Friday, May 6, 2011

Why are There Legal Limits on US Bond Purchases?

If the US Government is so concerned about being able to supposedly "borrow money" through the process of selling US Treasury securities, then why would the government limit purchases of these securities in any way?

I didn't know this but I was looking into some things this morning and found this link at the Treasury Direct website, excerpt:
"you can invest in electronic savings bonds (also referred to as book–entry savings bonds) each calendar year by purchasing as much as:

$5,000 in Series EE Bonds (Ed.: Whaaaaaaat?), and
$5,000 in I Series Bonds."
They changed a law in 2008 that lowered the limit you can purchase of US Savings Bonds to just $5K PER YEAR? Huh? What is going on here?

Regular marketable US Treasury securities also have a limit, but it is $5M per auction. This is certainly a lot for an individual, but for a non-financial corporation that is sitting on 100s of millions if not $billions of retained earnings, this could create a problem.

How could you think you have a "funding problem" and then at the same time implement these ridiculously small purchase limits for bond buyers?

Corporate welfare for the banks and Primary Dealers? What else could it be?

6 comments:

Mike Norman said...

Good post, Matt. Sometimes you wonder who is coming up with these ridiciulous rules.

Tom Hickey said...

Corporate welfare for the banks and Primary Dealers? What else could it be?

Yep. FIRE doesn't like government competition. They want to skim the rent.

Crake said...

My guess:

Aren’t these auctions like Dutch auctions, where you go down the competitive bids until you have enough to satisfy the offering, than the lowest bid of that cut-off is the rate everyone gets?

Actually this could signal that demand is down. I think these auctions operate like a Dutch auction and non-competitive bids are guaranteed placement. So, since an offering is finite, the higher the amount of non-competitive bids, the lower the amount of competitive bids that can get bonds and if prices are set in a Dutch auction style, that means the less competitive bids that are needed to fill the whole amount, the lower the rate. So do the Treasury need to impose these limits on non-competitive to keep the interest by competitive institutions? In other words, would more and more institutions walk away without the limits of the crowding out non-competitive bids?

TomatoBasil said...

I started buying $25/wk of the EE bonds when I was in high school twenty years ago. This continued until 2009 when the interest rates got so low it no longer was worth doing. I figured when I retired they would at least guarantee me a way to buy groceries if all my other savings went away. But at a 1% yield, the current bonds won't ever be worth enough to buy groceries each week. Savings bonds used to pay a higher non market interest rate than marketable treasuries and were intended to help people save money. Without the limits, a few of the very rich were buying the nearly all the bonds sold and the interest rate subsidy wasn't being used for the intended purpose.

Mario said...

is this a smoking gun proving that bonds don't "fund" our spending? China doesn't fund us!

Calgacus said...

Following up TomatoBasil's comments, and playing the devil's advocate, the limits can be understood to make sense, although 5000 is very low. There is not much reason for the government issuing bonds at all except when there is full employment, as their macroeconomic function is mainly to reduce investment spending. The only sensible reason for savings bonds then is redistributive - a vehicle with higher interest rates, and as TomatoBasil notes, that is no longer really true.

Savings bonds/ war bonds differ more from Treasuries and currency than the latter two differ from each other.
Because they are non-transferable and non-collateralizable, they are less "moneyish" than tbonds or currency. So especially with a high interest carrot, they can have the deflationary, consumption deferring, savings increasing, effect that the mainstream fantasizes that ordinary bonds do. See Lerner's Economics of Control, where he notes that bond sales can both inflate and deflate, so the mainstream's deflationary effect will likely be "not very large" while War bonds were an exception to this rule. And so were useful for the white-hot wartime economy.