin selling the one-year bill, also referred to as a 52-week bill, at an initial auction in June," reports the Associated Press.

"New one-year securities will be auctioned every four weeks [because] the government will need to cover a budget deficit expected to jump to an all-time high this year, surpassing the old mark of $413 billion set in 2004. A big part of the increased borrowing reflects the need to pay for economic-stimulus rebates to 130 million households."

Does it matter? "Countries don't go broke," as Walter Wriston, then chairman of Citigroup, said just before Mexico , Brazil and Argentina went broke during the Less-Developed Countries Crisis of 1982. And "governments with large exposures to currency mismatches and interest rate or maturity risks are, of course, particularly vulnerable," as Arturo Porzecanski, a scholar at New York and Columbia universities, writes in Sovereign Debt at the Crossroads (OUP, 2006).

"Governments tend to default specifically when they must increase spending quickly (for instance, to prosecute a war), experience a sudden shortfall in revenues (because of a severe economic contraction), or face an abrupt curtailment of access to bond and loan financing (e.g., because of political instability).

"It is usually very difficult for governments in such trouble to take the necessary offsetting actions, such as hiking tax collections or cutting spending on an emergency basis."

None of this points to a looming debt-default by the US Treasury, of course. But jitters in confidence can destroy front-loaded debtors if (or when) lenders go on strike. Witness last summer's collapse of Northern Rock – a top five British mortgage lender – precisely because it relied on short-term refinancing to keep itself running. Witness the classic "banana republic" structure of short-term debt that needs constant re-funding.

There's a clear "maturity risk" built into America moving its government debt out of long-dated bonds into ever-closer redemption dates. Not least if the Federal Reserve keeps squashing its short-term interest rates – now way below the rate of inflation – literally destroying the wealth of investors caught holding short-dated bonds.

If the bond market won't play ball at the long end, will it always play ball for short-term refinancing regardless?

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules