1 Mo. Treasury Jumps from 10 to 27 bps in 7 days | Hacker News Reader

1 Mo. Treasury Jumps from 10 to 27 bps in 7 days

treasury.gov

82 pointsJumpCrisscross103 comments

This is a confusing situation. When I call D.C. they say an impasse blowing through 17 October is likely. When I call my rates and bond dealers on Wall Street I'm told that it shouldn't be too unsettling. The truth is likely in the middle.

Past 17 October the U.S. Treasury can prioritise payments, i.e. make interest and perhaps Social Security payments while blocking others. This makes the U.S. plunging back into a recession probable. It also virtually assures Federal Reserve (The Fed) intervention.

Some time before 1 November all bets are off. There are big payments due that will force the Treasury to be creative (e.g. minting a $1 trillion coin, issuing original-issue-premium debt, or blatantly ignoring the debt limit) or default. The Fed could open swap lines with the banks in an attempt to de-couple the U.S. financial system from its political system. The odds of success are low.

An unknown number of pieces, with uncertain capabilities on a shifting board, collectively daring or being dared to test new limits. This is an interesting situation.

To summarize, Wall Street's saying "They couldn't possibly be that stupid." and Congress is saying "Just try us."?

"There are decades when nothing happens and there are weeks when decades happen" -Vladimir Lenin

Crises come quickly because nobody likes to dump until they absolutely have to. That is, when everyone else is dumping. Markets thus exhibit self-organising criticality.

Endogeneity doesn't help, either. Wall Street doesn't react because it assumes Congress isn't insane. Congress doesn't believe it's insane because "the Dow is down barely a point from a month ago!"

I just hope all the millions and millions of lines of source code out there at banks have no problem with defaulting T-bills. What should we call it.. Y2K => GOVT2DUMB?

I hope everyone learned their lesson after all the panic over Italy/Greece/whoever defaulting and when senior MBS bonds took losses way back in 2009 and the code can handle defaults. I think the bigger risk would be from the portfolio rebalancing that would need to be done as what was assumed to be a 0 risk T-note is no longer 0 risk. That's of course ignoring the sudden "oh shit" heard all the way in southern Jersey when the notes don't actually pay out.

There have been tons and tons of serious investors claiming T-bills are the most risky assets class since at least 2005:

Marc Faber, Jim Rogers, Kyle Bass, Peter Schiff, list goes on and on.

Hoarding gold since 2005 and tell you one thing - just can't wait.

U.S. debt will still be among the safest assets (as opposed to the safest, which it still could be).

Edit: I don't think that defaulting on or debt wouldn't lead to catastrophic consequences. Nor am I an economist.

> Hoarding gold since 2005 and tell you one thing - just can't wait.

I don't want to burst your bubble, but if things go tits up, it will affect the demand of useless shiny metals and as a consequence, their value. If I were you, I would hoard toilet paper. Historically, for some reason, when the shit hits the fan, there is never enough toilet paper around to wipe up the mess.

Gold has lots of uses. Of course, most of them are dependant on industrial (and hence financial) infrastructure...

Gold Price is currently at its mining cost. The asset you can buy at its production cost is a bubble? Where are you talking your investment advise from? CNBC?

US Treasuries at the most expensive price point for the past 300 years. That's for you, if you're looking for bubbles.

Gold's mining cost is directly correlated with its sale price - different precious metal or gem mines have different extraction costs. So the "mining cost" of an ounce of gold varies with which mines are open, which varies with how much the gold sells for.

mining cost = labor + energy

If: labor + energy to extract gold > gold price

we have a bubble?

;-) LOL

I meant "burst your bubble" as an idiom, not as an insinuation that there is a bubble in economic terms.

That said, gold's price is determined by supply and demand, just like for any other good. Certainly part of the price is supply, which is determined to some extent by mining costs, but there is also the demand side of the equation. You will find demand for precious metals greatly diminished during a recession or any kind of economic hardship. They are a luxury good. Toilet paper, on the other hand, is an inferior good whose price will not be affected by any economic hardship. In fact, it may even increase during such a crisis.

Buy toilet paper.

I lived through severe economical crisis in 1980s in communistic Poland that included food shortages and hyperinflation. Also read a lot about hyperinflation in Weimar Germany and role of gold during WW2. I think you are right. Toilet paper, cigarettes, alcohol, even toothpaste are luxuries and can function as money during hardship. For the poor. Rich at that time buy production assets on the cheap using gold. Did you know that the only way out of Aushwitz was to bribe guards with gold? That was the only thing so valuable that they let someone go. At the peak of hyperinflationary period in Weimar Germany gold price went down tremendously. True. Still the price of all the Mercedes-Benz equity was just about 600 ounces of gold. It's not that gold gets expensive. No, you're right. Toilet paper, food, guns, will be relatively much more expensive. The point is that production assets will get so cheap that you can get them easily for few ounces. You could probably trade them for food too. The thing is the food goes bad, and isn't practical for trade. Gold, you can shove up your ass and run away leaving your whole life behind.

So, I'd say, it's more like poor will be using cigarettes, alcohol, etc. to trade just to survive while wealthy will use gold and silver as the currency. Because if you're this guard in Aushwitz, how do you know if Germnay wins the war. Or the US? You don't. That's why you'll prefer currency gold to national currencies.

The term for this is heteroskedasticity, which I've never spelled right.

Essentially, volatile events are not evenly spaced-- volatility tends to cluster around events.

Endogeneity refers to the causality loop. The markets are judging the probability of the U.S. defaulting. The market's judgement, in turn, affects the probability of the U.S. defaulting. This will tend to produce a system exhibiting self-organised criticality.

The probability of the critical point being tripped could be heteroscedastically distributed. But that's not the same thing as saying the market judgement is endogenous to its prediction.

Who are you talking to when you "call D.C."? I am curious.

Everyone knows math and science is a republican invention designed by evil businessmen for inhumane profits. I prefer a system of government in which I can trust my welfare to the good nature and honesty of bureaucrats rather than cold, evil numerical equations, actuary tables, risk profiles and budgets. It's time mathematics and science are recognized as the tools of class warfare that they are.

Obvious sarcasm but this is basically what they are doing with macroeconomics, see http://delong.typepad.com/sdj/2013/10/whiskey-tango-foxtrot-...

My understanding was that there were legal and technical barriers to prioritizing payments. I wouldn't count on this happening, if it requires new law to be passed or ancient computer systems to be overhauled within the next week or so.

The bet is that the chief executive would be compelled by a looming default to stretch the law. Naturally, stretching the law does nothing for developers' timelines.

Hrmmm...this is interesting.

I wonder if there are "emergency powers" that the Executive branch can invoke (kind of like - "we are under attack" type powers) that would allow them to go around Congress and just ignore the debt limit.

I can't imagine the US defaulting on it's debts....but then again....you never know.

If the debt limit means questioning our obligations, it is an unconstitutional law and the President shouldn't be following it. Of course, that's only if the alternatives are equally illegal.

http://en.wikipedia.org/wiki/Trillion_dollar_coin

Fourteenth Amendment, section 4.

http://www.nytimes.com/2013/10/08/opinion/obamas-options.htm...

The trouble is that any scenario that would require invoking the 14th amendment, et. al. would already be sending shock waves through financial markets and economies around the world... effectively, putting a big question mark next our political will and the full faith and credit of the government... ironically, this would also blow a massive hole in the budget.

The fallout would be epic.

I thought this article (disclaimer: same parent) summed up a lot of the what-if fear circulating around in terms that everyone can understand:

http://www.bloomberg.com/news/2013-10-07/a-u-s-default-seen-...

Curious how likely you feel some of these possible outcomes are..

The worst thing about this is that no one actually knows what will happen. People who say it's not a big deal are like a blind man standing in the middle of the freeway: nothing can possibly go wrong.

The $1 Trillion coin thing was never a serious plan.

Ex-Treasury official: "As a straightforward matter the Federal Reserve wouldn’t give Treasury a trillion dollars for that coin."

That said, he's keeping with the party line that the US "always pays it's bills on time", so take it with a grain of salt (the US defaulted twice or more in the 20th century, depending on how you count)

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/03/w...

"A Lannister always pays his debts"

No national government of an English speaking nation has defaulted on its debt since the “Great Stop of the Exchequer” of Charles II Stuart in 1672:

"Here in the Anglo-Saxon world—never mind how few of us in it have any substantial proportion of our ancestors coming ashore with Hengest, Horsa, Esc, Ella, Cymen, Wlenking, and Cissa to loot, pillage, rape, and burn—we have not seen any government default since the “stop of the exchequer” of Charles II Stuart, when he simply got sick of paying his bills and decided to balance his budget by defaulting on his debt and then accepting bribes from Louis XIV of France, who was desperately anxious that Britain not help the Dutch resist his invasion."

http://delong.typepad.com/files/20120221-the-budget-and-macr...

I'm not sure if he's using an esoteric definition of "national government", "English speaking", or "default", but if you consider the "Failing to make a payment on a US government issued bond as agreed" then he's wrong. The US failed to pay out on inflation-adujsted WWI War bonds (paying them in nominal dollars rather than gold contrary to the bond terms, a substantial haircut) and during a previous unprecedented debt ceiling crisis in 1979 the US tried to dance too close to the edge and wasn't able to pay all the bonds due on time.

http://en.wikipedia.org/wiki/Liberty_bond#Default_of_the_Fou... http://www.npr.org/2011/07/11/137773341/looking-at-when-the-...

Or they could, you know, stop spending more than they take in in taxes.

When your understanding of the national economy is reduced down to comparing it to a simple household budget, you know you're hopeless.

Or perhaps he's sensible.

Experiment is the only true arbiter of truth.

Yes, let's test this theory on 300 million people.

Not choosing sides here (both sides are being irresponsible and goofy (or not), one perhaps more than the other).

To address your rebuttal: To get better statistics, more-local democracy, and reduce the likelihood of catastrophic failure, we could partition those 300 million into roughly 50 subunits and let each partition vote on what ought to happen.

Problem is, those partitions are far too leaky as people, goods, and money move across the partition so freely.

What horrific consequences do you imagine will manifest themselves from the government spending only what it takes in?

Do you mean as a strategy, to avoid issues like (and unlike) this in the future? Or as a tactic to avoid exceeding the debt ceiling this month? The answers are different, and the former more debatable than the latter.

You know he's hopeless. I doubt he does. Also, I do not.

Instead of a household budget, why not compare it to a company's balance sheet? A company perpetually spending more than it takes in will eventually go bankrupt.

Because companies cannot print their own money, unlike a nation.

Right but they can issue their own equity which is what a country's currency really is.

the belief that the current debt situation can be solved by printing money endlessly is being debated among economists right now. germany is a great proponent of keeping your budget balanced, and it worked quite well for them so far.

and btw, printing money on the current scale will eventualy cause devaluation, and so is in itself a kind of default.

"A company perpetually spending more than it takes in will eventually go bankrupt."

That is not a true statement. If a company's revenues are growing, the amount of debt they are holding can increase over time and they can be perfectly capable of servicing that debt in perpetuity as long as the cost of the debt isn't growing faster than the revenues. Revenues can grow both because of real growth (in the company's market or in the economy, depending on whether we are speaking within or without the analogy) and because of inflation (especially if the inflation rate is greater than the interest rate on the loans, which I believe is the case with some government debt).

> as long as the cost of the debt isn't growing faster than the revenues

But that can't hold true forever since the size of their debt is increasing, unless interest rates are 0, eventually the cost of holding onto debt will cross revenues.

Or how about an even more intelligent approach. Let's only spend money on people who are paying taxes.

Am sure the world would be better with less students, seniors, veterans etc.

sign me up for one of dem trillion dollar coins

Note that VIX--market predictions of volatility in the S&P 500--has remained largely unaffected by the shutdown[0], suggesting that Wall St is putting its money where its mouth is--the market either "believes" that a prolonged shutdown is unlikely, or that a prolonged shutdown would be unlikely to plunge us back into a recession.

[0] http://finance.yahoo.com/echarts?s=%5EVIX+Interactive#symbol...

The chart may hide the fact that VIX has risen 20+% since Oct 1st when the shutdown began.

A VIX above 20 is pretty significant.

The truth is very likely to be much closer to what Wall Street thinks than what D.C. thinks.

Traders and investors are incentivized to assess risk correctly and make good bets, while Congress is incentivized to engage in brinkmanship and make as much political noise as possible.

Traders are inscentivized to follow the herd and make big bets because when they lose they get bailed out or declare bankruptcy or (individuals) just find a new job and don't get a negative commission on losses.

Actually, based on an interview I heard recently, I'm not so sure they can prioritize payments. They system is very automated and apparently does not presently contain that particular feature.

To the people speculating the the US will default, and that the Treasury won't prioritize payments, I think you are, understandably, misdirected by the idea that Wall Street cares whether this is resolved legally or not. The market gives only the slightest of shits whether this is resolved legally.

The administration will make sure that we won't default if Congress can't act, and will most likely be dragged into court for doing so, where it will be determined that they acted illegally, but only on some technicality that nobody cares about and allows people to keep their money. Wall Street wants money, it doesn't care if your system has inner logic to get it.

"The market gives only the slightest of shits whether this is resolved legally."

Yes - the market would prefer the executive overrule the legislature versus follow it over a cliff. But nobody wants to be left holding a Treasury later ruled illegally issued and thus not entitled to payment.

Totally.

But a trillion dollar coin is currency, and if the US doesn't back its currency, then things will get real dark real fast.

Congress fails to make the debt payments happen (unconstitutional), President just prints more money and makes the payments (pretty sure this is also unconstitutional), everyone goes home happy.

Uh, the president can't print money. What he is constitutionally required to do is pay US debts before anything else. That means social security, the military, the white house janitor, etc, all get paid 2nd (or 3rd, etc). We're a long way from an actual default.

I'm guessing the Republicans are saying "Oh please, oh please," at the prospect of impeaching Obama for spending and borrowing without authorization. And they don't even have to win, they just need a forum that will be covered on the nightly/daily news to call Obama names and gum up his administration until the next election.

I'm guessing the administration is saying "Oh please, oh please" at the prospect of default that they'll justifiably lay on the Republicans, and use to make the Reps look bad and gum up their lives until the next election.

I'm guessing we're fucked.

Unless one of them happens to be a statesman, which I think Obama is.

A statesman who voted against raising the debt limit in 2006 when it was politically convenient?

Nobody's covering themselves in glory here.

He voted against the debt limit as a political protest when there was no chance the debt limit increase would fail.

Hence "politically convenient". He now describes people who consider casting that same vote as "hostage takers". Statesmen should be a bit more judicious.

That's my opinion as well. The Republican hardliners are echoing what I've heard many "normal citizens" say for quite a few years. I am sure they are ringing up the votes every time they declare no compromise.

The Democrats, on the other hand, get to point at the Republicans and say, "They are screwing you!", and have that more or less be true. I am sure they are ringing up the votes every time they declare that the Republicans are screwing the popularion.

Yeah, I'm not seeing how the parties have serious incentive to actually do their job.

they don't, and we should get rid of parties, or get a multitude more in power.

> we should get rid of parties,

The US tried that in the 1790s, as I remember. Didn't wind up working out in practice. I gather the current electoral system (winner take all) trends towards a two-party system. At least, that's what the poly-sci folk say.

This is notable because the change in perceived risk (as measured by the yield) of default appears greater in the shorter term government debt (1mo) as compared to the debt maturing later (3mo). It would indicate that "the market" believes there may be some technical non payment scenario over the short term (so, government shutdown related), but there appears to be no fear-mongery shaking of the faith in the nation. As you can see in the link the 30yr bond's yield has in fact fallen over the same period.

As this is a technical crowd, and there are requests for layman explanations, I'll elaborate some: Yield = Interest rate. This is inverse to the price of the bond. If you hold a bond and the yield rises (say, from 10bps to 27bps), you have lost money on your holding since the market price fell. The unexpected yield increase (price fall) on short term treasuries is notable because short term government bonds are held in large quantity by very risk averse investors (e.g. money market accounts) that not expecting to take losses. The unlikely downside scenario of a one off non-payment or deferred payment may cause settlement problems in short-term bond markets, or even a "freeze" as happened after Lehman collapsed.

Typically the yield of a bond increases over longer maturities because there is more time for something to potentially go wrong leading to an inability to pay. Thankfully, the United States is a sovereign nation that prints its money on keyboards, so that is only possible if a decision not to pay is made.

>> It would indicate that "the market" believes there may be some technical non payment scenario over the short term

It may seem ludicrous to an outsider, but it makes sense that if the market believes that the odds of the 1 month being delayed are significant, but the odds of the 3 month being delayed are insignificant, the 1 month would see a yield increase.

If anybody has 10 billion dollars lying around this is an excellent arbitrage opportunity ;)

If only LTCM were still around :(

Not sure if it was intentional, but this is precisely the trade that blew up LTCM. They bet on "convergence" in Russia's short-term debt. Russia repaid the favour by defaulting.

There's also what's called prepayment risk (or in this scenario I guess late-payment risk, but they're 2 sides of the same coin). For prepayment risk, essentially an investor thinks "OK, I put a lot of effort into this investment, but I don't have to worry about it for another x years". But the next month the investment returns at say a 15% yield, which would normally be great, but now you suddenly have to figure out what to do with that money and there may not be a similar quality investment around, at least one that's easy to find.

In this case, the bonds are such short term that the banks are probably using them basically as cash on hand to pay bills that are due at the end of the month or something while getting some return along the way. If the payment is delayed (or god forbid defaulted on entirely) suddenly they can't pay their bills. Then they have to either pull out of their other investments early (which will drop the prices of those investments), or turn to their own bond holders/power companies and say "it's not our fault we can't pay, it's the governments" which leads to a not-so-nice cascading effect. That's why Wall Street is so unsure what will happen, they aren't sure what they can do in the situation and how far their actions will cascade out.

> Yield = Interest rate. This is inverse to the price of the bond.

Why is that?

Isn't the interest rate of a bond a constant that is set by the seller of the bond? So if the bond becomes more risky, the interest rate doesn't change, but the market value of the bond goes down.

Put differently, the Treasury could offer a bond with a higher interest rate, but for the same "amount," in order to raise more money.

I don't know anything about bonds or the Treasury, and I am just trying to reason it out, so please let me know if I have a mistaken premise.

It's just how things are defined. Bonds have a value. Bonds have a term. Bonds have a price. The first two are fixed; the third changes with supply and demand. The yield is defined implicitly by these.

Bonds are a contract saying, "I'll pay you a fixed amount of money after a fixed amount of time". They then try to sell that contract on the open market.

Depending on how risky the market perceives the contract to be, the price could be a lot lower (increasing the effective interest rate)

> interest rate doesn't change

You're probably thinking of the coupon rate. The yield is a different thing.

Edit/Clarification: this is a negligible spike.

Can you spot the movement in 10y series? http://research.stlouisfed.org/fred2/series/DGS1MO

The risk premium isn't nearly the main determinant for such government securities unless you have an actual default. Lets hope we don't get to see that mayhem.

EDIT: Some FRED Data Not Updated Due to US Government Shutdown

OK, so you'll not see, for a different reason...

So that graph is only updated through 10/7 and the jump to .27 happens on 10/8.

Feels like we're about to have a Seldon Crisis:

http://en.wikipedia.org/wiki/Seldon_Crisis

What do you see as the external pressure?

If I had to pick one, it would be the global recession set off by the United State's last financial crisis... and the risk that another crisis could cause the collapse of the nascent global recovery.

http://www.nytimes.com/2013/10/08/us/politics/default-threat...

The headline would have been much more impressive if they just looked one day earlier. It went from 0.03 (9/30/13) to 0.27 (10/8/13). Being that the 0.03 number was much more the norm before the shutdown October 1st, it paints a better picture. What that picture means... I haven't a clue.

That a default will technically happen, but will happen in such a way that the market won't care all that much in the long term.

Can someone explain this to me in lay men's terms?

If the US govt defaults, it will default on the shortest end of the curve, because those are the payments that are required the soonest. This is why those rates have "spiked", even though 27 bps is miniscule.

Would the severity of a default effect the value of currency very inelastically because any weakness signals a tip of an iceberg?

BPS - Basis Point(S) (1/100th of a percentage point per Basis Point)

This is the interest on the bond, and the Fed sells these Treasurys to the public in order to raise money on an interim basis.

Effectively, it reflects the cost of borrowing money by the Federal Government of the United States to borrow money for ONE MONTH. This is a very short time period, as Treasurys are for sale in 1-mo to 30-year periods. So you'd only charge a high interest rate if you think the likelyhood of non-payment is actually an issue (that's risk vs. return).

Typically, 1 month is very not-risky, as it's highly likely that the US Gov is still around and solvent in a month. But with the recent debt ceiling / government shutdown rhetoric the market is beginning to get a little worried, so the premium the government must pay in order to borrow money has increased.

Basically by the Congress/White-House being deadlocked and having such fiery rhetoric it begins to appears as if there is a chance of default, and that chance is slightly higher than normal, so the risk/return on the 1 mo treasury has increased, as reflected in the increased interest rate the government has to pay to its bond holders.

Does this mean it would be a good idea to invest in a one month bond if you can wait out the chance the government would be delayed in paying you back?

the absolute interest rate is still very miniscule

Yes but what hedge funds would do (are undoubtedly doing) is raise a huge amount of money on margin and use it to arbitrage the spread between these and related instruments with other durations. Of course this can go horribly wrong; read the book "When Genius Failed".

Oh god, LTCM. Beware of investors that have no demonstrable controls against automated/HFT pouring of more of my money into a black hole trying to "win" back their losses.

The Trillion Dollar Bet is also a good, high-level documentary.

http://en.wikipedia.org/wiki/Time_value_of_money

Imagine we enter an agreement - you'll lend me $100 for a year, and I'll pay you $10 after a year. The banks will pay you $5 to borrow your $100, so you think this is a good deal.

After a year, I pay you back the $100, but I don't have my $10 for interest. I'll pay you back as soon as I can, I swear, seeing myself to the exit. Five years later, true to my word, I give you the $10. So you get your money eventually - is this a good deal?

Well, no, of course not. It may be better than the bank still, but it's not as good as the deal initially made it appear. You could have taken my $10, given it to a bank for the next five years and - assuming you didn't reinvest interest payments out of a noble desire to make math easier for yours truly - made $0.50 each year, for a total of $2.50. What's more, I could have done that, effectively reducing my debt to you by 25%.

Of course, this isn't on that scale, but that is the risk of delayed payment.

On 1 October 2013 investors demanded 0.10% annualised interest for the U.S. Treasury to hold their cash for 1 month. Now they demand 0.27%. This is strange since they demand 0.05% for 3 months.

Practically, banks, insurance funds, pension funds, and other risk-averse holders are dumping Treasuries due between 17 October and 1 November. Many of these institutions are highly leveraged and count on the certainty of cash from Treasury payments to fund other activity - a delay in payments from the Treasury, long considered "risk-free", could lead to them defaulting on other payments, leading to a daisy-chain collapse of credit similar to what we saw following the collapse of Lehman Brothers. By selling the riskiest securities, those due between 17 October and 1 November, these institutions can help defray the risk of being caught on the wrong end of an empty till.

Investors, over the last 7 days, believe that there is more risk surrounding 1 mo Treasuries.

A treasury is an investment that you get when you lend the government money. They promise to pay you back with X% interest in a certain time period. In this case, we are talking about 1 month.

So, with the increase in interest rate from 0.10% to 0.27%, investors demand more return because they think it is now 170% more risky (Simply calculate the difference of 0.27 - 0.10), to lend the government money for a short-time period (1 mo), than it was just 7 days ago.

Besides the absolute risks of default, an additional interpretation is that there is a risk that even if the shutdown/debt ceiling were worked out with no ultimate default - your principal and interest might end up tied up in some form of delayed hold on a one month scale, but that those issues are more likely to be resolved with no impact on a three month scale.

Good point, because money today is always better than money tomorrow....the whole time value of money concept[1].

[1] - http://en.wikipedia.org/wiki/Time_value_of_money

But what happens to the bank's asset value if TBills are suddenly no longer liquid (or at least desired)? Wouldn't that trigger some kind of valuation crisis, since banks are required to maintain a certain level of asset value?

Perhaps even more important than strict valuation is that banks (and especially institutional investors) have strict rules on the type of investments they can make. One of the most important issues is the level of risk carried. T-bills have historically been considered a (or the) risk-free asset. Suddenly they are not which potentially leads to a lot of selling (lowering prices) or attempted selling (if markets freeze).

The Treasury Secretary is charged with paying the interest on the US debt.

It doesn't need the approval of President Obama, nor can he explicitly prevent it.

ahem : http://blogs.reuters.com/felix-salmon/2013/10/08/the-un-terr...

Never have I seen so much speculation over 14 bps.

Wake me when it gets back over 1%... I might buy some.

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