just in in-tray
player 1: I think it could get interesting with this part if they can not find buyers for the debt. I expect a big difference in outcome between selling the debt or printing to buy the debt. Hyperinflation lurks while I am in reasonable shape for 30 to 100% annual inflation 100% daily inflation would have me living without comforts which is a personal concern. They are busy trying to collect more taxes with health care reform and cap & trade but it seems they are not fully commited to that because it seems they are letting a lot of the new collections get diverted to the politically connected. I have also not seen any commitment to reducing government cost beyond attacks on Medicare and talk of an attack on Social Security which is expected because the politically connected care less about Medicare and Social Security compared to other things.
The US budget and debt is my primary concern as I think the way the US handles it's budget is key to how we need to be positioned. While I can see Hyperinflation as a big concern I can also see us getting through this in a 70s devalue - inflate fashion IF the government can bring the budget into long term balance. If the debt was transfered to the Fed balance sheet they would be free to raise the interest rate to any level they wanted because the Fed interest come back treasury as income after Fed expenses so I think the common idea they can never raise the interest rate without defaulting because the interest payments would be higher than tax receipts is not correct. A high interest rate would be a big help if we were able to repeat the 70s devalue - inflate solution and it seems to me the politically connected would like devalue - inflate over hyperinflation if the politically connected are capable of thinking it through. I see no hope of the elected thinking it through and acting for the good of the country without the consent of the politically connected which is the best reason I know of for owning gold.
Although the US federal budget deficit may have peaked in F2009 (both in dollar terms and as a percentage of GDP), Treasury coupon issuance will continue to be pushed higher. This reflects an attempt to gradually boost the average maturity of the Treasury debt outstanding from its current level of about 4 years up to 6-7 years. Such a swing would take the average maturity from a historically low level at present to a level that is historically quite high. Thus, not only is gross coupon issuance poised for another sharp jump in F2010, but the average maturity of the issuance will have to move higher if the Treasury is to move toward a 6-7-year average maturity for the outstanding debt.
In short, we expect upcoming auctions to tilt steadily toward longer maturities, much as has occurred in the most recent announcements. The shift from 20-year to 30-year TIPS also supported efforts to boost maturities. The trend to longer maturities is likely to continue through mid-2010. Beyond that point, we suspect that short-dated issuance (2s and 3s) may be reduced while longer-dated supply remains elevated.
Why does the Treasury want to lengthen the duration of its debt? Treasury bill issuance soared in recent years and the average maturity fell, as is typical when there is a sharp and sudden spike in the borrowing need. The Treasury now wants to rein in the bill supply and begin to normalize the maturity profile. Why is it planning to go beyond historical norms? Treasury officials appear to want to create a cushion of borrowing capability at the front end of the curve in case there is a sudden need for short-term funding. Also, even though the Treasury's public position is that it is not an opportunistic borrower - i.e., it doesn't try to time the market - it appears advantageous to attempt to lock in low long-term borrowing costs at present.
player 2: The US Treasury has no chance....
The last 30-year auction was not well received and quite messy.
The real buyers at the moment are foreign governments and banks.
If the US Dollar continues to strengthen, then the foreign governments become a diminished buyer.
Banks are big buyers, as they incur no risk, can leverage up, and it is safe.
However, almost no bankers that I know of are going to borrow 30 days to lend 30 years.
So banks will buy comfortably with a 2-year duration and out to around 5 years maturity.
But hardly anyone wants to buy anything on the longer end, save some pension funds who need the longer duration, but they're likely to buy high-grade corporate instead.
Lousy risk-return.
So who is left to buy longer dated paper? Very few, I would think.
So if the Treasury wants to raise the amounts offered on the long end, go ahead.
But I think they'll be disappointed in the reception.
This is one point where I disagree with Paul Tudor Jones' and his argumentation for a flatter yield curve.
The Fed is going to be at near-zero for a long time, and when the Fed quits buying mortgage paper at the end of March, along with a near buyers strike from investors, along with alleged significantly increased supply tells me that the yield curve will remain very steep and perhaps go much steeper (300+ bp on the 2's-10's curve) that most anyone expects.
This is why I'm comfortable owning stocks such as Annaly Mortgage. Bought it last November at $11.00 and has paid me $3.04 in dividends by the end of January..... Their earnings and dividends are very highly correlated with the steepness of the yield curve.
Feel free to pile on and tell me where I am wrong.
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