Geithner Extends Average Maturity of Treasury Debt

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machinehead's picture
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Geithner Extends Average Maturity of Treasury Debt

From Bloomberg:

The Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26-year low of 49 months. That may mean boosting sales of 10- and 30-year bonds by 40 percent over the next year to $600 billion, according to FTN Financial in Memphis, Tennessee, driving down prices of longer-term securities.

Replacing bills with bonds may drive up the so-called yield curve ... the gap between yields on 2-year and 10-year notes widened to 2.47 percentage points, compared with an average of 0.8 point since 1977.

The average maturity of U.S. debt fell to 49 months in the fourth quarter, the lowest since reaching 48 months in the second quarter of 1983. About 23 percent, or $1.63 trillion of the Treasury’s $7 trillion in outstanding public debt will mature next year, Bloomberg data shows.

At the same time, interest paid by the U.S. dropped $67.8 billion even as outstanding deb rose 34 percent to $7 trillion from $5.21 trillion, government data shows. Yields o 10-year Treasurys ended last week at 3.48 percent, less than half the average of 7.31 percent over the past 40 years.

The steeper yield curve will help banks recapitalize after $1.66 trillion in losses and writedowns since the start of 2007 as they borrow shorter-term and invest in the longest-maturity debt, profiting from the difference in yields.

http://www.bloomberg.com/apps/news?pid=20601087&sid=auBVY_IxvAk4

At first glance, locking in low long-term rates seems like a good debt-management policy.  However, there is a darker side.

As in the aftermath of the 1990-91 recession, a steeper yield curve is helping to recapitalize banks, who can borrow at the Fed Funds rate of zero and invest in Treasury debt to earn a fat spread. But why should the selfish needs of an industrial cartel distort pricing in our command-economy financial system? Benny Bubbles' zero interest rate policy is creating a fresh Bubble -- Bubble III -- as we speak.

One also has to wonder whether Geithner fears a replay of the 2007-8 commercial paper meltdown in the Treasury bill market. T-bills are effectively government commercial paper. Any glitch in the weekly auctions which roll over these obligations would create instant liquidity problems for the Treasury.

Worse, Geithner probably has been advised that long-term yields are not just going up -- they're going up A LOT, as the dollar-denominated global monetary system enters its twilight.  Current lingering crisis conditions probably represent the last train out for long rates with three and four percent coupons. Problem is, with Usgov in permanent structural deficit as its slow-motion social benefit Ponzi schemes unwind, future borrowing at escalating rates risks an exponential runaway in interest costs.

Without fundamental monetary and fiscal reforms, even a well-timed issuance of low-yield long-term Treasury debt will be of little avail. In fact, it may well blow the game-ending whistle on this decade of anomalously low long-term rates.  Double-digit rates in the future would crush productive investment, just as effectively as the massive Looterfests of 2008-9 did by wasting and stealing our seed capital. Capitalism 101 teaches that if you don't invest, you become poor. Americans are the real-life guinea pigs as this cynical plutocratic experiment plays out.

 

 

 

 

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Re: Geithner Extends Average Maturity of Treasury Debt

Desperation: Geithener.

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Re: Geithner Extends Average Maturity of Treasury Debt

Bloomberg:  At the same time, interest paid by the U.S. dropped $67.8 billion even as outstanding deb rose 34 percent to $7 trillion from $5.21 trillion, government data shows. Yields o 10-year Treasurys ended last week at 3.48 percent, less than half the average of 7.31 percent over the past 40 years.

So far this year the U.S. has paid $314 billion on outstanding debt which isn't bad considering a $12 trillion national debt.  If rates go back or close to the 40 year average, the payments would double to over $800 billion which would make this the highest budget expenditure - higher than defense and war, medicare or social security.

The central banks and the big banks that own them are benefiting by borrowing USD at 0% and then using the money to buy US bonds and bills.  They are lending money they don't have, that we alone back-up, and then lending it back to us at a profit (3-4%) - money for free, not a bad deal if you can get it.

Why doesn't the U.S. simply generate it's own 0% money - yes, we can - and then use it to start eliminating our debt?  If 0% is appropriate for big banks that add nothing to the value of money, why shouldn't it be used by entities that actually back their money - like uncle sam?

Larry  

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Re: Geithner Extends Average Maturity of Treasury Debt

They need to stretch the amortization schedule so the threat of a failed auction in any given year doesn't materialize.  All kinds of projections out there.  I recently caught Mark Zandi forcasting 6-7% ten year rates by spring '11.  I believe it, subscribing to a fundamental that reconciles 3.2tt of supply vs a global demand that will be headed to riskier assets under the perception of stability.  So, there's a doubling of interest costs to ~500bb, or close to 14% of the federal budget.  The US can pay that, but the shame over what it displaces?

Larry wrote:

Why doesn't the U.S. simply generate it's own 0% money - yes, we can - and then use it to start eliminating our debt?  If 0% is appropriate for big banks that add nothing to the value of money, why shouldn't it be used by entities that actually back their money - like uncle sam?

Larry,

I respect that while there are many forces indebting the country we wish we could have more control of, but if we print money for ourselves and payoff the monetized debts (the 12tt), we'd be talking about printing a multiple of the ~1.5tt M1 paper currency that currently exists.  Inflation would closely represent the relationship 12 / 1.5, or 800+%. 

I'm for keeping the Fed.

FinPro 

 

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Re: Geithner Extends Average Maturity of Treasury Debt
FinPro wrote:

They need to stretch the amortization schedule so the threat of a failed auction in any given year doesn't materialize.  All kinds of projections out there.  I recently caught Mark Zandi forcasting 6-7% ten year rates by spring '11.  I believe it, subscribing to a fundamental that reconciles 3.2tt of supply vs a global demand that will be headed to riskier assets under the perception of stability.  So, there's a doubling of interest costs to ~500bb, or close to 14% of the federal budget.  The US can pay that, but the shame over what it displaces?

Larry wrote:

Why doesn't the U.S. simply generate it's own 0% money - yes, we can - and then use it to start eliminating our debt?  If 0% is appropriate for big banks that add nothing to the value of money, why shouldn't it be used by entities that actually back their money - like uncle sam?

Larry,

I respect that while there are many forces indebting the country we wish we could have more control of, but if we print money for ourselves and payoff the monetized debts (the 12tt), we'd be talking about printing a multiple of the ~1.5tt M1 paper currency that currently exists.  Inflation would closely represent the relationship 12 / 1.5, or 800+%. 

I'm for keeping the Fed.

FinPro 

 

I don't get it.  The strategy up to this point was to keep the yield curve low in order to prop up the housing market.

This will put a real damper on housing sales while there is still a huge shadow inventory as well as the impending Alt-A/Option ARM resets to hit in 2011.

I don't understand this move.  Is this a change in FED strategy or are they just running from one fire to another now without the luxury of time to think past the end of their nose?

What is their thinking on this?

 

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Re: Geithner Extends Average Maturity of Treasury Debt

 

I think the Fed's thinking is that QE will allow rates to stay low, and it may yet do that.  Maybe someone else can comment on the dynamics of Japan being ~130% debt/GDP, while maintaining low rates.  Suffice to say, if rates spike for JPY debt instruments they would be in a world of pain paying all that interest.  The supposition that rates will rise in the US to 6-7% on the ten year is akin to assuming the limits of fed control start to show up.  It would not be a policy move.  The bid on what they're floating won't be sub-4%, as the bonds they don't buy through QE saturate the remaining market.

Its tough to say.  The cynic in me thinks enhancing the perception of distress could actually be a Fed "flight to treasury" tool that keeps rates low.  On the other hand, its pure speculation to suggest that the bid side for treasuries won't come storming in at 4.5-5%.  There's a lot of conjecture here, but the answer to your question is they won't necessarily be behind the move.  Actually, Zandi is suggesting a move to 6-7% would be the event that forces the hand of tightened fiscal policy from the congress.  The problem there is no one believes unemployment will substantially recover by then.

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Re: Geithner Extends Average Maturity of Treasury Debt
FinPro wrote:

 

I don't get it.  The strategy up to this point was to keep the yield curve low in order to prop up the housing market.

This will put a real damper on housing sales while there is still a huge shadow inventory as well as the impending Alt-A/Option ARM resets to hit in 2011.

I don't understand this move.  Is this a change in FED strategy or are they just running from one fire to another now without the luxury of time to think past the end of their nose?

What is their thinking on this?

 

 

Could it be the exact opposite?

Could the FED allow the yield curve to grow to get the support they need for continued QE?

As it stands today, the FED has used all of the $300B in POMO (QE).  The question of dollar strength has risen to the level of national attention and "main stream" media.  The US govt has made it clear through its actions that it has no intention of exercising fiscal restraint.

That means that the FED and US Treasury will have to promote an environment where US T's are an attractive financial instrument to foreign and domestic investors.

How can they pull that off in the face of current fiscal policy?  I'm way out of my depth here but in my mind they will have to capitalize on aversion to risk.  I'm inclined to believe that the FED is banking on a correction in equity markets and the "flight to safety" of US T's.

Like I said, I’m out of my depth.  I’m just trying to understand what’s going on.

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DrKrbyLuv
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Re: Geithner Extends Average Maturity of Treasury Debt

FinPro wrote:

I respect that while there are many forces indebting the country we wish we could have more control of, but if we print money for ourselves and payoff the monetized debts (the 12tt), we'd be talking about printing a multiple of the ~1.5tt M1 paper currency that currently exists.  Inflation would closely represent the relationship 12 / 1.5, or 800+%. 

I'm for keeping the Fed.

I think your math is flawed or maybe I should have explained myself better. 

I think we owe the private Federal Reserve around $4.5 trillion dollars. If the U.S. government wanted to, they could issue $4.5 trillion to the Fed in payment of our account.  The money would be extinguished upon repayment as the loan is retired and with it, $4.5 trillion would cease to exist.  After all, the money only exists as debt.

It can be argued that this would be deflationary but but by the math, it could not be an inflationary event. 

The good news is that our national debt would instantly shrink from $12 trillion to $7.5 trillion for reduction of almost 38% in principal and interest.  The Fed created that debt from money they didn't have and they don't back up.  We can eliminate our liability and their asset by simply creating the money as they did.

You said you wanted to keep the Fed, please tell me why?

npwebb wrote:

I don't understand this move. Is this a change in FED strategy or are they just running from one fire to another now without the luxury of time to think past the end of their nose?

What is their thinking on this?

Well said.  And the short answer is that it's none of our business.  The Fed, by charter, is supposed to operate independently and they are not accountable to anyone.  That's the whole idea.  They are also chartered to manipulate our markets (FOMC & PPT) and to set our interest rates.  They are a private corporation that pays no taxes, thus they cannot be audited by the IRS.  Their business is private and technically, their strategies are protected by intellectual property rights.

This is a huge conflict of interest, the banks control our economy, that cannot happen if capitalism is to operate.  The Federal Reserve is monopoly; by charter, ownership and definition;  they form the nucleus of fascism.

Larry

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LogansRun
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Re: Geithner Extends Average Maturity of Treasury Debt

Finpro,

I think you need to read:  Meltdown by Tom Wood

May give you a better understanding of REAL WORLD ECONOMICS and REAL WORLD MONETARY POLICY.  

Your posts scare the hell out of me with the lack of understand of the REAL WORLD.

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