Oh, those sneaky little dogs at the U.S. Treasury.
Did they really think they could start getting ready for higher interest rates without anyone noticing?
You’ll find it in the details of the Treasury’s upcoming auction of $81 billion in new and rolled-over U.S. debt. In next week’s offering the Treasury will sell $40 billion in three-year notes and $25 billion in 10-year notes and $16 billion in 30-year bonds
Two things you ought to notice about what the Treasury is selling.
First, the package is a very clear effort to extend the maturity of U.S. debt. Right now the average maturity of the U.S. debt as a whole is just 53 months. The Treasury has told bond dealers that it would like to extend the average maturity to 74 to 90 months.
A longer maturity means the Treasury gets to lock in today’s low interest rates for a longer period of time. Extending the average maturity by somewhere between almost two years and about three-and-a-half years is exactly what you’d expect Treasury to do if it was convinced that interest rates were going to start climbing within the next year or so. Time to lock in those low rates, you can hear Treasury Secretary Tim Geithner saying.
Second, those aren’t just any 30-year bonds the Treasury is selling. It’s selling 30-year inflation protected bonds, or TIPS (Treasury Inflation Protected Securities). The Treasury has told dealers that it will replace sales of 20-year TIPS with a 30-year issue.
That’s the kind of move you’d make if you thought that investors might be getting worried about inflation and be looking for really long-term inflation protection. Of course, if investors were worried about that, they might be willing to take a lower interest rate in exchange for the extra 10 years of protection.
Next week’s auction will tell Treasury if it is right. But you’d have to say the folks on 15th Street sure are spending a lot of time thinking about higher interest rates.
kelvinator, That’s exactly what a rational expectations economist would argue. Investors anticipating that rae increases are coming are acting now on those expectations, which pretty much guarantees that actual interest rates will move higher well in advance of any move by the Fed.
The Chinese haven’t shown a ton of savvy in this area as they lost quite a bit before the downturn.
Jim has discussed the end of the carry trade as soon as this happens and it is looking more and more like this will be an explosive one.
In my opinion as well this is China and India using more of a “power” approach to the US tightening its monetary policy. If there is serious worry about the dollar following and central governments can somewhat force the US into a tighter policy IMO.
Also I’m not so sure the interest rate hikes will kill the stock market rally, but it will definitely dampen the carry trade and put a large correction in commodities. Even if we go up to 2% interest rates those will be low on a historic level.
I think we will see rates go up, commodities/emerging markets correct 25-35%, and the market stay in a trading range until banks repair their balance sheets.
There are still great opportunities in the alternative energy sector as well. I suspect a lot of speculative money from oil will start shifting into here as traders anticipate the interest rate rise.
The interest rate hike thing really worries me. I know it will kill the stock market, but will also kill the rally in gold, and commodities ?
Gold is being pushed up by a global surplus of money, but rates across the planet are going up.
But, India just bought 200 tons of gold, and china is buying 200 more. And China is on a commodities buying binge. IE: getting out of US dollars. That would imply no faith in the dollar..
Butt, US rates are going to go up , so, are China and India stupid ? Or, am I missing somthing ?
Did China and India just make the horrundus financial mistake of going against the dollar, just before a dollar rally ?
Doesn’t it seem likely, Jim, that the bond market itself will react to the fact that the Treasury is beginning to anticipate increasing rates by adding momentum to the rate increases? Already, I understand the Chinese have shown less interest in the longer term debt, so moving further out in maturity may find less auction interest, even if they try to ease the process using TIPs for the longest term. I would guess that most bond investors know that TIPs are better than regular bonds in an inflationary environment, but that they aren’t likely to come close to addressing the damage of real world price inflation since the government has fiddled with the CPI so much in the last 20 years.
If the market catches a whiff of the fact that the gov’t think rates are going up and are offering less short term debt, it seems the move could snowball.
“That’s the kind of move you’d make if you thought that investors might be getting worried about inflation and be looking for really long-term inflation protection.”
Buying TIPs may be the only way China will keep financing the US deficits for a few years more.
I’ll have an update on Maxwell early next week.
Hate to get totally off topic, but one of your picks, MXWL, had an earnings release a few days back that sent the stock diving . . . any comments?