Wall Street Gives Treasury Its Blessing To Launch Floaters; Issues Warning On Student Loan Bubble

Tyler Durden's picture

We previously observed that the US Treasury, under advisement of TBAC Chairman Matt Zames, who currently runs JPM's CIO group in the aftermath of the London #FailWhale and who will become the next JPM CEO after Jamie Dimon decides he has had enough of competing with the Fed over just who it is that run the US capital markets, would soon commence issuing Floating Rate bonds (here and here) as well as the implication that the launch of said product is a green light to get out of Dodge especially if the 1951 Accord is any indication (which as we explained in detail previously was the critical D-Day in which the Fed formerly independent of Treasury control, effectively became a subservient branch of the government, in the process "becoming Independent" according to then president Harry Truman). Sure enough, minutes ago the TBAC just told Tim Geithner they have given their blessing to the launch of Floating Rate Notes. To Wit: "TBAC was unanimous in its support for the introduction of an FRN program as soon as operationally possible. Members felt confident that there would be strong, broad-based demand for the product." Well of course there will be demand - the question is why should Treasury index future cash coupons to inflation when investors are perfectly happy to preserve their capital even if that means collecting 2.5% in exchange for 30 Year paper. What is the reason for this? Why the Fed of course: "Whereas the Fed had, as a matter of practice, reinvested those proceeds in subsequent Treasury auctions, Treasury must now issue that debt to the public to remain cash neutral. For fiscal years 2012-2016, this sums to $667 billion." Slowly but surely, the Fed's intervention in the capital markets is starting to have a structural impact on the US bond market. 

And while this move was not unexpected, what is more curious, is that the TBAC, i.e., Wall Street, has issued its first formal warning on the student debt bubble:

Separately, TBAC expressed concern about what incentives these programs create in the field of higher education. Given that the program is fairly new, in time, more empirical data will help shed light on both the nature of the asset and liability management.

From The Treasury Borrowing Advisory Committee:

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

July 31, 2012

Dear Mr. Secretary:

Since the Committee last met in early May the pace of expansion has downshifted, as real output grew at only a 1.5% rate in the second quarter, following a 2.0% pace of growth in the first quarter. This slowdown has been accompanied by a worrisome deceleration in employment; on average only 75,000 jobs per month were created in the second quarter, after the first quarter’s more respectable 226,000 monthly pace. The sudden slowing has been blamed on several factors. Unseasonably warm weather may have pulled forward activity into the winter months at the expense of the spring and summer. Uncertainty regarding the domestic fiscal outlook and the European debt crisis are likely adversely affecting business attitudes. Finally, a period of pent-up demand in hiring and capital spending may have petered out of its own accord, giving way to more subdued growth. Although economic developments have been disappointing, the weekly and monthly economic reports point to slow growth, but nothing worse. Most forecasters anticipate the economy will continue to expand modestly in the third quarter.

Real consumer spending increased at only a 1.5% pace last quarter, even though real disposable income expanded at a 3.3% rate. Apparently households took advantage of the decline in energy prices to increase saving rates, which had fallen sharply over the course of prior quarters. The softening in the pace of nominal labor income growth may have contributed to the more cautious attitide on the part of consumers. Looking forward, the lagged effect of the decline in gasoline prices could provide some tailwind to consumer spending, and the stabilization of house prices has buttressed household balance sheets, but ultimately an improvement in labor income growth will be necessary for consumers to make a healthy contribution to final demand growth.

The pace of corporate capital spending growth remains solid, but has decelerated from more rapid gains earlier in the expansion. Real business fixed investment outlays increased at a 5.4% annual rate in the second quarter after growing at a 7.5% pace in the first quarter. The deceleration was due to spending on nonresidential structures downshifting from a 12.9% pace to a 0.9% rate – a step-down that may owe in part to swings in the weather. Spending on real equipment and software increased at a 7.2% pace last quarter, a modest acceleration from the 5.4% growth registered the prior quarter. New orders for capital equipment have turned down lately, raising some concerns about whether the solid gains in equipment spending will persist into the second half. Moreover, some surveys of business spending intentions have signalled that the pace of investment outlays may slow some in coming months. Separately, it appears that the shortfall in final demand last quarter may have left businesses with more inventories than anticipated, as real inventories were accumulated at a $66 billion rate last quarter – a rapid pace that will likely slow in the second half as businesses pare unwanted stockpiles.

Homebuilding and related activity remains a bright spot for the economy, as residential investment expanded at a 9.7% pace last quarter and has increased in each of the past five quarters. Home sales generally continue to move forward – albeit unevenly – and surveys indicate improving confidence among realtors and homebuilders. One of the more promising elements in the recent dataflow has been the continued signs of improvement in house price measures. This should, over time, make its way into potential homebuyer expectations for future house price appreciation, thereby further supporting housing demand.

Real government outlays continued to contract in the second quarter, declining at a 1.4% annual rate. Spending at the state and local level fell at a 2.1% pace, the eleventh consecutive down quarter, and outlays at the federal level declined modestly. Over the past year defense outlays have fallen 4.0%, the most since the early 1990s when the end of the Cold War led to large declines in defense spending. Fiscal policy remains a source of uncertainty in the economic outlook, as the “fiscal cliff” comes closer into view. Although concerns surrounding the cliff have increased, action to address this impending fiscal tightening are unlikely to occur until after the November election.

Thus far, the global growth slowdown has spared U.S. exporters, as exports expanded at a 5.3% rate in the second quarter, after increasing at a 4.4% pace the prior quarter. Surveys of manufacturers point to more subdued growth in industrial output in the third quarter, and the external environment is commonly noted as the largest headwind to the factory sector. Even so, the European sovereign debt crisis has not materially tightened credit conditions in the U.S.

After a good start to the year, the labor market has once again become a source of concern. The unemployment rate fell 0.8%-point in the six months ending in March, but has since held relatively steady at 8.2%. The softening in the labor market has also hit nominal labor incomes, and wages and salaries grew at only a 3.4% rate last quarter after expanding at a 7.6% pace in the first quarter. Any pick-up in consumer spending from the anemic second quarter showing will require some firming in the growth of labor income. The jobless claims data have been particularly noisy in recent weeks, and business surveys do not point to any material change in hiring attitudes relative to the current subdued pace.

Consumer price inflation has eased recently, largely due to declining energy prices. The headline PCE price index advanced at only a 0.7% annual rate in the second quarter, down from the 2.5% inflation rate seen in the first quarter. The ex-food and energy core PCE rose at a 1.8% pace in the second quarter, and has been growing at a similar pace over the past year. Core inflation has continued to run close to the Fed’s 2.0% goal. Wage inflation remains subdued and inflation expectations appear well-anchored. Commodity prices may have diverging influences on consumer price inflation in coming months; while industrial commodity prices have moved lower in the wake of the global slowdown, prices for some agricultural commodities have been lifted by drought conditions in the US. On balance, headline inflation should remain modest in the second half of the year.

Since the Committee last met, the FOMC has extended the Maturity Extension Program (Operation Twist) through year-end, and stated that it will take “further action as appropriate” to fulfill its mandate. Since that statement was made at the June meeting, data have continued to print on the soft side, fuelling speculation that the Fed will do something at an upcoming meeting to stimulate growth. At the semi-annual monetary policy testimony before Congress, Chairman Bernanke highlighted communications and asset purchases as the two major tools the Fed could employ if it decides that the speed of the recovery is inadequate for making progress towards full employment.

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 immediate changes to Treasury coupon issuance were necessary. Yet, the evolution of the Fed’s Maturity Extension Programs (MEP) warrants increased issuance to the public sector. We examined this more closely in the second charge.

Separately, the Committee again discussed Treasury’s capability to auction bills at negative yields. The Committee unanimously felt that Treasury should move as quickly as possible towards implementation. We further discussed the prospects for a Floating Rate Note (FRN) program. TBAC was unanimous in its support for the introduction of an FRN program as soon as operationally possible. Members felt confident that there would be strong, broad-based demand for the product. A dialogue ensued about which floating rate index should be used. The Committee gravitated towards referencing treasury general collateral, in lieu of federal funds effective and T-bills. The introduction of GCF futures aided the argument.

The second charge was to examine the impact of the Federal Reserve’s MEP on Treasury’s borrowing needs. The presentation, [attached], highlights how the Federal Reserve’s sales associated with MEP transferred the maturing stock of debt held by the Fed to private investors. Whereas the Fed had, as a matter of practice, reinvested those proceeds in subsequent Treasury auctions, Treasury must now issue that debt to the public to remain cash neutral. For fiscal years 2012-2016, this sums to $667 billion. A discussion followed about the composition of the additional needed issuance. TBAC agreed that maintaining flexibility, given the uncertainty surrounding the fiscal outlook, was critical. Furthermore, the Committee continues to be committed to lengthening the Weighted Average Maturity (WAM) of its debt. Hence, we felt a combination of larger T-bill issuance, FRNs, and a modest increase in coupon issuance was appropriate.

The third charge was a detailed examination of the Department of Education’s federally funded student loan programs. Subsequent to 2010, all federal student loans are now funded by Treasury. The presentation, [attached], attempts to encapsulate the anticipated, growth in size, credit quality, duration, and convexity of these loans.  A discussion ensued about what liability structure Treasury should employ to fund these assets. Separately, TBAC expressed concern about what incentives these programs create in the field of higher education. Given that the program is fairly new, in time, more empirical data will help shed light on both the nature of the asset and liability management.

In the final charge, the Committee considered the composition of marketable financing for the remainder of the July 2012 to September 2012 quarter and the October 2012 to December 2012 quarter. The committee’s recommendations are attached.

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fonzannoon's picture

Nirp here we come.

sickofthepunx's picture

i just got back from launching a floater of my own

BigJim's picture

Have you considered posting it to Timmy?

LawsofPhysics's picture

Right, because there is no real cost for creating capital out of thin air and debt can pay for itself.  FAIL.

All I want to know is when can my company get paid to take out a loan?

AldousHuxley's picture

is your company a bank?


then Fed has free money for you at the window.

MacGruber's picture

This is just another angle of the Fed supporting the extractive process by the bourgeois bankers against the people that work to EARN a wage. They want variable rate loans to "perform" again, the only way to do that is raise rates. Pretty simple math really. The bankers have gotten all they can out of ZIRP, time to get back to the base business of f*cking people with interest.

fonzannoon's picture

Gold down 12 bucks, S&P up 60. Look at the miners! WTF

gjp's picture

Yep, another day advancing the grand fascist plan with military precision.

joemayo's picture

Gold must be smashed so that it can go up later in the day/week and still be unch.

A82EBA's picture

Whoever is selling gold to knock price down, dont they eventually run out of gold to sell? How does that work?

PMakoi's picture

No they will never run out of gold to sell... they have to run out of gold to deliver first.

Manthong's picture

The Chinese are working on that part.. but since when does anything in this market have  a connection with reality.

ParkAveFlasher's picture

My question to the gold market is, couldn't massive amounts of contracts be bought and sold by a price fixing cartel with agreement to never take delivery?  Sort of like the Treasury - Fed bond circuit.

Envision a huge spinning mechanism that controls the altitude of the market as a single mass. 

And, could of all of us be invited to the recreation den of this cartel, bringing the chips and all in good faith, to watch them play pong with each other so we can take bets on who goes up and who goes down? 

"Say, can I play now?"  "NO.  Now get me some soda...Isn't this fun?" 


edifice's picture

They sell paper contracts which represent (in theory) physical gold in vaults. In reality, they can print as much "paper gold" as they want; in the case of silver, this already leveraged 300-400 times what is physically available. This is how they suppress the price of the underlying commodity.

Mad Max's picture

They aren't selling physical, they are selling electronic digits that, in some abstract theoretical sense, are somehow tradable for physical.

Mostly they are doing a favor for anyone smart enough to buy physical and take delivery.  It's musical chairs though - don't be standing when the music stops.

Stuck on Zero's picture

A lot of the gold entering the market now is coming from people like us who are selling their gold jewelry to buy food.


Beam Me Up Scotty's picture

Looks like we will find out later who is right about the FOMC meeting today.  Either gold is going to reverse course, or the S&P is.

Bastiat009's picture

Gold depends entirely on the Fed. The Fed controls gold and doesn't like it.

MillionDollarBoner_'s picture

Business as usual. Nothing to see. Move right along...

SeverinSlade's picture

S&P up 60?  Sheeeet, the Fed must've made an early announcement of QE3.

DeadFred's picture

This article may give the reason. If the Fed is losing control of the bond market they may need to ramp up the fear. No QE candy today for the eagar boys and girls. Pump the AM market then dump after the Fed announcement and get everyone's attention. These new bonds don't come on line for awhile and there can't be bond losses until then. What better way to keep bonds afloat roaring than the MSM in a craze as the S&P drops to the 200dma. Just a theory.

piliage's picture

Of course its rally on. Manufacturing is down 1%, Greece is almost broke, and we are nearing the fiscal cliff. In the world of QE3, these are buy signals. Didn't you get the memo?

q99x2's picture

Just say default.

ghengis86's picture

"Slowly but surely, the Fed's intervention in the capital markets is starting to have a structural impact on the US bond market. "

dafaq did I just read? Starting to have a structural impact?!??! You mean 1.5% 10y and 2.5% 30y would occur with out the FED ("indirectly") buying 60% of the issues ?

Blopper's picture


LawsofPhysics's picture

Growth is dead, we are beyond the limits of current technology.  Fucking deal with it already (default or debt jubilee).  Boring world indeed.  Now where the fuck are those fusion reactors I ordered?  We need them to drive the water condensors we ordered for infinite crop hydration.

Stupid fucking sheep.

LMAOLORI's picture


"indirectly"  NO DIRECTLY

WSJ: Fed Buying 61 Percent of US Debt



As for Student loans they were subprime so obama's new idea is to screw the investor's and let the people file them on bankruptcy rather then going after the banks once again.


Private Student Loans Work Like Subprime Mortgages

Private lenders offered student loans without confirming that recipients could pay them back -- then sold them to investors, thus protecting the lenders against defaults, a government study finds.




Congress Urged by Obama Administration to Include Student Loan Debt in Bankruptcy


otto skorzeny's picture

gas up 50 cents a gallon here to $4 in last 1.5 weeks as we get towards end of "summer driving season"- so much for "energy savings". couple that with food inflation that will pound every consumer in the ass this fall and all green shootz look to be good for a Dow rip.

PMakoi's picture

All of your monies are belong to us


francis_sawyer's picture

How about I just give you all my floaters & we'll call it even?

fuu's picture

Of course they did.

JR's picture

Finally, the summit has been reached. It is the cartel versus the people. And the bottom line is the currency belongs to the banks.

Enforced restriction on the use and withdrawal of cash is the ultimate control.  As G. Edward Griffin wrote, it offers the Cabal yet one more benefit: “There can never be another run on the banks, because it is now illegal to demand currency.”

Safely Stashing Cash in a Near-Zero Rate, High-Risk Environment | Russ Winter | 7/20/2012


Crazy as it seems and taking the ongoing financial repression to new levels, the Treasury Advisory Committee (a group of Wall Street bankster types) has been toying with the idea of creating a scam to have savers also pay negative interest rates to the U.S. Treasury for the “privilege” of loaning them money (New York Times: Treasury Ponders Negative Interest Rates). All it would take to set this travesty up would be for the Fed to reduce the interest paid on reserve deposit to zero (just like the ECB), and the last little vestiges of yield paid by banks and money markets would completely disappear. Aunt Millie and her ilk might face paying her bank for the mere privilege of loaning money as well.

Outlandish, you ask? You’ve been forewarned. Even before adding this risk to zero rates, money-market mutual-fund assets were in gradual draw-down mode. …

Money-market fund withdrawals should be limited in the event of a “run,” according to a report by the FRBNY “strongly” endorsed by bank president Bill Dudley. The authors suggest a “minimum balance at risk” that would not be available for withdraw for 30 days, forcing depositors to think twice about where to place funds.

The criminality, the bending of rules, the zero and negative interest rates paid to hold insolvent sovereign debt and the questionable standing of banks all beg the question: Why shouldn’t holders of money collectively withdraw hundreds of billions out of the banking system and just store it in a custodian bank vault? There may be some sign this is happening already at the margin. Currency has increased $39.5 billion to a total of $1.113.1 trillion in circulation since year end, or 7 percent annually. …

Stashing it in your home might cost you both your money and your life.


XitSam's picture

Isn't the Federal Reserve Note (FRN) already a Floating Rate Note?

Totentänzerlied's picture

Actually a Sinking Rate Note

AmeliaV's picture

Oh my God,, when will they finally find a fair solution for student loans? Do they know how hard it is to pay it off, I bet they don't know and will never know. All they know is terrifying numbers. Have they ever experienced turning to instant pay day loans lender ? I doubt that. Obama should finally decide how to influence student loans program