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Geithner Gone Wild: Treasury Entertains 100 Year and GDP-Linked Bonds to Fill New $2.4 Trillion "Demand"
Reprinted with permission from EconomicPolicyJournal.com
Each quarter, we break down the minutes of the Treasury Borrowing Advisory Committee (TBAC) meeting where primary dealers and other members of the investment industry advise various members of the Treasury what the market will bear in terms of debt issuance. There are usually more than a few interesting tidbits as we learn just what's on the mind of those in the business of buying Treasury coupons, holding them for two weeks, and selling them to the Federal Reserve at a higher price. And because the Federal Reserve viz a viz its System Open Market Account (SOMA) is the largest holder of Treasury debt, none other than its two managers, Brian Sack and Joshua Frost, were present as representatives of the world's largest central bank cum [unhedged] hedge fund. The current minutes are shorter than usual, but worth reading as they reveal an emboldened, opportunistic Treasury looking forward to novel ways to fill an ever expanding appetite for US debt, which is all but guaranteed as a result of new, socialized banking regulations.
As we have long speculated, Basel III is nothing more than an elaborate mechanism for artificially increasing demand for sovereign debt and globalizing banking regulation. Indeed, the minutes of the prior TBAC meeting revealed that new regulations aimed at "reducing banks' risk profile" are expected to generate at least $400 billion in increased US Treasury debt alone by 2015. However, this estimate has now exploded and has Treasury salivating (emphasis ours):
The member recommended that Treasury develop products that target the needs of three different investor classes, specifically banks, pension funds/insurers, and retail investors. The member estimated that demand from these three investor classes could total $2.4 trillion over the next 5-years, if the right products were offered.
And just where is this new demand coming from? Why, the very markets that have imploded are are teetering on implosion thanks, in no part, to the actions of the central planners:
On the supply side, opportunities to expand the investor base have developed due to market dislocations following the financial crisis. Adecline in GSE debt issuance, the wind-down of bank debt issued under the Temporary Liquidity Guarantee Program (TLGP), dislocation in the municipal market, and the contraction of the commercial paper market have resulted in a shortage of high quality assets.
For further evidence that Treasury lusts to crowd out private investment (or is it "crowding in", as Paul Krugman hallucinates--paging Bob Murphy) and become the #1 investment in its citizens' portfolios:
Expanding the Treasury investor base to include more domestic investors by offering new products is desirable and would reduce overall funding risk. The presenting member noted that other sovereigns’ debt(Italy, Japan, and the UK) is largely funded by domestic investors. The member further noted that it was important to avoid cannibalizing the current auction process and that any new products should add to demand.
A dazzling array of "solutions" are then presented to fill the engineered void, in which we find 40, 50 even 100 year bonds, callable coupons, floating rate bills (to reduce rollover risk) and even GDP-linked bonds (because the BLS is so spot-on):
The presentation next discussed a variety of specific securities and debt management techniques that could potentially aid Treasury in achieving its goal of expanding the investor base and financing the government at the lowest cost over time.The presenting member first discussed “ultra-long” bond issuance, which were defined as securities issued with a tenor of 40-, 50- and/or 100-years. The member noted significant demand exists for high-quality, long-duration bonds from entities with longer-dated liabilities. It was noted that duration tapers off rapidly with maturity and is dependent on the underlying coupon on the bond. As a result, liability-driven investors would likely use the STRIPS market to capture additional duration exposure.The presenting member then discussed increasing the U.S. Treasury investor base through callable issuance. The presenter noted the emerging gap between demand and supply in this market, driven by less GSE callable debt and MBS issuance. The member added that Treasuries are a relatively close substitute for Agencies, especially in the 2- to 5-year maturity ranges with 6-month to 1-year lock outs. According to the member, accounts that buy callable product include domestic banks, foreign banks, state and local governments, fund managers, insurance companies, pension funds and foreign investors. The presenting member noted that demand may exist for longer-maturity callable paper. This space is currently occupied by corporate names carrying ratings of BBB or lower.
Examining current pricing for Agency product, the presenter estimated it would cost Treasury an additional 18 basis points to issue a 5-year bond callable in 1-year and an additional 8 basis points to issue a 2-year bond callable in 6-months.While this strategy would give the Treasury additional optionality in managing its debt and potentially increase its investor base, the presenting member remarked that demand for callable product tends to decrease if investors expect interest rates to increase. If market volatility increased or we entered a rising rate environment, the member mentioned that the Treasury would have to offer higher yield enhancements to maintain a regular issuance program.The discussion then turned to potential demand for new money market instruments. The presenter concluded that new regulations may be creating room for increased bill and callable issuance to fill the emerging gap between Money Market Mutual Funds and issuers. Regarding bonds targeted for individual investors, the member concluded that increasing household ownership of Treasuries has the potential to broaden the investor base significantly.The discussion turned to floating rate securities with short-dated reference rates such as bonds indexed to the 6-month T-bill rate with a semiannual reset. While such instruments would not protect Treasury against increased debt service costs in a rising rate environment, they would reduce rollover risks. CMT-style floaters, which have a reference rate that is generally on a maturity much longer than the reset period, have had mixed success in other countries due to the complexity of pricing.GDP-linked bonds were noted to be an interesting product for which more research needs to be done to assess their potential. A discussion ensued about the possible increased demand for TIPS from separating the final cash flow of TIPS into the unadjusted principal and the inflation accrual components in order to create a “pure inflation” component.
The meeting apparently ended with animal spirits getting the best of those in attendance:
An energetic discussion followed regarding the merits of different debt instruments discussed in the presentation. The committee concluded that this topic deserved further review.
Full minutes may be found here.
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.;.....and on tap is the spanking new 100X derivatives on those bonds invented by Joe Cassano from his hidey hole neer Fleet St.
B of England, ECB, and the FED are all lined up as buyers.
Hahahaha! "GDP-linked bonds," eh? Is that anything like a CDO, perhaps a special class of 'em that gave the economy its current bout of epilepsy?
Maybe Turbo Timmah is looking to inflict his own form of Benocide on the taxpayers.
The fact that they are even discussing such long maturities tells you that this is end game for the dollar. They will herd the pension funds and institutional money into these 'forever' bonds by government edict dressed up as "we need to provide for the public's retirement security." Once the herd is safey ensconced, the run on the dollar will commence in ever increasing intensity and with it, interest rates. Of course, the dollar will collapse and these bonds will be reissued in a new currency unit and tremendously discounted. This is all just another ploy to squeeze the last few drops of liquid wealth out of the public, 97% of whom still trust their government and cannot imagine their government scheming to rob them blind.
If you hold your wealth in paper then you are just a puppet and a stooge of government. For the time being, paper investment is for fools, the ignorant and the trapped. After the end of the Kondratiev winter, when the corrupt paper Ponzi has collapse and all the bad debts and poisonous leverage have been purged from the system, it will be the time to cycle out of hard assets and back into paper. And those hard assets are largely restricted to concentrated wealth physically sequestered beyond the grubby hands of government: gold and silver bullion.
i think its genius, they know interest rates are going up in a big wqay, and ony way to avoid paying such massive interest on renewing bonds that cycle every year is roll em over into low rate 100 year bonds.
now just need some suckers stupid enough to buy, oh yeah USA tax payers and pension fundss.
Anyone surprised?
Next article.
Yes, let us all let it pass, like the turd down the river on it's way to our children and grandchildren.
Yes, we must accept that this is the way of humankind, to shite upon each other, bleed each other out, pass the moldy bread, gulp the clean water and wine, hoard the medicine and protein for the "men".
If this is truly the case than let the killing and mayhem and anarchy commence and dispense with any pretense of civility, rule of law, or morality.
Really now, do you not see where you or your vampire squid line of logic leads the society?
Ach!
Avoid having children is one solution.
Or if you do make sure they have a guaranteed Living in paradise.
I am with you bud, apathy is our greatest enemy.
the Treasury's bitches will buy these; it's called protection money and it protects the supra-State from imminent foreclosure.
like the guy said, we'll take your $$$ and go get screwed
What is sad is even after all this nonsense blows up and all these banksters are exposed as frauds, these same banksters will still be the ones "earning" top dollar in the new scheme, what ever it turns out to be.
100 yr bonds from a nation $15T in debt??? LOLz
100 year bonds, that just takes the cake. When you come up with instruments to fund your govt. that essentially increase the time when you will pay on the full bond, it's buying time. Next there might be the 150 year bond or the 200 year bond etc. etc.. Guess what everybody, we have Hyperinflation but not in the currency (not yet) but in the bond market. I truly feel sorry for the American people when this whole game comes crashing down. The super rich and rich are leaving to Montenegro and other places overseas (with their riches and money) and what are we doing. We are going to be left with a burned out system with bullies fighting for whats left of the American Dream.
fuck im buying a shitload if they have a sweet logo and somebody like NLY leverages em up 10x to make them 50% anual yield guaranteed
You would be required to buy the 100 year as part of your retirement savings.
Exactly. IRA and 401k savings could easily create $2.4T of demand if so demanded.
Optimism reign supreme in DC
Let's hope Meridith Whitney gets her Credit Rating Agency going soon and can rate these 100 Yr Bonds 'SSS'...... Triple Rated Shit
So how does this math out history wise. 1911 to 2011. How does the future look going foward compared to 1911.
GDP-linked bonds? HAHAHAHAHA
GDP is as accurate as CPI Sorry not interested.
sounds great-as long as they give me 100 year credit card, auto and home loans!
Exactly.
Where's my fucking bailout you asshole CONgress creeples?
100 year bond = "I'll gladly pay you Tuesday...of your next life."
We have a debt problem, a speculating upon debt problem, and we are dreaming up new debt instruments?
LOL. "I will have a $1 Trillion Hamburger... for which I will gladly pay you Tuuuueeessday."
Did you know when we were kids ebworthen, that we were learning high finance when we were watching Popeye cartoons?
Yes, we were learning the language of the last debt crisis, when the average man was reduced to practice the foibles, follies, and fibs of the banking class that had caused the collapse to begin with ;-)
"Where is me cans o' spinach!?!?"
Must be time to kick some banker ass methinks...
It is all about durations. Pension funds and insurance companies have very long duration liabilities and they would like to have long duration assets to match against them. 30 year bonds have a around 18 years (sorry don't have B'berg to get the exact number). Pension funds and Ins. co's have much longer duration liabilities. So they will be happy to buy 100 year bonds. It isn't that they have a view that 4 or 5% for 100 years is a great investment, they just need to hedge the liability side of their balancve sheets.
But as a cynic about the wisdom of the Geithner and the gang, I would fade the treasury on this. If they issue fixed rate, yields will be going lower, if they issue indexed, yields are going higher
A key point you make there. In addition: as long as the bonds are rated triple A by S&P, what pension fund manager cares about inflation or true credit risk? He is exonerated even if he buys 250-year bonds. OPM is the name of the game (other people's money = my pension)
Those of you letting out peals of laughter; remember - they don't have to fool everyone, they just have to fool someone.
There will be a tremendous market for US century bonds.
It is, of course, the anti-QE as it reverses duration, but frankly it's probably a smart thing for the treasury to consider.
They can always pass a law requiring that 10% of pensions, IRAs and 401Ks be invested in these bonds in order to keep their tax exempt status.
Bet your ass. Exactement. just keep the faith, and you'll be roadkill. Silver, bitchaez, Silver; now !
Bet your ass. Exactement. just keep the faith, and you'll be roadkill. Silver, bitchaez, Silver; now !
10%..... at first.
Then 20%, 40%, 80%, 100%.... but you'll get a steady income from the safest investments in the world, US Government Debt.
I don't think the guys in the Fed are stupid or uninformed. They projected the funding requirement out for several decades. Who wants or will buy 100 year bonds is a non-issue. The Government needs much more money, and it is the Fed's job to get it.
Exactement, mon cher.
Agreed they are neither stupid nor misinformed. This is just another necessary chapter in the tragic farce.
How does this brilliant idea differ in principle from offering 10-year used car loans?
But pension funds will buy them; maybe they can get Cub Scouts to sell them door-to-door; call them 'Lincolns' and put the Eagle on the reverse side.
Our once-proud country's leadership is embarrassing me on almost a daily basis lately.
The stench rises from D.C.
Sounds to me like they realize they have just about plucked the public chicken clean and now must plunder the US Treasury with fancy new steroid substitutes. Isn't this the same bunch that gave us a multitude of "new financial products" over the past decade. "WE THE PEOPLE" are the greater fools for letting them get away with this.
The financial industry has grown from somewhere around 14% of the economy 30 years ago to now over 40%. Meanwhile, we learn today that manufacturing jobs were the strongest growth category. That would be great all the way around, if only the manufacturing base had not been almost choked to death. It is now a whopping 11% of the economy.
These Wall Street assholes may be slimy, cold-blooded, lying, theiving fuctard traitors, but they are not stupid. If only I could be so stupid as to pocket a few million $/year.
Independent Contractor
I would buy one. If it was non core inflation adjusted, paid 25 percent. seeing that I would never see my money back in my lifetime and holder callable in gold bullion. Now there is a product. Pay up you broke azzz bitchez just like you make the broke azz people do with your payday loans.
Don't laugh,because it sounds insane and it is, doesn't mean that people will not buy it.
Look at Uk War Loan or Consols,the worst investment ever,the UK Govt since WW1 has been devaluing sterling and hence its debt to anyone stupid enough to buy it.
Think the US Treasury can't get away with the same?
http://www.independent.co.uk/arts-entertainment/money-chasing-the-yield-on-war-loan-and-pibs-1139854.html
It would be interesting to see the market reaction; your basic premise is correct, of course.
i'd buy a twenty dollar hundred year bond. I'd will it to my heirs along with an explanation of where we are now in the world so they could understand their past better. They could use it to start a fire to cook the rat they were about to eat.
mmmmmm....rat!
Why not 1000 years... the Millenial Bond? WTF?
With these in his tool-box, the Bernank could cool down inflation in 15 seconds. GUaran-fuckin-teed.
Millenial bonds and perpetuities do exist, but I sure as hell wouldn't trust the US Govt
Dont give tbac too hard a time. Congress expects them to shovel out a whole barnyard of shit with a spoon. They are just trying to invent new shoveling instruments.
WHY?
WHO?
WHY?
WHO?
will buy that crap?
Why invest money for 100 years into somehting unless you're dracula and live forever?
Are they inflation adjusted?
I like your point of view; I always remember the silver in the trunk of your car, but wouldn't it be a good idea to try the decaf?
"WHY? WHO? WHY? WHO? will buy that crap?"
Timmay Jeethner's Uncle Ben, of course...
better yet, where is geithner expecting to find the fools who believe the USD will be around in 100 years....me, i'm giving it another two years, tops.
100 years from now... it's like looking back to 1910 and wonder what's changed since then...
I also think the dollar and the euro won't be arround anymore by then.
looking back to 1910 and wonder what's changed...
Well, let's see, in 1913 the Jekyll Islanders took the title of US citizen and converted the residents into "taxpayers". Then, 50 years later, when JFK tried to supplant the Fed's products with US dollars backed by intrinsically valuable coinage, both he and his currency bit it. Now, 50 years later, the BIS' tools are back at it again looking for another pound of flesh from the US productivity machine.
...if the right products were offered...
By "right products" I believe he means the current and future US citizenry all being offered back up on the slave block for a further selling down the river. Lots of good that little skirmish our fore fathers fought 50 years before Jekyll Island, huh?
We need to export these clowns, their business model and their con federate reserve paper all off shore, 2/3 of them are there already.
Our US mint should start issuing intrinsically valuable coinage instead of collectibles and the treasury department needs to print up notes redeemable in said coinage instead of the interest bearing paper that further enslaves us. imo.
Replaced by what ... the peso, yuan, drachma?