Worried about Interest Rates? WHY?
Not only did the U.S. Treasury just sell $29 Billion worth of four-week bills at par (i.e., they got $29 Billion for them, and will return $29 Billion on 29 December), but the bid to cover ratio was over 5:1 (pdf link; had $154B in bids for $29B in securities).
This is down 0.06% from last week’s auction (pdf again).
Ken,
I have been hearing not to worry for ast least 3-4 more months. I caveot this with I heard the same thing last year (and the year before). Its always going up in 2,3,4,6 months…
Good for me since I’m planning a home remodel and need to replace the roof. Even looking at solar panels if the ROI is 5 years or less…
Islam will change
Poor Clinton, he based his economic legacy on the story that he cooked up with Rubin that his tax hike cut the deficit which was the cause of falling interest rates and strong economic performance. But now both Bush and Obama have interest rates lower then Clinton with high deficits. So where does that leave Clinton? It seems to me he was some guy that liked sex who happened to be president during a nice time with the economy — which gave him time to chase his interns around in the dish room.
Ken, are you completely obvlivious of seasonal demand for U.S. T-bills?
Look back at constant maturity T-bill yields from November – February. You will notice something. I wonder why corporations (particularly banks) would have a higher demand for T-bills that start in December and then mature in January (note there is something special about December 31).
http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_M3.txt
I might add the 2/10 spread is 270 basis points and the 10/30 spread is 99 basis points. By historical standards these are huge.
Ken, is your money where your mouth is? Are you long the 10 year and short the 2 year?
And also don’t forget the the Treasury is reducing the amount of T-bills outstanding. So $32 billion in 4-week T-bills come due on the 10th and that cash has to go somewhere. There is only $29 billion to roll over into.
Jay,
Out of morbid curiosity, I thought I’d test your seasonality claim. The test I ran is whether or not a month has a negative effect on yield. It looks like it holds up pretty well for October, and sorta well for Nov/Dec, while not at all for the rest of the year. This matches up with the story that companies buy 3-month treasuries to expire right at the new year. Good call.
Here’s the ugly regression, if you care:
Model 1: OLS, using observations 82/01/04-09/12/08 (T = 6984)
Missing or incomplete observations dropped: 303
Dependent variable: TCMNOMM3
coefficient std. error t-ratio p-value
——————————————————–
const 5.19949 0.114891 45.26 0.0000 ***
Feb 0.0588599 0.165271 0.3561 0.7217
Mar 0.0956302 0.159673 0.5989 0.5493
Apr -0.0526074 0.161780 -0.3252 0.7451
May 0.0155923 0.161033 0.09683 0.9229
Jun 0.0191890 0.160570 0.1195 0.9049
Jul -0.0443908 0.161033 -0.2757 0.7828
Aug -0.0430566 0.159238 -0.2704 0.7869
Sep -0.256856 0.162623 -1.579 0.1143
Oct -0.336333 0.161033 -2.089 0.0368 **
Nov -0.314832 0.164407 -1.915 0.0555 *
Dec -0.314319 0.162127 -1.939 0.0526 *
Mean dependent var 5.103465 S.D. dependent var 2.747472
Sum squared resid 52549.11 S.E. of regression 2.745390
R-squared 0.003088 Adjusted R-squared 0.001515
F(11, 6972) 1.963324 P-value(F) 0.027862
Log-likelihood -16957.16 Akaike criterion 33938.33
Schwarz criterion 34020.54 Hannan-Quinn 33966.66
Buff: If you get the loan by February you will also benefit from the wealth redistribution going on because of the Fed buying Agency MBS. Stealing from renters (a minority in this democracy) and giving to home “owners” (the majority in this democracy).
If I am borrowing on a four week schedule, it is not the interest rates that bother, it is the short tem account management I need, oppossed by my standard laziness.
Ken,
The IMF doesn’t share your “don’t worry” thinking, citing the possibility that rates may increase 2 percent by 2014-15.
As of September 30, 2009, total U.S. Government debt was recorded as $11,909,829,000 of which Marketables were reported as $7,009,733,000. Marketables represented 58.86% of total debt.
Treasury states that it issued approximately $6.7 trillion in securities in 2008. If I’m reading the second reference correctly, Treasury issued $8.85 trillion in securities as of 30 September 2009.
I don’t know what the net issuance was for the year. Does anyone have that info?
http://treasurydirect.gov/instit/auctfund/work/work.htm
http://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_0909.pdf
MG: Neither do Treasury markets, as I have mentioned several times regarding the steepness of the yield curve. Doing a back of the envelope bootstrapping the 2yr/1yr FRA (i.e. what the 1 yr. T-bill breakeven will be 2 years from now) is around 2% (the 1 y. T-bill is currently at 0.27%). The 2yr/3yr FRA is around 3% and the 2yr/8yr FRA is around 4%.
I can atleast respect Keynes, because he put his money where his mouth was. I doubt any of you are betting against these FRA’s or even betting against the yen/dollar falling to about ¥70 10-years from now.
The present rate on a one month bill is almost 0——0.01 to be exact. You think if that goes up disaster will follow? Pleeeeeeze. Use your head. Interest rates are negative in real terms. I sure wouldn’t spend sleepless night over the interest rate on Treasuries unless I was, well, daft.
You can calculate a flow by taking ending balance minus beginning balance from the monthly reports found here.
http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm
Margery: You’ve never heard of the maturity matching principle before, have you? In short, your debt should mature over the same time horizon as the asset you are acquiring. Most of today’s government spending is on long-term assets, which means you should issue long-term debt. The 0% yield on T-bills is an illusion created by the Fed + as noted above temporary seasonal patterns. The rate is irrelevant, because we will be rolling it over at higher interest rates. The meaningful figure is what is the long-term CAGR of the debt we started to accumulate recently. Geithner is atleast smart enough to try and issue as much 10-year notes as 3.4% as possible to minimize the long-term costs of the government’s spending binge. While poliitcians that are up for reelection would prefer overloading on T-bills, even if it means a repeat of Metallgeschaft.
Cantab,
Yeah, because what Presidents are remembered for are the interest rates on their watch, not economic performance. Woohoo, GW, bestest president evah!
Note also that corporate tax payments are about to reduce the need for short bills. That helps explain the decline in issuance.
The point about the curve is correct. In fact, the coupon curve is pretty close to a record, if not at a record. Even so, nominal ten-year Treasury yields are at 3.46%, historically quite low and just 1.34% above the post-Lehman low. When short rates are at zero, you can have a very steep curve and very low long rates. The point of the post was that rates are low (so why worry?), and that point is quite true.
Treasury sells $13 bln in bonds today, so we may see further steepening.
Jay,
For those who face the possibility of a liquidity or credit problem, maturity matching is good practice. The US government has not, since the early days of the Republic, actually faced those problems. The Treasury is extending the maturity of its outstanding debt, in recognition of the long-term increase in debt outstanding. That is mostly a housekeeping issue. You don’t have to pay off maturing debt and reissue as often – at some expense – if you have a longer average maturity.
Treasury is mostly in the business of meeting the demands of its creditors – lots of accounts need bills, as evidenced by the very low rates on bills, so Treasury sells bills. Lots of accounts need tens, so there are lots of tens. Maturity matching is, rightly, a minor issue.
Yeah I remember hearing similar soothing noises from a different “rose colored glasses” crowd about housing prices and “equity cushions” back in 2006.
Just because markets price something pleasantly on a given day doesn’t mean they always will. Unusual pricing should *always* be viewed with great suspicion.
Catcus,
President Clinton’s supporters claimed his tax hikes lowered the deficits which drove down interest rates which was the key to the strong economy. but according to their own evaluation criteria Bush and Obama with have better interest rate numbers.
You specialize in making spurious implicit arguments that don’t hold up under examination. That’s your problem and anyone that takes your charts or book seriously.
OK, I’m going to go over this again, for the students who weren’t listening the first many times.
There are three factors that have strong influence over nominal interest rates across the economy (Various forms of ideosyncratic risk can have a large influence for individual borrowers.) Those factors are, in order of importance —
1) The Inflation Rate
2) The Rate of Growth in Output
3) Debt and Defiicts
Because inflation and growth have a greater influence than the debt and deficit, it is possible to for the first two to mask the influence of the third. So, while poorer students may draw the conclusion that debt and deficits don’t matter, that is a fundamental misreading of the situation. A look at the current situation would find that growth has been very slack – with the result that total credit use in the US economy fell by 0.8% in Q2 and again in Q3. It would also find that inflation is low and that most analysts expect it to stay low for some time. That is easily sufficient to overcome the influence of the debt and deficit in the near term.
There is another issue to consider, though I offer it just to be facetious. Given the comment to which I am responding, facetiousness seems in order. When it comes to debt and deficit issues, expectations matter. If the general expectation among creditors to the Treasury is that the deficit will be brought down reasonably quickly, upward pressure on interest rates in the near term would be minimal. So, if we are just going to play the game of making the facts fit our own bias, I will assume that a Treasury in the hands of Democrats is seen as highly responsible, allowing large deficits to be run without much upward pressure on rates.
This is year-end window dressing by the big money guys to show US Treasury assets at EOY.
Kharris,
If you want to try to teaching something on an economic variable that is the result of an equilibrium condition a nice place to start would be with some sort of supply demand analysis. Maybe if you had done that you would not have left fed policy and its influence on money supply from your list.
“Note also that corporate tax payments are about to reduce the need for short bills. That helps explain the decline in issuance.”
Approximately $3 trillion in U.S. government debt held by the public will need to be rolled over in the next 12 months. Any reasonable increase in corporate tax payments won’t put in a dent in that figure.
“The point of the post was that rates are low (so why worry?), and that point is quite true.”
Two things, the main argument was that a single auction of $30 billion (less than 3% of the total debt oustanding) had strong demand. I’ll bet everything that I own that there will not be another 4-week T-bill auction between January and November 2010 that garners a bid-to-cover ratio over 5. This is an anomoly not a trend. It is a meaningless number. Secondly, short-term interest rates are low. So what? We won’t be paying off the debt anytime soon so what is important is the interest rates that we will have to roll over the mountain of debt at. Below I provide examples of FRAs. If you look at swaptions you realize that there is a fat tail developing expecting higher rates. So that is great that was can borrow for a year at 0.29% if we roll that over for 10 more years at 4.5%, we have a CAGR of 4.1%. That 0.29% proved pretty meaningless.
I’m looking at the interest rate as if I’m a chess player looking 3 moves ahead. You and Ken, the same person that in a prior post proved he didn’t even know that tranches in an RMBS allow investors to take on different prepayment risk yet was still brazen enough to claim that tranches were a worthless financial innovation, are the donkeys that can barely see one move ahead in a game of chess.