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Bond Expert: Refunding and Treasury Financing

by: John Jansen July 30, 2008 | about stocks: TIP    

John Jansen

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I was away from my work station for several hours but return now to note that the Treasury has announced the refunding package as $17 billion 10 year notes and $10 billion of a not-quite-30-year bond. That is a little more new cash than many had expected and reinforces my belief that there will be a significant yield curve concession to underwrite these gems.

There might be a concession in price, too, but I would not make that bet until after the GDP data and the labor data are available tomorrow and Friday.

The Treasury has an enormous deficit to finance and participants anticipated that this question would be addressed. It was as they will probably add another round of monthly reopening to the 10 year cycle which will make for 12 auctions of that issue each year. They will also consider issuing a new bond each quarter. Under the current methodology they issue a bond in one quarter and then reopen it in the following quarter.

The Treasury Borrowing Advisory committee had some thoughts in its report. The Committee had suggested the quarterly bond as well as the monthly 10 year issuance. They recommend the quarterly three year note as the next option and believe that these options should be exhausted before the Treasury decides to get more creative with other maturities.

The Borrowing Committee had harsh words for the TIPS segment of the Treasury market. One member concluded that is was very expensive financing and by his reckoning had cost the taxpayers $30billion more than if Treasury had issued nominal bonds with the same maturity. The Committee noted that relative to nominal bonds trading volume in TIPS was exceedingly low. And they recommended that the Treasury should consign the 5 yrar tip to the dustbin of financial history.

One final point on TIPS. The committee noted that the idea has not caught on with corporate issuers as it is a very expensive vehicle.

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This article has 3 comments:

  •  
    Jul 30 03:21 PM
    In my limited financial world, and as a recent retiree, I am holding quite a lot of TIPS. Opinion??
    Reply
  •  
    Jul 30 05:15 PM
    The tip is expensive to the treasury, relatively speaking, because they are accustomed to borrowing from foreign governments who are riff with dollars and very welling to dump them to treasury bonds to get some return. But! for the locals the tip is anything but a great ride due to it volatility and the yield is not competitive, even when the adjustment is made for inflation (what little they admit). Oh well, gold is better for now. And if bubbaw is just retired for gods sake get some gold, the Treasury will steal your eyes.
    Reply
  •  
    Aug 01 04:49 PM
    Actually, TIPS are good for locals, because there is relatively little foreign ownership. That means they will not suffer as much as nominal Treasuries in a dollar crisis, nor are yields unnaturally depressed by SWF safe harbor buying, a serious worry with nominals at this point. As a class, they have performed very well historically. The CPI calculation is a negative, but this is a known problem, and thus, the yield/price reflects the somewhat diminished inflation protection. The biggest problem is liquidity -- these should be buy and hold instruments, held primarily as core holdings in retirement accounts due to the unfavorable tax treatment. They won't make you a millionaire, but if you are one already, they insure that you will stay that way forever, after inflation.
    Reply
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