{"id":50411,"date":"2019-09-17T10:18:09","date_gmt":"2019-09-17T14:18:09","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=50411"},"modified":"2019-09-17T10:18:09","modified_gmt":"2019-09-17T14:18:09","slug":"its-time-to-go-long","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2019\/09\/its-time-to-go-long\/","title":{"rendered":"It's Time To Go long"},"content":{"rendered":"

While President Trump\u2019s tweet calling the members of the Federal Reserve \u201cboneheads\u201d for failing to cut interest rates as low as Trump wants them grabbed the financial headlines<\/a>, his suggestion that the government \u201crefinance\u201d its enormous $22.5 trillion debt got less attention. At the most, it was dismissed as undoable.<\/p>\n

It\u2019s hard to believe that the smartest people on Wall Street and at the U.S. Treasury can\u2019t come up with some kind of scheme that would take advantage of today\u2019s \u2013 and probably tomorrow\u2019s \u2013 historically low bond yields and save taxpayers some money. This job would fall to Treasury Secretary Steve Mnuchin \u2013 himself a former Goldman Sachs investment banker \u2013 and not the Fed. <\/p>\n

On Thursday, Mnuchin told CNBC that Treasury is \u201cvery seriously considering\u201d issuing a 50-year bond next year. \u201cWe think there is some demand for it. There are some technology issues we need to make sure we have in place; there are market issues. But we would do this in a way that if there is demand, it\u2019s something that we would meet.\u201d<\/p>\n

If Walt Disney and several European countries can sell 100-year bonds, certainly the United States of America can.<\/p>\n

The initial reaction to Trump\u2019s suggestion about refinancing Treasury debt was met with derision and skepticism.<\/p>\n

\u201cIt\u2019s not viable and could be a significant problem for investors, financial markets and ultimately the economy,\u201d Mark Zandi, chief economist at Moody\u2019s Analytics, told CNBC, which said the idea is \u201cwithout any modern precedent.\u201d <\/p>\n

\u201cThe debt is not prepayable,\u201d Zandi continued. \u201cThere\u2019s a contractual relationship the Treasury has with investors. This isn\u2019t a mortgage; this is U.S. Treasury debt. I think it would be incredibly disruptive to financial markets, and interest rates would ultimately rise, not fall.\u201d<\/p>\n

Well, yes and no. The Treasury refinances or rather rolls over, its debt constantly. That\u2019s how the federal government runs, after all: Most of the debt it issues simply replaces \u2013 but doesn\u2019t retire \u2013 old debt as it comes due, with a little (okay, a lot) extra for new spending (and more debt). While that\u2019s not technically a refinancing, it comes pretty close.<\/p>\n

But there is a precedent in the municipal bond market, although there are special circumstances there. For years state and local governments have sold \u201cprerefunding\u201d bond issues to pay off their old, higher-yielding ones. The proceeds from the new issues are used to buy specially tailored U.S. Treasury bonds called State and Local Government Series, or SLGs \u2013 pronounced \u201cSlugs\u201d \u2013 which are used to pay interest on the old muni bonds until they mature. That gives them an automatic triple-A rating because they\u2019re now backed by the federal government. Neat, huh?<\/p>\n

Now, SLGs are a unique animal, so duplicating them in the Treasury market would be a lot trickier. What makes SLGs doable is the fact that most of the time, Treasury securities yield more than comparable muni bonds because the latter are usually exempt from federal taxes. So there\u2019s enough extra yield to pay off the older debt. <\/p>\n

To do the same thing in the Treasury market would presumably require the government to issue vastly more and longer debt \u2013 albeit at lower rates \u2013 to pay off older debt. Or maybe not. Again, I\u2019m sure the smartest people on Wall Street would be happy to come up with some workable ideas.<\/p>\n

The problem is that the Treasury is selling too much debt at today\u2019s relatively high short-term rates and not enough at lower long-term rates. What the Treasury needs is better debt and yield curve management, not artificially lower rates. <\/p>\n

That\u2019s why the rest of Trump\u2019s tweet storm should be dismissed as nonsense, such as his suggestion that \u201cthe Federal Reserve should get our interest rates down to ZERO, or less.\u201d This would drag us down to the level of the European and Japanese economies, which have been trailing U.S. economic growth badly for the past 10 years despite much lower \u2013 even negative \u2013 interest rates and all kinds of quantitative easing. The U.S. doesn\u2019t need to go down that road.<\/p>\n

Of course, the only real solution to Mr. Trump\u2019s problem is for the federal government is to stop spending and borrowing so much money. Unfortunately, that\u2019s the one issue that draws bipartisan support \u2013 against it. There is no appetite, desire, or even inclination in Washington to stop spending. Most Democrats have never pretended to be fiscally responsible, while Republicans talk the talk but never seem to walk the walk. Now Trump has united both parties in unconstrained spending. <\/p>\n

As one of Trump\u2019s predecessor\u2019s recognized a long time ago: \u201cWe are all Keynesians now.\u201d If that\u2019s the case, a 30-year bond just isn\u2019t long enough. <\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

While President Trump\u2019s tweet calling the members of the Federal Reserve \u201cboneheads\u201d for failing to cut interest rates as low as Trump wants them grabbed the financial headlines, his suggestion that the government \u201crefinance\u201d its enormous $22.5 trillion debt got less attention. At the most, it was dismissed as undoable. It\u2019s hard to believe that […]<\/p>\n","protected":false},"author":16,"featured_media":50413,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[9252,6938,8771,5442],"class_list":["post-50411","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-30-year-bond","tag-george-yacik","tag-president-donald-trump","tag-the-federal-reserve"],"yoast_head":"\nIt's Time To Go long - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"I can't believe that the smartest people on Wall Street and U.S. Treasury can\u2019t come up with some a scheme to take advantage of historically low bond yields\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2019\/09\/its-time-to-go-long\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"It's Time To Go long - 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