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T-bills GOOD, T-bones B-A-A-A-DDD!


machinehead

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Deputy Assistant Secretary Timothy Bitsberger, in an Oct. 2, 2003 presentation document (pdf - 29 pages) makes some rather surprising assertions, which amount to "T-bills good; T-bonds BAD."

 

Page 11 of 29 shows that the average maturity of all Treasury debt is around 57 months. However, the maturity of recent issuance (the past four quarters) is only 26 months. So the Treasury, like everyone else, is borrowing at the short end to take advantage of those low, low 1% rates from Uncle Al.

 

But then Bitsberger goes on to make some rather radical assertions. On Page 16 of 29, he says that "long maturities are more expensive on average." This claim is buttressed with a chart which shows that since 1980, ten-year notes have been more expensive (by a couple of hundred basis points, on average) than 1-year bills rolled ten times.

 

Well, GUESS WHAT, Timmy? That was a period when rates were steadily falling. But if you look at the earlier portion of the chart from 1954 to 1979 -- when rates were steadily rising -- 10-year notes were, by contrast, about 100 basis points CHEAPER than 1-year bills rolled ten times. Why? Because the 10-year notes locked in [relatively] low rates in a climate of secular rising rates.

 

As conclusions (Page 29 of 29), Bitsberger urges:

 

- Weight issuance toward shorter maturities

 

- Bonds do not meet our criteria: expensive, inflexible, unnecessary

 

Well, isn't this just grand? Timmy & Co. have issued a portfolio where over 40% of their massive debt comes due within 12 months (an insanely reckless borrowing policy, as any corporate treasurer would tell you). They are massively exposed to rising short-term rates.

 

Just months after the lowest long-term yields in 40 years were touched in June 2003 -- when homeowners and corpses were refinancing like crazy -- the Treasury airily announces that "bonds do not meet our criteria." Like a beggar informing you, in response to your offer of a fiver, "Sorry, I only take twenties."

 

MH's translation: Taxpayers be damned; it's not our money. And inflation will be low forever. Rising rates -- What, ME WORRY???

 

http://www.ustreas.gov/press/releases/repo...resentation.pdf

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ya know what struck me straight away...

 

"Percentage Breakdown of Nonfinancial Credit Market Debt"

 

Treasuries = declining thru 02

Muni's = slight uptick as fed's raid state treasuries

Corporates = boom!

Consumer Credit = insane

Other = ? other what ?

Home Mortgages = Ka chingo as momo would say

 

debt created outside the "Classic Banking System" has been allowed to bloom under the guise of 13 rate cuts.

 

timmy, you moron, these rates have NO WHERE TO GO BUT UP.

 

brilliant assertions. borrow short, lend long, party like it's 1999.

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i've come to the conclusion the 30 year will be back with a vengance.

 

and perhaps some newer kinkier paper too boot.

 

75 year mogage's anyone?

 

if we ran our cash flow like this nutjob, we'd be outta biz in a quarter or two.

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Thanks for the link MH. I just put together a compilation of posts in regards to "this mess" and e-mailed it to relatives. A little MH, a little Hyper, a little Jrmfl, a little Yobob, etc... I wonder what they are going to think? :blink: :lol:

i'll plead insanity in advance and avoid civil & crimnal charges, if that fails.

 

i'll plead the fifth.

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In a financial crisis, some countries have found that t-bill s could not be issued at any price. In those circumstances, which usually occurred in third world countries with a balance of payments crisis, the t-bill auction was cancelled and new money was essentially printed up to pay domestic bills.

Not a good outcome.

 

Don't see why things would be any different here, with the Fed taking the role of money printer by buying unwanted new Treasury issues. This is why I still see inflation in our future even in the middle of any potential recession/depression.

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Because my personality is mostly honesty and anger, I have a tendency to distill things down to thier essence. You think the short term borrowing is ACCIDENTAL???? Or simple stupidity? T-Bond prices set the curve for Mortgage bonds, set the curve for Corporate Debt. So lets look at what Greenie and Bushie have done:

Reduced supply of T-Bonds.

What, oh what, would this do?

Increase the price of T-Bonds.

What, oh what, does that mean?

Decrease the yield of T-Bonds.

What, oh what, does that do?

Lower the yields on mortgage and Corporate debt.

 

It was intentional. Of course, once doubt in the US Financial System arises, this will go off like a nuclear bomb. But it did what it was supposed to do.

PRESERVE LOW RATES IN THE MORTGAGE AND CORPORATE DEBT MARKET

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Because my personality is mostly honesty and anger, I have a tendency to distill things down to thier essence. You think the short term borrowing is ACCIDENTAL???? Or simple stupidity? T-Bond prices set the curve for Mortgage bonds, set the curve for Corporate Debt. So lets look at what Greenie and Bushie have done:

Reduced supply of T-Bonds.

What, oh what, would this do?

Increase the price of T-Bonds.

What, oh what, does that mean?

Decrease the yield of T-Bonds.

What, oh what, does that do?

Lower the yields on mortgage and Corporate debt.

 

It was intentional. Of course, once doubt in the US Financial System arises, this will go off like a nuclear bomb. But it did what it was supposed to do.

PRESERVE LOW RATES IN THE MORTGAGE AND CORPORATE DEBT MARKET

sustaining the unsustainable at all costs is not rationale.

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Thanks for the link MH. I just put together a compilation of posts in regards to "this mess" and e-mailed it to relatives. A little MH, a little Hyper, a little Jrmfl, a little Yobob, etc... I wonder what they are going to think? :blink: :lol:

Dear God, what have you done. If this kind of information gets out into the public eye it could cause a a stampede. Of course they will be stampeding in a circle given the dichotomy of your list of posters. I plead insanity caused by a fifth.

 

While long term rates are likely to a little frisky for a while, I still think longer term we have lower rates ahead for the longer issues. Unfortunately for the powers to be the ability of said rates to provide any stimulus has been fully used up. I think the "flight to safety" reaction will still apply for a while. When that fails we can all kiss our respective asses good bye.

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While long term rates are likely to a little frisky for a while, I still think longer term we have lower rates ahead for the longer issues.

What if long Treasury rates really are headed for a two-handle, as you've said in the past?

 

It would still be prudent for a large borrower to ensure that only a limited portion of its bonds have to be rolled over every year. This provides predictable costs, and limits the scope of any funding crisis.

 

But also, it gives the authorities an incentive to keep inflation and long term rates low.

 

The Federal Reserve believes (apparently with reason) that it can control yields at the short end of the curve. Is the new ABAT (All Bills, All the Time) policy a declaration that they would let long bond yields soar into double digits, if necessary, while they hold the Fed funds at 1% "indefinitely" for the borrowing convenience of the Treasury, the banksters, and the leveraged speculating community?

 

I would call that a gold bug's wet dream. Silver, too!

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