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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: isopatch who wrote (3520)	11/1/2001 4:57:19 PM
From: Roebear	Respond to of 36161

isopatch, Most excellent post on the bonds, the plot thickens and it was a most unusual move. BTW, unless he acts by midnight (watch out for 11pm I guess), UBL or OBL is missing a chance to go down in numerological history, today being 110101, seeing how he liked all those 11's on 9-11. Usama/Osama, whatever, I just wish he'd go down for the real numbers, like for the final count AND history. Roebear

To: isopatch who wrote (3520)	11/2/2001 10:10:03 AM
From: kingfisher	Read Replies (1) \| Respond to of 36161

Are Homeowners Smarter Than the U.S. Treasury?: David DeRosa By David DeRosa New Canaan, Connecticut, Nov. 2 (Bloomberg) -- I don't think I'm alone in wondering what the U.S. Treasury was thinking when it decided to suspend auctions of 30-year Treasury bonds. Wednesday's announcement by Treasury Undersecretary Peter Fisher left traders flabbergasted, if not outraged. The announcement itself was clumsy, setting off a squeeze in the 30-year bond that pushed up its price by 5 3/32. That is a huge move for the long-bond. Fortunes were made and lost right there and then. Isn't the Treasury supposed to be looking to avoid exactly that sort of thing? Whatever happened to the Treasury being a calming, stabilizing influence on markets? More importantly, Fisher's rationale for ditching the 30-year bond is highly questionable. Fisher said: ``The 30-year bond no longer maintains a position of significance in the financial markets. Activity and attention have shifted to our 10-year offerings.'' To some extent, that may be true. The focus of other governments' bond markets is their 10-year bond. Still, the American Treasury bond market is unique because it offers a liquid term structure from one week to three decades. That, by itself, makes the U.S. financial market a desirable habitat. Phantom Savings Fisher's other justification is also questionable. He said, ``Our decision to suspend 30-year borrowing at this time will have saved the taxpayers money.'' His boss, Treasury Secretary Paul O'Neill, was brimming over with admiration. ``It shows Peter Fisher at his best, using analysis for the American people,'' he said. What analysis? What savings? It'll be decades before we know whether Fisher saved us any money. At this moment, all we know is what the current yields are for 10-year and 30-year bonds. The two are not directly comparable in the context of understanding the cost of long-term financing. Following Wednesday's announcement, the yield to maturity on the 30-year 5 3/8 percent February 2031 bond fell to 4.88 percent. The yield on the 10-year 5 percent August 2011 bond was about 60 basis points less. But that doesn't mean Fisher saves any money by issuing the 10-year instead of the 30-year bond. Locking in Costs If the Treasury sells a 30-year bond it locks in its borrowing cost for three decades. Alternatively, selling a 10-year bond locks in the cost for only one decade. When 10 years pass, a new 10-year bond must be issued. Ten years later, a third 10-year bond will have to be issued. As nobody knows what 10-year bonds will yield in 10 and 20 years time, it will be 20 years before we know whether Fisher's punt saved taxpayer money. This brings up the question: How long can bond yields stay this low? I don't know anyone with a home mortgage who hasn't already refinanced, or isn't thinking about refinancing, to get today's bargain-basement interest rates. Six months ago conforming 30-year mortgages were going for 6.81 percent interest. Today they are priced at 6.19 percent. This is almost surreal to those of us old enough to remember the double- digit mortgage interest rates of the 1980s. It strikes me that, at a yield of 4.88 percent, the Treasury ought to be thinking of the 30-year bond as its preferred vehicle. Obviously it depends on one's view of future interest rates. Historically Low Rates The rate might fall even lower from here. But we do know that the 30-year yield is, by all historical comparisons, at a very low level. It would be interesting to ask Fisher for his view on interest rates. What we do know is his view on the economy's prospects. Yesterday, Fisher said the government's ``fiscal position will improve'' after a ``temporary setback.'' The only way for the government's fiscal position to improve is for tax collections to increase. That means personal income and corporate profits will rise after Fisher's ``temporary setback.'' This is the official view the administration has been selling. Things will get better in a few quarters. Doesn't that mean the Administration and Fisher are calling the top of the bond market in terms of price, or the bottom in terms of yield? Now, where did I put that mortgage refinance company's phone number?