A new paper by several Harvard economists, including former Treasury Secretary Larry Summers, argues that a little more than a third of the impact of the Fed’s asset purchase programmes was “offset” by the Treasury’s decision to lengthen the maturity of its outstanding bonds:
US 10-year Tips are feeling the full brunt of taper-talk. First there was an abrupt sell-off on Wednesday in the 30 year sector, with break-even rates moving lower across the whole Tips spectrum after the US consumer price index fell for the first time in six months. Then there was a swift recovery with strong auction demand on Thursday following the Philly Fed.
As TD Securities’ Richard Gilhooly observed:
Treasury will auction $13bn 10yr TIPs at 1pm, a second re-opening that will take the benchmark size to $41bn. The real yield is around 61bp after the market has bounced on weaker Philly Fed, with 30yr nominals steepening out to new highs on the 5-30s curve before some aggressive buying in the 30yr sector materialised in the past half hour. 10y Real yields have ranged from 32bp in late October to a high of around 90bp in early September and an absolute low of -75bp in April of this year.
Compare and contrast the following from a note by GoldMoney’s head of research Alasdair Macleod that landed in the collective hands of FT Alphaville on Friday.
Here’s the original version: Read more
The prospect of a US technical default is unfortunately becoming an ever greater reality.
That said, there’s no reason to panic just yet.
If there is a D-day it isn’t until November 15.
What’s more, there’s an ever louder chorus of voices suggesting that a technical default may not matter at all.
How can that be? Read more
This piece of comparative calm is very definitely to be read in conjunction with Cardiff’s post on how the Treasury’s payment system (might) work.
It’s to do with the fact that there is no cross-default clause in US Treasuries. That means a missed payment on one bond would leave the other bonds unfazed, and equally usefully, if needed bonds can be split up into a ‘delayed component’ and a ‘normal component’ .
Pity the EM sovereign with such sloppy protections, eh? Read more
Ah, how we love the smell of US debt-ceiling drama in the morning.
In a note out on Monday, analysts at Bank of America Merrill Lynch give the chances of a US government shutdown this coming quarter a 30 per cent probability. They add that if it was to occur, it would probably be short-lived with minimal economic repercussions. Also, it’s not like a shutdown hasn’t happened before: it happened once in 1990, as well as once in 1995/1996. It wasn’t the end of the world then, and thus shouldn’t be the end of the world this time either. Read more
The US borrowed for 10 years at the lowest rate ever in Wednesday’s auction (technically a reopening of an existing bond).
Ahem. The full, semi-annual US Treasury report to Congress on exchange rates is here:
Click image for full doc. Read more
Total comprehensive income of $3.1bn (net income $2.7bn) vs dividend payments to Treasury of $2.8bn in 2012’s first quarter. Meaning – Fannie Mae hasn’t had to draw from the Treasury to pay back the Treasury for the first time… in a while.
David Wessel over at the Wall Street Journal has followed up on a story FT Alphaville has been covering for a while. That the world economy is running out of super-safe financial assets, and that this is doing untold damage to central banks’ abilities to control interest rates (the last bit is our spin).
He raises a point which we think is pretty important. The fact that all this asset encumbrance really started back in the mid 2000s — and was possibly the reason for Alan Greenspan’s famous yield conundrum, when the Fed chairman declared he couldn’t rationalise why longer dated yields would not budge higher despite Fed rate hikes. Read more
The US Treasury and Wall Street dealers are set to discuss whether to introduce a new debt security, the FT reports. Topping the agenda of a meeting on Friday between Treasury officials and dealers, who underwrite US government debt sales, is the possible introduction of floating-rate notes. In contrast to normal fixed-rate Treasuries, which pay the same coupon throughout their lifespan, the payment to investors from floating-rate notes would go up or down as the Federal Reserve changed short-term interest rates. That could make them attractive to investors who think that Treasury yields have hit a floor and are set to rise in the coming years. But the discussions may not herald the imminent introduction of such securities. The Treasury has asked similar questions in the past and is conservative about changes to debt issuance.
Mortgage fraud reports by banks rose 88 per cent last quarter as lenders were asked to take back bad home loans sold to investors, the FT reports. A US Treasury Department report released Wednesday says during the three-month period ending in June, lenders filed nearly 30,000 “suspicious-activity reports” related to mortgages. The surge was due to demands by investors and other buyers of mortgages for lenders to repurchase the debts, leading the banks to comb through documents, the Treasury said. Without repurchase requests, mortgage fraud reports would have slid 3 per cent year on year. Eighty-one per cent of the filings came from mortgages originated before 2008. Like last year, a large majority of fraud reports continued to be based on loans made during the height of the real estate bubble .
The US Treasury would accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, the FT says, citing a person familiar with the Treasury’s thinking. The effectiveness of ‘Operation Twist’ would depend on how the Treasury reacted. If it pushed the other way, and took advantage of the Fed’s buying to sell more long-dated debt, then it could minimise the effect on interest rates. However, the Treasury would be unlikely to respond to falling long-term interest rates with a sudden shift in the pattern of debt issuance, even though one of the Treasury’s strategic goals is to increase the average term of the US national debt.
FT Alphaville has already noted the extreme specialness of the current benchmark US Treasury 10-bond.
On Friday, however, that specialness reached new levels of extremity, with Bloomberg reporting repo rates of as low as minus 2.92 per cent. Read more
Strange, fast, markets. The S&P 500 closed at 1,172.53, up 53 points, or 4.74 per cent. That’s the biggest one day rise since 20 October, 2008. 10-year Treasury yields touched crisis lows. And the US dollar… don’t even ask.
The US treasury conducted its first post-downgrade auction of Treasuries on Tuesday and, guess what, it’s a record breaker.
Three-year yields were sold at a record low yield of 0.5 per cent, which means the US could easily be confused for a AAA sovereign: Read more
Tim Geithner has decided to remain as Treasury secretary, avoiding a potentially unsettling transition at the tiller of US economic policy amid renewed strains in financial markets and concerns about the trajectory of the recovery, the FT reports. A senior Treasury official said on Sunday: “Secretary Geithner has let the president know that he plans to stay on in his position at the Treasury. He looks forward to the important work ahead on the challenges facing our great country.” Mr Geithner – who has been in office since the beginning of the Obama administration in early 2009 – had considered leaving the Treasury once Congress raised the US debt ceiling, thereby averting a default on the nation’s debt. However, he came under pressure from White House officials to remain, given the tight relationship Mr Geithner has forged with Barack Obama, president, and the fact that economic and financial challenges still remain more than two years after the end of the financial crisis and the ensuing recession. Moreover, the political strains over fiscal policy would have made Senate confirmation of any potential replacement tricky.
US Treasury Secretary Timothy Geithner will stay on in the role, despite considering stepping down after the government debt ceiling limit was raised. Mr Geithner confirmed on Sunday that he will remain at his post at President Barack Obama’s request. “I believe in this president,” Mr Geithner told CNBC. The move avoids a potentially unsettling transition at the tiller of US economic policy amid renewed strains in financial markets and concerns about the trajectory of the recovery, says the FT. Mr Geithner came under pressure from White House officials to remain, given the tight relationship he has forged with Barack Obama, president, and the fact that economic and financial challenges still remain more than two years after the end of the financial crisis and the ensuing recession.
A deal required before an Asian markets drop on Monday. Bankers summoned to a joint meeting with officials in New York. Congress paralysed. Despite our continuing optimism and markets’ relative insouciance, it all sounds worryingly familiar.
Bloomberg reports on Friday morning that the Federal Reserve is preparing to issue guidance to banks should Congress fail to raise the debt ceiling and that the US treasury has invited all 20 primary dealers to a contingency briefing in New York. Read more
You’re looking at an excerpt from the 2008 Housing and Economic Recovery Act. That’s the thing which created the Federal Housing Finance Agency (FHFA), which is currently charged with regulating the US’s massive Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Read more
A small team of officials at the US Treasury is looking at ways to avoid default if Congress fails to raise the debt limit by August 2, Reuters says, despite senior officials including Timothy Geithner repeatedly saying there were no contingency plans. Sources told the news agency that top officials have studied several options. One of those options – using the 14th Amendment to continue issuing payments without debt increase approval from Congress – has been dismissed by the White House as “not failsafe”. Ways of working around the debt ceiling by delaying payments and prioritising payments are also being examined. Meanwhile Eric Cantor, the House leader, laid out conditions under which Republicans might support an administration move to raise revenues by reducing some tax breaks, saying such measures could be considered if they were offset by tax cuts elsewhere. The FT reports the comments were seen as a positive step towards reaching an agreement on the debt ceiling.
Tim Geithner is considering leaving his post as US Treasury secretary, but not before the tense negotiations over raising the country’s borrowing limit and preventing a default are concluded, according to people close to the matter. A Treasury official told the FT on Thursday that Mr Geithner did not plan to make any decision while he was focused on negotiations regarding deficit reduction and the debt limit. However, Mr Geithner has been telling associates for several weeks that he might leave the administration, according to people familiar with the matter. News of the potential departure comes amid fears that the White House and Congress have not made enough progress on a deal on fiscal policy. Mr Geithner has often prevailed over President Obama during his tenure, says the Washington Post.
The Department of the Treasury Read more
The Treasury and Federal Reserve are split over the ratio of extra capital they want banks to hold on top of requirements under Basel III, the WSJ reports. Fed officials want an extra 3 per cent on top of Basel’s 7 per cent, but the Treasury is unwilling to support a buffer totalling 10 per cent, people familiar with the matter said. Banks had expected between 1 and 2 per cent of extra capital, leading to Jamie Dimon’s pressing of Ben Bernanke on the issue in a speech this week, Bloomberg says.
The first vote to increase the $14,300bn US borrowing limit has failed, the FT says, highlighting the persistence of deep divisions between Republicans and Democrats over budgetary policy two months ahead of a crucial deadline to avert a potential default. On Tuesday evening, the Republican-controlled House of Representatives overwhelmingly turned down a bill that would increase America’s debt ceiling by $2,400bn without any accompanying spending cuts. Time’s political commentator, Adam Sorensen, says the Republican leadership designed the vote to fail, to prove that raising the debt ceiling won’t happen without a package of accompanying spending cuts. If a bout of market panic does ensue after the vote, he says, it will likely cut short congressional brinkmanship in the run-up to the August deadline, when the Treasury Department says it will be forced to stop debt payments if the limit is not raised.
The US Treasury took the first step in its exit from American International Group, and made a small profit, by selling $5.8bn worth of the shares it inherited in bailing out the insurance group during the financial crisis, the FT reports. The shares were priced at $29, with the Treasury selling 200m shares. AIG itself sold 100m shares, raising $2.9bn for the group as it moves towards independence and attempts to rebuild its core businesses. The price of AIG shares has fallen sharply this year, but the Treasury was still able to generate a modest profit on its $47.5bn cash injection by selling just above its break-even point of $28.73 a share. That does not account for other elements of the $180bn bail-out.
American International Group and its largest investor, the US Treasury, are poised to raise at least $8.7bn through a sale of stock on Tuesday, handing the federal government a small profit on the deal, people familiar with the matter said. The FT reports that AIG and the Treasury plan to issue the shares at $29-$29.30 each on Tuesday. The offering attracted enough demand to meet Treasury’s goal of selling 300m shares. As of late Monday, officials had ruled against selling more, they said. The price range would ensure that the Treasury will make money on its first attempt to shed some of the AIG holdings it inherited during the financial crisis. The government, whose $180bn bail-out left it with a 92 per cent stake, needs to sell each share for at least $28.73 to break even on the bail-out. “If the government wants to do the next tranche quickly, they need to place and price it right,” said Scott Sweet, senior managing partner of IPO Boutique, an investor advisory firm.
Welcome back AIG, or um, another 15 per cent of you.
From the bailed out insurer’s public offering prospectus, released Wednesday morning: Read more