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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (46)	2/11/2000 2:48:00 AM
From: John Pitera	Read Replies (1) \| Respond to of 33421

The adoption of the 10 year as the benchmark to price other debt, whether corporate, municipal,government agency, emerging market, etc will require a period of time to iron out any idiosyncrasies of the new pricing mechanism. It may increase the volatility of other debt instruments, since the shorter-end of the curve is statistically more volatile over time. There are some tougher questions for users of the 30 yr . Such as insurance companies that have long-term actuarial pricing and hedging needs. And have long-dated payments to make that need to be hedged or offset, as rates fluctuate. We'll have to see how this and other issues are worked out. There are certainly some institutional positions that are short the 30 year debt, and long the 5 or 10 year notes, and these folks obviously want the curve to revert the slope of the curve back to a rising one. Looking longer term, The treasury by moving the refunding of debt to shorter-term maturities, will probably have the exact opposite impact on the economy, than what JM Keynes advocated. When the recession comes, and tax receipts go down. the treasury will exacerbate an interest rate rise because they will be refunding more frequently and refunding on a shorter part of the yield curve. Keynes wanted the govt. to expand government spending during recessions , and reduce it during booms, so he would not object to paying down debt. He would object to reducing the funding period of the existing debt as it should cause a bigger crunch when the Govt starts generating bigger deficits in an economic downturn. One further thought, it is a deflationary development for the US to pay down it's debt; as it reduces the monetary aggregates, and money in the system. When the money supply expands, there is the money multiplier affect where the new money that the Fed Creates (Monetizes) then moves through the economy and "multiplies" as it is turned over. by reducing the money in the system, this creates a negative multiplier effect,and with less money to chase the same pool of goods, prices go down. This will be a contributory factor to the next Recession, at least as history will see it, imo. JP