"Supercommittee That Runs America" Urges End To The "Zero Bound", Demands Issuance Of Negative Yield Bonds

Tyler Durden's picture




 

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.

Not only that, but beginning in just 4 short months, the Treasury may launch a brand new product: a Floating Rate Bond. From the TBAC:

The second charge was to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.

 

A discussion then ensued over whether 3 month Treasury bills or Fed Funds Effective was the more appropriate floating rate index. In conjunction with fixed-rate issuance, FRNs give Treasury an attractive alternative to increase the average maturity of its debt. While more analysis on the specifics of the program must be done, the Committee was unanimously in favor of Treasury issuing FRNs.

As a reminder, this is what Treasury's Mary Miller said earlier:

Treasury continues to study the possibility of issuing Floating Rate Notes (FRNs).  The Treasury Borrowing Advisory Committee suggested in its February 2012 charge that FRNs could complement Treasury’s current suite of products.

 

Treasury recognizes that FRNs may provide a number of benefits to government finance, and plans to announce a decision regarding whether or not to introduce an FRN product at the May 2012 Quarterly Refunding.

Ealier we were kidding about that PIMCO gold fund. Now that we look at tit, it may not have been a joke...

 

From the just released TBAC letter:

Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

2/2/2012

January 31, 2012

Dear Mr. Secretary:
Since the Committee last met in early November, economic activity has continued to expand, and real GDP increased at a 2.8% annual rate in the fourth quarter, the fastest pace of growth in over a year. The acceleration in activity last quarter was supported by a rebound in stockbuilding, as businesses returned to building up inventories following the more cautious attitude displayed in the third quarter. Inventories added 1.9%-points to last quarter’s gain in output, following a third quarter in which stockbuilding subtracted 1.4%-points from growth. The lift from replenishing lean stocks helped support manufacturing production, which expanded at a 3.9% annual rate in the fourth quarter.

With inventories now better aligned with final sales, the support to industry from a positive turn in the inventory cycle will likely diminish. In addition, slowing global growth may exert a damping effect on US factory output. Despite these headwinds, early manufacturing surveys for January suggest the factory sector is faring well early in the year. Automaker production schedules indicate that this key sector should continue to expand in the current quarter.

Real consumer spending increased at a 2.0% annual rate last quarter. Spending growth was particularly strong for consumer durables; a normalization of auto and truck inventories after the Tohoku earthquake supported vigorous growth in light vehicle sales, which climbed to a 13.6 million annual pace of sales by year-end. Modest but steady gains in labor income are providing support to consumers. Employment has increased by 137,000 jobs per month on average in the fourth quarter, and the average work week increased last quarter after declining in the third quarter. Consumer spending was also supported by a decline in retail gasoline prices, undoing some of the drag on purchasing power witnessed earlier in 2011. Even so, the holiday shopping season was a modest disappointment. One possible explanation is that households are seeking to bring saving rates back up, after lowering saving earlier in the year to smooth consumption growth in the face of the hit from higher energy prices. So far, indicators regarding consumer spending in early 2012 are mixed.

After growing vigorously for much of the expansion, real business fixed investment spending cooled off to a 1.7% pace of growth last quarter. Real outlays for equipment and software expanded at a trend-like 5.2% annual rate. Meanwhile, business spending for structures surprisingly declined at a 7.2% rate. Spending on mining-related structures fell off sharply, as lower natural gas prices have reduced the economic feasibility of capital spending in this area. Residential investment, however, expanded at a 10.9% pace. While housing indicators generally remain mixed, there have been some encouraging signs recently, particularly a jump in homebuilder sentiment. Mortgage rates have recently fallen to new all-time lows, providing an important support to housing demand.

Declines in real government spending continue to drag on overall economic growth. Real government outlays declined at a 4.6% annual rate last quarter. The decline was exaggerated by a big drop in the volatile defense spending category. While this decline may be partly reversed in coming quarters, real defense outlays are generally set to trend lower. Real outlays by state and local governments declined at a 2.7% rate, the 13th decline in the last 16 quarters. Late last year, policymakers extended expiring payroll tax and unemployment benefit provisions. Those programs are now extended through late February, and most analysts expect they will be extended through year-end.

Real exports expanded at a 4.7% pace, the same as in the third quarter. However, growth in foreign markets has slowed decisively, from Europe to large Emerging Market countries including China and Brazil, and this slowdown should be expected to restrain export growth before long. While the trade spillovers from slower European growth are likely to have a negative effect on the US economy, sentiment regarding financial spillovers has improved recently, as aggressive actions by the ECB to provide liquidity to the banking system has helped to stabilize the sovereign debt crisis.

Inflation has moderated in recent months, largely due to a decline in energy prices. In the three months ending in December, the PCE price deflator increased at only a 0.1% annual rate. Outside of food and energy, core consumer prices increases have also been modest as the core PCE deflator increased at a 1.4% annual rate in the past 3 months and 1.8% over year ago. The easing in commodity prices has taken some pressure off of core goods prices, and the normalization of vehicle inventories has allowed vehicle prices to cool off after surging earlier in 2011. Even though the unemployment rate fell by a half percentage point last quarter, wage inflation remains subdued: average hourly earnings are up only 2.1% on a year-ago basis. Contained labor costs should continue to limit the pace of consumer price inflation.

Monetary policy has remained active. At the January FOMC meeting, the Federal Reserve unveiled new Committee forecasts for the path and timing of interest rates. Moreover, the FOMC statement pushed back the guidance on the time for the first rate hike, from mid-2013 to late 2014 at the earliest. The revised guidance has further served to keep interest rates quite low. For now, it would appear the Fed has exhausted their options for easing policy through communications. The prospects for further asset purchases remain in flux. Committee members have publicly expressed differing views on the desirability of such action. But, importantly, Chairman Bernanke’s comments in the Q and A following his recent press conference lowered the bar considerably for further Fed asset purchases.

Against this economic backdrop, the Committee’s first charge was to examine what adjustments to debt issuance, if any, Treasury should make in consideration of its financing needs.  The Committee did not feel that any changes to Treasury coupon issuance were necessary at this time.

There was a lengthy discussion regarding the bid-to-cover ratios at recent Treasury bill auctions. It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical. 

The second charge was to explore the viability of Treasury issuing floating rate notes (FRNs). In particular, the presentation [attached] assessed potential client demand, optimal maturity, reference index, and reset frequency. The structural decline in the stock of global high-quality government bonds, coupled with an increase in demand for non-volatile liquid assets, should make U.S. government issued FRNs extremely attractive. Pricing for a hypothetical two year FRN was estimated to be in the arena of 3 month Treasury bills plus 8 basis points.

A discussion then ensued over whether 3 month Treasury bills or Fed Funds Effective was the more appropriate floating rate index. In conjunction with fixed-rate issuance, FRNs give Treasury an attractive alternative to increase the average maturity of its debt. While more analysis on the specifics of the program must be done, the Committee was unanimously in favor of Treasury issuing FRNs.

In the final charge, the Committee considered the composition of marketable financing for the remainder of the January 2012 to March 2012 quarter and the April 2012 to June 2012 quarter. The committee’s recommendations are attached.

Respectfully,

 

____________________________________
Matthew E. Zames [JP Morgan]
Chairman

 

____________________________________
Ashok Varadhan [Goldman Sachs]
Vice Chairman

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Wed, 02/01/2012 - 10:43 | 2116145 youngman
youngman's picture

and people will buy them............I need to start drinking again

Wed, 02/01/2012 - 10:47 | 2116162 Chuck Bone
Chuck Bone's picture

In Soviet America, government debt earns interest from you!

Wed, 02/01/2012 - 10:48 | 2116172 gmrpeabody
gmrpeabody's picture

Surely, Tyler, you jest.

Wed, 02/01/2012 - 10:53 | 2116197 johnQpublic
johnQpublic's picture

on a long enuf time line ,everyones savings drops below zero

Wed, 02/01/2012 - 11:37 | 2116381 Comay Mierda
Comay Mierda's picture

commence market melt up to record highs

Wed, 02/01/2012 - 11:49 | 2116419 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

USA!  USA!!  USA!!!

Wed, 02/01/2012 - 13:11 | 2116758 trav7777
trav7777's picture

People wonder why Gross is pissed?  How's he going to explain this shit to his rentier class customers?  Not only do they have to pay HIM but now they have to pay someone ELSE too?  And all to LOSE net worth?

Grab something real that can't be taxed.

Wed, 02/01/2012 - 13:31 | 2116844 zaphod
zaphod's picture

Just wait till Gross decides to move his $1.3T into Bitcoins!

Wed, 02/01/2012 - 16:09 | 2117542 SWRichmond
SWRichmond's picture

I recall reading about a forced-inflation currency scheme where the currency was date-coded and, on each successive date, actually reduced in value by a specidifed amount.  ALL inflation schemes essentially seek the same outcome: stimulate the economy by turning money into a hot potato.  They all resultin the same thing: the complete destruction of savings, and of anyone who relies on savings, for example the financially prudent.  This is why hard-working and self-reliant people everywhere despise central banking.

Wed, 02/01/2012 - 22:06 | 2118642 TheGoodDoctor
TheGoodDoctor's picture

@SWRichmond. I think people would shit a brick (riot in the streets) before they let that happen. I was thinking about your post. And wouldn't a black market form with the old money that wasn't dated? Either that or there would be a strictly barter economy.

Wed, 02/01/2012 - 13:56 | 2116944 Bananamerican
Bananamerican's picture

what haunts me is the idea that there is a "final solution' for gold (legal sanctions?) already in place, to go along with a neg interest rate program (i almost wrote pogrom)...in which case any holders are going to have to simply ride out the storm, waiting for gold's monetary utility to re-emerge on the other side...

Wed, 02/15/2012 - 04:57 | 2160904 jonytk
jonytk's picture

At last, the rich paying taxes

LOLOLOL

Wed, 02/15/2012 - 04:57 | 2160905 jonytk
jonytk's picture

At last, the rich paying taxes

LOLOLOL

Wed, 02/01/2012 - 13:21 | 2116809 prains
prains's picture

USA!  USA!!  USA!!!      backwards is the new forwards

Wed, 02/01/2012 - 13:44 | 2116900 smlbizman
smlbizman's picture

heree wee go gool-old here we go (clap-clap)...heree wee go gool-old here we go(clap-clap) ...heree wee go gool-old here we go.. (clap-clap)......

Wed, 02/01/2012 - 10:55 | 2116201 Buckaroo Banzai
Buckaroo Banzai's picture

OF COURSE we will be required to pay money to hold cash. It is the logical extension of the policy that has been in force since 1913: (1) punish savers and (2) reward debtors, and those that traffic in debt.

OUR ENTIRE MONETARY SYSTEM IS BUILT ON DEBT. Savers are anathema to this system and must be crushed. How can it be any other way?

Sow the wind, and reap the whirlwind.

Wed, 02/01/2012 - 10:57 | 2116215 johnQpublic
johnQpublic's picture

monetary policy by yogi bera

 

investing always beats savings and vice versa

Wed, 02/01/2012 - 11:25 | 2116331 Captain Kink
Captain Kink's picture

FRNs and Federal Reserve Notes--same thing.

FRN = FRN = TP

Wed, 02/01/2012 - 11:16 | 2116290 sushi
sushi's picture

Pay the coupon in Hopium.

 

Americans love that stuff.

Wed, 02/01/2012 - 11:51 | 2116429 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Everyone in stocks!  C'mon!  All at once, everyone in!  You're missing the rally!  Best October, January, what if it's the best Spring ever, and you miss it?  Don't want to miss it!  Don't miss it! 

Wed, 02/01/2012 - 12:47 | 2116668 LouisDega
LouisDega's picture

Yes, But the volume. The volume. That mudda fucking volume. Whats a volume?

Wed, 02/01/2012 - 13:06 | 2116739 CrazyCooter
CrazyCooter's picture

I can't hear what you are saying.

Regards,

Cooter

Wed, 02/01/2012 - 12:15 | 2116539 DaveyJones
DaveyJones's picture

you meant pee in the wind

Wed, 02/01/2012 - 21:17 | 2118532 Buck Johnson
Buck Johnson's picture

We are getting close to end game right now.  By going this route, they are out of options.

Wed, 02/01/2012 - 10:53 | 2116195 Roy Bush
Roy Bush's picture

So let me get this straight....you can buy US Treasuries at a loss or you can just hold cash and make nothing... Hmmmm.  I don't get it.

Wed, 02/01/2012 - 11:03 | 2116241 Axenolith
Axenolith's picture

If you're holding cash you're losing value to inflation.  You've got to spend it on "Things" and "Stuff" to hold value.  At this point in time, "Things" should be gold, silver, and lead and "Stuff" should be food, TP and liquor...

Wed, 02/01/2012 - 11:28 | 2116349 Captain Kink
Captain Kink's picture

Except I hold my negative rate bond for 3 years, get $95 for my $100, and the $95 has been further eroded by 3 years of inflation!

Thu, 02/02/2012 - 11:21 | 2119874 connda
connda's picture

Whaddayamean!  The CBO says that essentially there is next to no inflation.  That's their story and their stickn' with it.

 

Wed, 02/01/2012 - 14:50 | 2117162 Citxmech
Citxmech's picture

So let me get this straight - are we now essentially paying GS and JPM to gamble at a rigged casino using our credit card while they get to make all the  side bets they want?

Is that basically what this means?

Thu, 02/02/2012 - 14:59 | 2120800 SomethingWicked
SomethingWicked's picture

Well, we're also paying for their mixed drinks and hookers / lobbyists.  You can't run a casino without that.

Wed, 02/01/2012 - 11:04 | 2116247 unununium
unununium's picture

-% bonds = Kryptonite

floating treasuries = finally a treasury I could love.  But at what price after GS and JPM gobble them all up?

Wed, 04/11/2012 - 08:50 | 2334077 Overflow-admin
Overflow-admin's picture

html tag bug, comment removed...

Wed, 02/01/2012 - 11:15 | 2116249 tarsubil
tarsubil's picture

It makes perfect sense really. Everyone that holds treasuries pays the government instead of the government paying them. Budget be balanced, biznitchez.

The debts are done miahnn.

Wed, 02/01/2012 - 11:17 | 2116293 bbq on whitehou...
bbq on whitehouse lawn's picture

There is not enough cash on the planet for holders of US debt to buy.  Its also about convenience and its price.

So yes pay they will just as Japan found out. If you have small enough savings you can keep it outside the bank, maybe.

Wed, 02/01/2012 - 11:29 | 2116352 Instant Wealth
Instant Wealth's picture

The 11th Commandment:

 

"Thou shalt wander through the shopping mall and spend thy shillings on all the wonderful goods thither"

Wed, 02/01/2012 - 12:55 | 2116686 Stares straight...
Stares straight ahead's picture

deleted

Wed, 02/01/2012 - 14:05 | 2116985 Clycntct
Clycntct's picture

"I don't get it."

Ahhh now you get it.

Wed, 02/01/2012 - 11:03 | 2116239 tarsubil
tarsubil's picture

You think this is bad. Greece is now asking people to take a 150% haircut.

Wed, 02/01/2012 - 11:18 | 2116295 hedgeless_horseman
hedgeless_horseman's picture

 

 

flag as very funny (1)

Wed, 02/01/2012 - 11:19 | 2116309 fonestar
fonestar's picture

150% haircut implies half of their frontal lobes are chopped off as well.....

Wed, 02/01/2012 - 11:38 | 2116386 Kobe Beef
Kobe Beef's picture

They lost their frontal lobes when they became bankers. I'd say we're working on lopping off Sensory/Motor cortex by now.

Wed, 02/01/2012 - 13:10 | 2116750 CrazyCooter
CrazyCooter's picture

Best comment in the whole thread!

Regards,

Cooter

Wed, 02/01/2012 - 11:18 | 2116299 fonestar
fonestar's picture

Negative rates?  Sure, why not... paperbugs love losing money!

Wed, 02/01/2012 - 13:23 | 2116819 vato poco
vato poco's picture

Don't see what the big deal is. All the history books tell us that JFK was pure & shining & beloved by the whole country. The Morgan/Goldman cabal is just taking his diktat to a higher level, is all. "Ask what you can do for your country!"

Well, here's our answer.

Wed, 02/01/2012 - 10:47 | 2116166 chubbar
chubbar's picture

OT, but here is the easy to read transcript from Obama's eligibility hearing in Georgia. If you will read pages 13-15 you'll see some pretty interesting information on his SS# and past names. Christ, hard to believe this isn't covered at all in the MSM, obviously they are paid off.

http://www.orlytaitzesq.com/wp-content/uploads/2012/01/Farrar-transcript.pdf

Wed, 02/01/2012 - 11:01 | 2116227 Hmm...
Hmm...'s picture

Borrrrrrriiiiiiinnnnnnngggggggg!

I heard he's a space alien who eats little Christian children and shits out communists who then invade america forcing straight people to have gay sex... and then abort their gay sex progeny.

You would think this is impossible, but not with O, an avowed muslim.

Wed, 02/01/2012 - 11:13 | 2116267 francis_sawyer
francis_sawyer's picture

Really???

Gee, I thought he was just a community organizer who sucked at being TOTUS & bombed other countries using explosive devices embedded in Nobel Peace prize medals in his spare time or when the greens & fairways were being aerated...

Wed, 02/01/2012 - 11:17 | 2116292 Manthong
Manthong's picture

Yeah, boring alright..

Just reconcile yourself to who exactly is sending that third aircraft carrier through the Suez.

Wed, 02/01/2012 - 11:28 | 2116336 Hmm...
Hmm...'s picture

Dude, I hate Obama with a passion.  He is the Trojan Horse President who can neuter the left and deliver a neoconservative corporatist agenda to our BigCorp masters.  He can do what no Republican President could ever dream of.  Which is why he will win his second term.  Which is why the Republicans put up such buffoons.  Only they could possibly lose to Obama.

We don't need to invent stupid reasons to get Obama out of office.  And these birther arguments are just about as stupid as my above argument

as for who sends the Aircraft carriers to the Suez canal... do any of you think it would be different with ANY other President?  The answer is no.

Of course I'll get a lot of "Ron Paul wouldn't do it!" 

and that's exactly why he will never be president, much like anybody else who stands up against BigCorp. 
Ron Paul has as much a chance of the Presidency as my candidates Bernie Sanders or Denis Kucinich.  for exactly the same reasons.

so now that we know that Ron Paul, Denis Kucinich, and Bernie Sanders will never be President, who are we left with? yeah... people who suck.

Wed, 02/01/2012 - 11:50 | 2116418 francis_sawyer
francis_sawyer's picture

do any of you think it would be different with ANY other President? The answer is no.

Completely "non sequitur" follow up...

Folks (you know, the citizens of the DIEBOLD States of America), voted for this chump because he made a boatload of promises which he went in exactly the opposite direction on...

It's not fair to bring Ron paul into the argument (until or unless he gets voted in & has the opportunity to live up to his words or prove that he's FOS)... All Obama has proven is the latter (in spades ~ no pun intended)...

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