This is for anyone interested in looking under the finance silk sheet Mr. Bush says isn't hiding anything.
"My take is this: Someone made a mistake some place. A government should not be in the business of starting and stopping the issuance of such an important financial instrument as the 30-year within the span of less than four years. If it made sense to stop it then, it should make sense to keep it stopped now." --------- THE MACRO INVESTOR By STEVE LIESMAN In trying to figure out why the Treasury Department this week said it was considering issuing 30-year bonds, we must begin with this simple proposition: that bureaucrats would rather lop off their arms in private than embarrass themselves with a reversal in public. It is thusly -- is that not the way our first Treasury Secretary Alexander Hamilton would have begun? -- that we must approach dissecting the reasons behind this change of fortunes for the once eminent, later exiled and now embraced 30-year bond. Prior to this week, the Bush Administration's Treasury Department was known for many things. There was a wayward secretary in the name of Paul O'Neill who didn't drink the "Deficits Are OK" Kool-Aid. And there has long been the sense that Treasury in its current incarnation is a place where policies are promulgated but not necessarily produced. (That "heavy lifting'' is left to the operatives inside the White House.) Most of all, prior to this week, one of Treasury's most notable acts was the decision in October 2001 to abruptly end the issuance of 30-year bonds. Inseparable from that accomplishment, if you can call it that, was Treasury's insistence that it would never have to bring back the 30-year despite clamoring from markets and potential buyers for just such a product and despite the evident good sense it made, especially when interest rates were low. Now, Treasury has eclipsed itself with a stunning reversal of a decision that was supposed to represent a paradigm shift -- less than four years into the supposed eternality of the paradigm shift itself. In short, for reasons that aren't readily apparent, it looks either like Treasury panicked or has some very compelling reasons for the change. I say "not readily apparent" even though many good and potentially plausible reasons were given for the change. Assistant Secretary Tim Bitsberger used phrases such as increasing the "flexibility" of the government's funding mechanism and lengthening the "average duration" of outstanding government securities. But the more compelling places to look for answers are exactly those areas that Treasury suggests are not the reasons for the change. Chief among them is the proposal by President Bush to privatize Social Security. Mr. Bitsberger insisted that the decision had nothing to do with the plan, saying, correctly, that privatization isn't even a plan yet. It just so happens -- and we don't believe in coincidences in cases like this -- that a 30-year bond would be just the ticket for the government to help pay for privatization. Moments after Mr. Bitsberger spoke, Ashraf Laidi, chief currency analyst for MG Financial Group, wrote that reissuing the 30-year bond is "at the heart of financing transition costs of privatizing Social Security, estimated to cost as much as $2 trillion." Think about it. The government is diverting current payments into the system, which pay for current retiree benefits, to private accounts for future retirees. It's a long-term obligation. And the government must finance the missing revenue. What is the best possible way to replace it? How about with a bond that is not due for decades? So privatization may not be a reason for the change. But it'd sure be nice to have some of that paper around to finance the president's proposal. Treasury also said the decision was not because of a worsening of the budget-deficit outlook, even though it noted that total debt outstanding had increased (to $4.7 trillion in 2004 from $3.3 trillion 2001.) Of course, Treasury couldn't say it's worried about the fiscal outlook as the president has promised to cut the deficit in half in a now-remaining four years. Indeed, the 30-year announcement came amid reports from Treasury that April tax receipts have been running 20% ahead of a year earlier. Several economists have recently lowered their 2005 deficit forecasts to around $360 billion from around $400 billion. That's short term, however. In the not-too-distant future, there are several issues that threaten to severely strain government finances: fixing the Alternative Minimum Tax, making tax cuts permanent, rising Medicare costs and the coming retirement of baby boomers Tony Crescenzi, chief bond market strategist for Miller Tabak, notes, "The large U.S. budget deficit is a key motivation for the Treasury's decision to consider issuing 30-year bonds, but there are other factors." One has to think that folks inside Treasury see the numbers and know, despite what they say today, that the numbers won't be pretty in years to come. And there was the issue of market timing. Was the Treasury trying to take advantage of low interest rates? Mr. Crescenzi thought so. "A second motivation is the Treasury's desire for the ability to lock-in the low level of long-term interest rates (it is two years late in coming on this front. Where was the Treasury when the rest of America was refinancing its debt?)," he wrote. The folks over at UBS offer that the Treasury has been a notoriously poor timer. The Treasury suspended the 30-year in 2001 just as bond yields hit 40-year lows. "If history were to repeat -- which of course it seldom does -- the proposed revival of the 30-year bond would in turn seem to signal a new low point for bond yields." None of this is to suggest issuing the 30-year doesn't make sense. There are plenty of good reasons for it. Issuing government paper more closely tied to the government's liabilities seems appropriate. There's also a public-service aspect: Companies want to issue 30-year paper, too. But in the absence of a true 30-year government market, there is no benchmark. The existence of a real long bond will make it easier for investors and companies to price long-maturing corporate paper because they will have risk-free benchmark in the form of a 30-year government bond. In addition, with so much short-term paper coming due in 2008, something had to be done to alleviate potential pressure if foreigners and other holders of short-dated paper fled for the hills and didn't roll over into new notes or bonds. And the relatively muted reaction of the markets to the announcement -- the 30-year bond price fell and the yield rose around 0.10 percentage point on Wednesday -- suggests there is plenty of appetite for such government paper. My take is this: Someone made a mistake some place. A government should not be in the business of starting and stopping the issuance of such an important financial instrument as the 30-year within the span of less than four years. If it made sense to stop it then, it should make sense to keep it stopped now. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~| Find out how CFTicket can increase your company's customer support efficiency by 100% http://www.houseoffusion.com/banners/view.cfm?bannerid=49 Message: http://www.houseoffusion.com/lists.cfm/link=i:5:156681 Archives: http://www.houseoffusion.com/cf_lists/threads.cfm/5 Subscription: http://www.houseoffusion.com/lists.cfm/link=s:5 Unsubscribe: http://www.houseoffusion.com/cf_lists/unsubscribe.cfm?user=11502.10531.5 Donations & Support: http://www.houseoffusion.com/tiny.cfm/54
