Today's economic lesson comes from Bloomberg again talking to a top dog economist at the IMF who notes that the Treasury is going to be issuing a new bond - the 7 year bond. So the US is issuing a whole new class of debt, and there's speculation that Treasury may issue a 20 year bond as well.
Among bond traders and experts, there is something known as the 'belly of the curve' which is speaking about the yield curve of the treasuries. If I understand this correctly, a yield curve is a projected estimate of the return on bonds across the types of instruments. Here are the current numbers.
So there are long term and short term bonds and if you look at the middle, or the belly of the curve, that's where most of the interest rates that affect our lives are based. Considering the credit I get, I suppose they just take whatever that number is and multiply it times 7.
Now here's the strange thing I don't quite understand, among the millions of things I don't understand. The Treasury is issuing debt and the Federal Reserve is buying it. Somehow this allows the Fed to bail out somebody. It sounds awfully queer to me. The LAT explains it this way:
With its benchmark short-term interest rate already at rock bottom, the Fed can’t make any more use of that tool to influence market rates. So the central bank in mid-December signaled that it might buy Treasuries for its own portfolio as a way to pull longer-term rates down or at least keep them from rising.
The Fed, led by Chairman Ben S. Bernanke, went a step further after its meeting last week, saying it was "prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
Here’s the problem the Fed faces: Traders and investors have some legitimate reasons to push Treasury yields up from their recent record lows. For one, Wall Street knows it is facing a massive supply of new government debt to fund the financial-system bailout and economic stimulus plans.
The Treasury today said it would borrow $67 billion next week alone via sales of three-year, 10-year and 30-year bonds. To attract enough buyers, the government may just have to pay more.
What I know is that I understand stocks, and I understand options. I understands puts and calls. But I don't understand the bond market. I just know that I get sick of California initiatives that call for a bond. I always vote them down.
A long time ago when I used to work at a bank, I worked the Certificate desk. I really loved that job. I used to sell TCDs during the crazy days of the early 80s - the last time gold was up this high - but interest rates were crazy high then too. Now they're rediculously low. I especially liked the quirky kinds of securities and whatnot. In fact, now that I think about it, it used to be my job to hold collateral titles on boats and whatnot to secure various loans. It was at that desk that I learned about municipal bonds (munis) and commercial paper - stuff I've forgotten since. I used to crack up the loan officers when I used to tell them how much money I could make on munis and commercial paper, while the bank was losing money on TCDs. But nobody paid much attention to munis because at the time they were paying a miserable 5%. Well 5% is not miserable any more, and I wonder where I can get some.
Of course I wouldn't think about buying a bond from anywhere in California right about now, but that's another sad story.
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