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Long Bond Reintroduction
- Thread starter drsteph
- Start date
The U.S. Treasury announced plans to discontinue use of the 30-year Treasury Bond in October of 2001. At that time, the move made sense for several reasons (some obvious, some not).
During the low interest rate environment, the government should have been focused on arranging as much long term financing as possible.
However, how many investors would have been willing to lock themselves in for 30 years at those rates? It's hard to tell, but it could have been much more than you might think considering the level of global uncertainty.
What also happened during that time? The housing market helped to keep the economy going when things could have been much worse. Many people refinanced their homes, and these interest savings added extra money to the budgets of American families. Furthermore, new home construction provided many good jobs for American workers.
The thing that people may not realize is that low interest rates and easy credit do not go hand in hand. What is the mortgage market? Essentially it is a 30-year bond. Therefore, the demand for fixed income found its way to the housing market. The government provided the low interest rates, but investors who had no other good alternatives supplied the money.
Therefore, the government was actually able to help stimulate the economy by discontinuing the 30-year Treasury Bond.
Now what has happened?
The Chinese have been pressured to revalue (float) their currency. This means that it no longer makes sense for the Chinese government to buy our treasury securities.
They were able to support our debt even at the lowest of interest rates simply because their currency was pegged to the dollar. Not to mention they had a substantial trade surplus. However, the Chinese will now expose themselves to much more risk if they decide to hold massive dollar reserves. Therefore, the time has come to find an alternative source of financing for our budget deficits.
The "conundrum" is not a problem, but a signal. It signals demand. It signals that investors are not so willing to invest in the mortgage market anymore. It signals that the aging Baby Boom generation is becoming more conservative and is searching for fixed income investments.
The U.S. Treasury is now continuing use of the 30-year Treasury Bond. At this time, the move makes sense for several reasons (some obvious, some not).
During the low interest rate environment, the government should have been focused on arranging as much long term financing as possible.
However, how many investors would have been willing to lock themselves in for 30 years at those rates? It's hard to tell, but it could have been much more than you might think considering the level of global uncertainty.
What also happened during that time? The housing market helped to keep the economy going when things could have been much worse. Many people refinanced their homes, and these interest savings added extra money to the budgets of American families. Furthermore, new home construction provided many good jobs for American workers.
The thing that people may not realize is that low interest rates and easy credit do not go hand in hand. What is the mortgage market? Essentially it is a 30-year bond. Therefore, the demand for fixed income found its way to the housing market. The government provided the low interest rates, but investors who had no other good alternatives supplied the money.
Therefore, the government was actually able to help stimulate the economy by discontinuing the 30-year Treasury Bond.
Now what has happened?
The Chinese have been pressured to revalue (float) their currency. This means that it no longer makes sense for the Chinese government to buy our treasury securities.
They were able to support our debt even at the lowest of interest rates simply because their currency was pegged to the dollar. Not to mention they had a substantial trade surplus. However, the Chinese will now expose themselves to much more risk if they decide to hold massive dollar reserves. Therefore, the time has come to find an alternative source of financing for our budget deficits.
The "conundrum" is not a problem, but a signal. It signals demand. It signals that investors are not so willing to invest in the mortgage market anymore. It signals that the aging Baby Boom generation is becoming more conservative and is searching for fixed income investments.
The U.S. Treasury is now continuing use of the 30-year Treasury Bond. At this time, the move makes sense for several reasons (some obvious, some not).
Quote from AFterburner:
The "conundrum" is not a problem, but a signal. It signals demand. It signals that investors are not so willing to invest in the mortgage market anymore. It signals that the aging Baby Boom generation is becoming more conservative and is searching for fixed income investments.
Yes, you also are right.
BTW your analysis was well-considered.
Quote from drsteph:
BTW your analysis was well-considered.
Thanks.
The Fed has been raising interest rates in an attempt to stop inflation. However, these inflationary pressures are not due to low interest rates; they are a product of our weak dollar.
From my report dated February 23, 2005:
The true effects of a weak dollar are delayed in appearance because they are only calculated on currency conversions.
If the American economy were not so dependent on foreign producers and consumers, our currency fluctuations would be largely inconsequential. However, we are heavily dependent on international commerce, and our country is a net importer of goods. Each international trade is subject to a currency conversion. While American exporters have been taking advantage of this favorable rate of exchange, foreign importers have been at a disadvantage. Foreign economies are heavily dependent on American trade, and they have been absorbing these inefficiencies and selling at a relative loss in order to remain competitive. However, they have recently been forced to start raising the prices for our imports. At this point, the true crisis in the dollar will become painfully evident. America must adopt a strong dollar policy; it is vital to our long-term economic health. America has been entranced by the mirage of a weak dollar, however, a net importer cannot possibly benefit from currency devaluation over the long term. Unfortunately, the average American family does not release a quarterly earnings report. While American corporations have been experiencing profits on exports, American citizens have been experiencing losses on imports. We must act now to avert a potential inflation crisis.