The $700 Billion Carry Trade
Bloomberg reports: There might be a gem in the Treasury's plan to buy $700 billion of dubious mortgage-related assets.
Call it the biggest carry trade in history. It might just put as much as $60 billion a year in the government's coffers.
All of the discussion of risk has focused on whether the government eventually could sell the assets it buys from financial institutions for more than they cost. In other words, whether the government -- and therefore taxpayers -- would incur a loss or a gain.
``I am very uneasy with the proposal to spend a trillion dollars to buy illiquid assets, toxic securities from large financial institutions, and have the taxpayers pay for that,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, said on Sept. 23.
The government will get the $700 billion by selling a range of Treasury securities to the public with yields of 3 percent to 4 percent. With investors around the world clamoring to buy risk-free Treasuries, the market should be able to absorb the jump in supply without a significant increase in yields.
Contrast that with likely yields on the troubled assets for which there currently is no market. No one can be sure how big a haircut there will be on the assets Treasury buys, though if it's 50 percent or more, their yields should be 10 percent or higher.
That is, the government will be borrowing at 3 percent to 4 percent to buy assets yielding 10 percent or even 12 percent. Conservatively, that spread on an investment of $700 billion should generate income of $40 billion to $60 billion annually.
Full Story: bloomberg.com
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