I haven’t read this anywhere and I’m a bit surprised which is why I’m thinking perhaps I’m wrong.
Would you agree that…Because we will be funding this stimulus package with Treasuries we sell (largely to foreign entities), it is in our best interest (as US taxpayers) to keep the mood gloomy so that demand for Treasuries (safety) stays high meaning interest rates on these newly issued Treasuries (increasing supply) can stay low (due to continued demand). Indeed, Obama and Geithner’s negative comments about our economy helped push the 10 year Treasury down 5bps and the 30 year 12bps yesterday. Seems like it is in our collective best interest to keep confidence levels low until we’ve dumped the Treasuries on the open market.
Is this factually correct or am I a conspiracy nutjob?
I think that what the OP is getting at, that it’d be good to keep the rates low until they’ve sold off a large chunk to finance the stimulus plan. If the rates go up quickly, the stimulus plan gets even more expensive. I think that’s what the OP was after?
I was an econ minor in college, but never really studied anything about t-bills. All we ever heard was in our finance classes, where the t-rate was the default rate for ‘safe’ investment.
Yes, that is what I’m saying. We’re about to flood the market with our bonds and the lower the rate we have to pay out the better. If we can “rig” the system a bit by spreading uncertainty and gloom we can get that rate down prior to issuance of those bonds.
If the mood is too gloomy, then American consumers will not buy stuff from China. If we don’t buy stuff from China, then they have no dollars to buy Treasuries no matter what the rate is.
Yes. I am only referring to the nominal (coupon) yield because as taxpayers (the borrowers) that’s all I (we) care about. We only have to payout the stated interest rate.
The other part of that equation is what happens to its price when it hits the open market. That gets measured as current yield.
I don’t see how the rates can stay low? Too much supply, how can we continue to attract buyers? Either the world is so screwed up that this is safest investment or we have another bubble brewing…which will unleash the inflation monster.
Apparently, our government officials will be creative in order to decrease their own taxes. But our taxes???
I think the market’s reaction is “buy the rumor, sell the news”.
“Seems like it is in our collective best interest to keep confidence levels low until we’ve dumped the Treasuries on the open market.”
While you are right in that it is in our best interest to keep Treasury rates low in order to minimize the cost of financing of our debt, the negative consequences of suppressing confidence in our economy would likely far outweigh the benefits.
Demand for Treasuries imply a low appetite for risk. As long as investors continue to shun risk, it will be impossible for our credit markets to return to normal or for business to raise capital. Of course without credit or the ability to raise capital, firms cannot expand and will not hire, so our economic recovery would be stalled at best. Even our government cannot afford to support our economy on its own. Any additional spending in an attempt to do so will result in additional supply of Treasuries and would leave us in a much worse position than we are in now.
I believe that the negative comments from Obama and Geitner are all about politics rather than finance. The administration was working overtime to ensure its plan made it through congress by levering the support of the public.
BTW, today’s Treasury auction of 30 year bonds was a little weaker than anticipated, so if we are trying to scare investors into lower rates, it doesn’t appear to be working all that well. While there are benefits for countries like China and Japan to hold US Treasuries, the overwhelming reason they will continue to buy our debt (for now anyway) is that it is in their interest to ensure that their best customer remains healthy. BTW - the largest holder of US debt is not China or Japan - it is the US Government…I suspect that that will not change as the Fed works to keep interest rates low.