Thursday, February 2, 2012

Negative interest coming? What was the about a downgrade? Debt ceiling?


(Reuters) - The U.S. government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.
In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.
Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.
Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.
"It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible," according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.
Read the rest at Reuters
Treasury may let investors pay to lend to U.S. government
by Glenn Somerville and Mark Felsenthal


38 comments:

Matt Franko said...

It's like a tax of sorts, it will reduce interest income even further....It will be interesting to see what the Fed thinks of this.

Back when they lowered the policy rate to near zero, they were adamant about keeping it positive, even slightly positive, to maintain the function of the Fed Funds market...

I dont think the Fed is going to get behind this idea.

Resp,

Matt Franko said...

PS This may be the last straw that pushes Santelli over the edge finally... ;)

Anonymous said...

Well, that's one way to reduce a deficit. But it seems like a bad development, representing a net drain of dollar assets from the economy. It seems deflationary.

But I'm also very puzzled about what this means from the dealer's POV. The demand for negative interest bills would have to mean that bank fees for simply holding deposits are higher than the losses that come from buying negative interest bills, right?

Broll The American said...

Is this all in efforts to discourage institutions from saving and push into lending and investing? Seems like more evidence to support the lack of aggregate demand argument and continues to dispute supply-side. The parties with all the money just don't know what to do with it anymore... for shame.

I wish someone would with any influence would suggest Warren's $150bn payment to the states combined with the payroll tax suspension. Seems like that would more likely give the economy the nudge it needs rather than this.

Matt Franko said...

Dan,

I think this is somehow being driven by the Dealers, tho I dont see their angle yet. I believe the TBAC is dominated by Dealer types.

Rates have been effectively negative out to six months for some time as the Dealer spreads (last I looked in WSJ) were about $700 for every 1 million $ issued. With the Dealers taking this commission, the end non-govt sector buyer of the bonds have been receiving negative interest out to the 6 month point last I checked.

Hey who knows, maybe a bunch of people sold bond options at the zero bound thinking that was as low as they could go, the banks have noticed this in the open interest, so now the Banks are going in to try to rob the option sellers by changing the rules to allow negative rates; that or perhaps bankrupt the CME as the banks probably hate the CME... hard to say at this point.

I expect a lot of chatter to begin on this issue...

Hey if Bill Gross didnt like a less than steep curve he will absolutely HATE this idea. This could actually kill a PIMCO imo.

Resp,

Matt Franko said...

Hey Anon,

It's a DEALER market.

You have no choice in the matter.

Anonymous said...

Matt, we will see what comes of this stupid idea before we worry about the dealers. The dealers currently get free money to be held at the NY FED, or they buy 10s and collect the loot in either case. The FED bought 80% of all paper in 2009, and I believe we will see them do this again in the future. We are simply the prettiest horse in a glue factory.

Matt Franko said...

Or without USTs being able to go negative, the interest rate hedging market may be drying up, so they need the govt to break the zero bound... and get IR futures and options volume back up....

Anonymous said...

Matt, I posted a link on bank's assets to derivatives exposure a few days ago. Those derivatives are mostly in the form of interest rate swaps. Good luck to the banks who also happen to be Primary Dealers. They are dead men walking until it blows up, and it will blow up in their faces. Couldn't happen to a nicer bunch of crooks, or as they prefer, men doing God's work.

Matt Franko said...

Anon,

Primary Dealers are part of the consolidated govt sector (public-private partnerships).

All they do is intermediate an accounting transaction between the Treasury and the Fed based on lawful Congressional appropriations.

Once the treasury then makes withdrawals from the TGA at the Fed to pay for govt sector provision by the non-govt sector, THEN the dealers sell the USTs to the non-govt sector to put in the non-govt sector's securities account at the Fed in order to maintain a specific monetary (ie interest rate) policy.

Dealers are waaaaaaay overpaid to do this simple intermediation.

Resp,

Anonymous said...

Since we are in such a celebratory mood, let me mention the BDI which just took out the 2008 low of 663.

Next, on the day this goes into effect, negative interest rates, I want to be in hard assets because I don't want to die in a stampede. This is like a state raising it's income tax and then expecting receipts to grow. WRONG! People vote with their feet. They will do the very same with this toilet paper currently known as Treasury Paper.

Anonymous said...

I think what we can expect from this is more election-year posturing from the administration trumpeting the decrease in the deficit that comes from negative rate borrowing. It looks like the deficit hawks are still in charge at the Treasury.

But they are actually shooting themselves in the foot by moving in the direction of surplus and draining dollars from the economy in this way.

Anonymous said...

Mike, you sound like Little Timmy promising no downgrade. How did that work out again? I know your thinking is linear, but try and jump a few spaces to see what is coming down the road. We seem to be financing everybody including the EU, and in due time this truth will see the light of day which will be a very bad day for America. 662 on the BDI. LOL!

Anonymous said...

Dan, this will never happen. See my post regarding hard assets and negative Treasury Paper. These idiots at the FED actually believe people will line up for this chit? LOL! I know Matt says the PDs have to buy it, and he's right, but they will be the only ones holding this crap because people will do what is in their own best interest and walk, no make that run, to hard assets. They are shooting themselves in their own feet.

Anonymous said...

Anon, it's not the Fed, it's the Treasury.

And they claim that the reason for holding negative interest auctions is that there is a market demand for them. People apparently want the security of treasuries, and are willing to pay a premium for it.

But if people do run to hard assets, isn't that a good thing? Part of the problem is excess demand for liquidity and security, isn't it?

Matt Franko said...

Anon,

Look for the Fed to weigh in for some of your reasons perhaps....

If the Fed had to position it's balance sheet with negative yielding assets I dont think they (Fed) would like it at all....

Anonymous said...
This comment has been removed by the author.
Anonymous said...

OK, on further reflection, I'm hypothesizing that something like the following is going on:

The dealers are willing to do this because they expect the Fed to vacuum up all the T-bills. So they pay $10,250 for a bill that matures at $10,000. But then the Fed buys the bill from them for, let’s say, $10,300. The dealer still makes $50, and Treasury has a liability of only $10,000 in exchange for the $10,250 in cash assets it received.

So the net effect is $300 in net financial assets created by the Fed, with $250 credited to the Treasury and $50 to the private sector.

If that’s what’s going on, then I think I like it, in principle. The phony aspect of the “debt” that Treasury owes to the Fed tends to be used by fiscal hawks to bamboozle the public, even though it is insignificant. If the Fed and Treasury can accomplish the same functional effect without increasing the nominal deficit, and with private sector dealers getting a smaller cut, then that looks good to me. It moves us closer to a system of direct central bank crediting of Treasury accounts in order to expand deficits.

However, if the whole operation accomplishes nothing but a “paying down” of the debt, with no expansion of net financial assets, it won’t be worth anything.

Anonymous said...

Dan, yes it's the Treasury, but we both know they are joined at the hip. People generally do what is in their own best interest. I believe this would indeed push people into hard assets and out of paper assets. Even the roll of Treasury Paper providing the return of assets as opposed to a return on assets has it's limits when people are told they can expect something less than 100% of their principal back in the future. There are many investment choices that are available when I'm feeling like a one legged man in an arse kicking contest per those wonderful pieces of toilet paper called Treasury Paper. Shiny things are pretty!

Tom Hickey said...

or perhaps bankrupt the CME as the banks probably hate the CME

Right, Wall Street has been after LaSalle Street for some time on the principal that whatever hurts LaSalle St is good for Wall Street business. There is even some (loose) talk that Corzine was a Wall Street set up to take down CME.

Bad blood there.

Anonymous said...

Dan, in my last post roll = role. My bad.

Matt Franko said...

Tom,

wrt the MFG/Corzine thing, the WSJ was out this week claiming the customer funds "vaporized".... i kid you not:

http://online.wsj.com/article/SB10001424052970203920204577191014034430488.html?mod=rss_US_News&utm_medium=twitter&utm_source=REMAXSINGH

We know that funds (ie balances) do not "vaporize" this is bullshit...

Anonymous said...

Tom, I think MF Global was an excuse because so many folks lined up to actually take delivery. Celante was doing this very thing by expecting to take delivery of his gold until the money went missing. We know JP Morgue is short orders of magnitudes above physical available. I guess they figured let's blow it up and throw so much chit at the wall that we confuse everyone enough that the real reason for the company's collapse is nowhere to be found. Can't be proven, but it makes as much sense as it was vaporized. Vaporized to where exactly?

Tom Hickey said...

Could also be euro flight into the dollar. The Treasury is apparently anticipating some really big bucks flowing into USD and the only place to put that kind of money seeking safety is US tsys.

Negative interest on tsys would indicate excessive demand for existing supply. The deficit needs to be larger to supply the increased demand for tsys, or the Fed could sell some of the tsys it accumulated through QE.

ON the other hand, it could be that someone is listening to Krugman. He has been saying that the burgeoning trade deficit is the problem since it exacerbates saving in US dollars making full employment impossible to achieve unless the US can break China's peg or else make it expensive to save in US dollars, thereby discouraging trade deficits with the US. So this could be floating the idea of negative interest rate monetary policy.

See, for instance, Krugman, The Return of Secular Stagnation

Anonymous said...

Matt, vaporized = let them eat cake! The rule of law no longer exists for the aristocracy. They are playing with fire as Celeante says, "when a man loses everything, and he has nothing left to lose, he loses it". God forbid those transfer payments stop because we will get the real deal in a NY minute.

Tom Hickey said...

If the Fed and Treasury can accomplish the same functional effect without increasing the nominal deficit,

I don' t think that this is legally possible. As I understand it, US tsys are only sold to offset a deficit, so the stock of tsys is limited. The Treasury is not permitted to just issue tsys as far as I know. There is no way to issue tsys and not increase the public debt, and that is fiscal, under the control of Congress.

Tom Hickey said...

I was talking to a friend (bond trader) who lost some $ in the MF Global fiasco, and he was telling me that the word he has gotten is that they know where the funds went but are not saying until this is settled. He speculates that a great deal of the money was in the hands of the banks, specifically JPM, and they are not letting it go, even though they are not first in line. So this is going to involve a big fight between La Salle St and Wall Street, since CME is not going to just roll over for Jamie Dimon.

Anonymous said...

Tom, what would happen if the treasury faced a $1 trillion dollar deficit in the current fiscal year, raised $1 trillion via bonds sales at negative interest, e.g. it sold bonds that mature at $950 billion but sold them at the premium price of $1 trillion. After it redeems the bonds, other things being equal, hasn't the total debt decreased by $50 billion dollars?

Anonymous said...

When looking at current rates against anything representing reality on inflation we are already at negative rates although J6P doesn't know this because the CPI is so loaded with bovine excrement as to be almost worthless. They still believe they are receiving a positive rate of return because it's stated that way to the sheeple. When Treasury comes out with negative rate paper on it's face, I don't think people will be lining up for this product because it's not hiding the theft.

Anonymous said...

Excuse me for going off-topic, but I have a new post up at New Economic Perspectives:

http://www.neweconomicperspectives.org/2012/02/doing-what-needs-to-be-done-facing.html#disqus_thread

Tom Hickey said...

Dan, I am not sure how the debt increase is computed for fiscal purposes, face value of the security (value at redemption), or the amount of reserves that the Treasury receives from the auction (discount). I think of it as the number that Treasury "owes," i.e., what is returned at maturity. But I confess ignorance of the details.

Anonymous said...

I don't know either Tom.

Matt Franko said...

Dan,

Else equal, I believe you are correct.

The way I look at it, Treasury TGA/TTL accounts would have deposits of $1T at issue and withdrawals of $950B at redemption.... vice an alternative scenario.

Deficit would as normal, "fall where it may"...

Resp,

dave said...

is this the interest that is supposedly going to cripple the nation and burden our grandkids? lions and tigers and bears, oh my! where are the low-life asshole politicians who stay in office touting the bs doomsday debt crisis now? why isnt this on the front page of every paper, the way the "dreaded" debt and deficit are? are the current crop of moron politicians the best this country can come up with? liars, cheats and thieves the whole lot of them.

Anonymous said...

Im not into investing at all, just studying MMT.

So I have a very noob question:

Why would anyone want to own a Tsy with Neg yields rather than holding cash?

Arent you loosing money holding the Tsy rather than just sitting on the cash?

Matt Franko said...

Dave: Concur!!!

Anon,

Hard to tell at this point... stay with it here we will be following this issue (neg interest USTs) going forward... this is "uncharted waters" to an extent...

Resp,

beowulf said...

Dan, I am not sure how the debt increase is computed for fiscal purposes, face value of the security ....

Yup. Public debt is face amount of guaranteed principal due at maturity.
(b) The face amount of obligations issued under this chapter and the face amount of obligations whose principal and interest are guaranteed by the United States Government (except guaranteed obligations held by the Secretary of the Treasury) may not be more than...
http://us-code.vlex.com/vid/sec-public-debt-limit-19220756

The obvious question is, why doesn't Tsy put this whole debt ceiling messiness behind it by issuing perpetual Consol bonds?
There's be no face amount of guaranteed principal to increase public debt.

I've said it before but its still true; if this crew were running the govt during World War II, our number one export industry today would be Japanese Army comfort women.

Matt Franko said...

Beo,

I dont think we have ever had worse people in govt in this regard in the history of the country... they are the worst ever...

Resp,