LISTEN TO THE SHORT-TERM BONDS

There was an article yesterday in the “Wonkblog” section of the Washington Post, by Neil Irwin, linked as follows: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/08/whats-happening-in-the-treasury-bill-market-today-should-terrify-you/?wprss=rss_business&clsrd&wpisrc=nl_wonk.  The Wonkblog is generally focused on numbers-oriented issues.  In this case, it was the recent spike in short-term U.S. Treasury bill yields.

Generally, many people have an idea of whether the Stock Market has been going up or down; however, when it comes to the Bond Markets, they don’t have a clue.  Oftentimes, movements in the Bond Markets, however, can be a good indicatior of the overall Financial Markets.  Over the past nine days, since the Government Shut-Down and, more recently, the focus has shifted to the potential impasse over the Debt Limit, Short-Term Treasury yields might have been telling us something.

Treasury bills are short-term obligations, issued by the Government for terms of one-year or less.  Oftentimes, the real short issues reflect Uncertainty even before the rest of the bond market.  Since the Shut-Down, last Tuesday, the Dow Jones Industrial Average has dropped by a little; but, hardly enough to cause alarm.  The chart in the linked article, however, shows how much short-term T-bills have spiked since the Shut-Down.  In fact, two week bills were yielding 0.03% (virtually nothing) on September 30. This past Monday, the yield was 0.17% and, on Tuesday, it shot-up to 0.297%.

Now, none of those yields would mean much in your or my portfolio; however, given the hundreds of Billions of Dollars floating around, those numbers start to mean something.  Consider that, if the Treasury’s Credit Rating drops, and even worse, if we actually default, the yields on all Treasury debt–issued for terms of three months to 30 years– will skyrocket.  Additional Debt would have to be issued (for years to come) just to pay the additional interest expense.

Currently, as the World’s only Reserve Currency, other countries invest their excess reserves in Treasury obligations.  And, we count on them re-investing when those mature.  Well, what if they didn’t?  That would push the rates up further again.

The Uncertainly and havoc that a default on Treasuries would cause on the World is hard to imagine since the U.S. has never defaulted on its Debt before.  But, it could cause another Financial Meltdown that would even surpass the recent one.  So, those in Congress who think that we could pick and chose which bills to pay are really acting ridiculous*.  They’re either playing with fire, or just stupid.

Lastly, our Dollars have also dropped in value by a fair amount. U. S. companies that export their products will find them more attractive on overseas markets; however, products that we import will then be more expensive to us.  The real question would be: how high would the interest rates be that we would have to pay to sell Treasuries overseas when, for the foreseeable future, they will be repaid repaid in Dollars that might be worth less than before all this Insanity started.

*  Generally, there is a covenant on just about all debt which  states that, if the borrower defaults on any debt whatsoever, all debt could be declared due and payable, at the option of the lender.

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