U.S. Treasury Bonds

Hasen Bao 25/02/2009 19:15

There are recent concerns that with all the bailouts of the housing market, the banking and auto sector, the issuance of debt by the U.S. government will augment. The major concern is; will there be enough people to purchase debts issued by the Treasury; and what will happen to the market interest rates if demand for Treasury bonds fails to catch up to its supply.

Treasury Bonds when compared with large/small cap stocks and corporate bonds are considered a much safer investment; it often generate a steady flow of fixed income over the lifetime of the bond, but comes at a much lower return. At times of financial duress treasury bonds are relatively attractive due to the plunging stock market and volatile commodity prices, investors are purchasing T-bonds to abate chances of defaults, but the Treasury is issuing debts at such a rapid rate that the market begins to mull the effects if demands for these bonds fall.

If supply has outstripped demand on Treasury bonds the most significant effect is reflected in a rise on the yields of these bonds, while the bond price plunge, (interest rates and bond price are negatively correlated; finally something from the textbook can be applied). With the rise of the bond yield; so will the market interest rate charged on loans, mortgages, credit cards etc. If this were to happen to the economy; the already depressed consumer spending will impair because high interest rates is basically an impediment for growth in businesses and consumer spending.

Some argues that high interest rates driven by a fall in bond price due to less demand is the result of investors shifting their money back into the stock market because the economy have began to recover. On the other hand; demands for bonds may slow down simply because there are just not enough people who want to purchase treasury bonds. There might still be hundreds of millions of people out there who do not own any Treasury bonds; but the supply of these bonds cannot incur in such a way that the government takes assumptions that everybody in America will at least purchase some of the bonds and a majority will own a bulk.

It is right for both bondholders and non-bondholders to be concerned about how the government’s financial stability plan will play out for their need for public debt and the ladder effects. To determine factors affecting the direction of the demand and supply of Treasury bonds; we should first and foremost be prognosticate of the direction of the board economy.

The first few questions I consider are ‘Is the current stimulus package enough?’ ‘Has all those who are incompetent in this recession received government bail out?’ ‘Will they need more bail out money?’ ‘How much more do I think the government is going to borrow before the economy reach trough?’ If the soothsayer inside of you has told you that the economy will enter the process of recovery next month than you will be able to derive the effects of the recovery on things like bond yields, bond price, demand and supply of the bonds, market yields etc.

I’m incompetent of knowing whether the U.S. Treasury has ever defaulted on any of bond’s coupon payments; but as the issuer of such massive amount of debts, combined with the pressures of reduced tax revenue and so many other areas that needs adequate government spending, this time, just maybe, to put it lightly a chance for interest payment delay or maybe, default.

Eventually the economy will recover from this devastating recession; and when it does I predict investors will rush into the stock markets like they always do. They will ask their mutual fund managers to readjust their portfolio to allocate a larger percentage in stocks and less in fixed-income bonds and the like. What I’m trying to point out is that the value of the bonds may deteriorate in both ways. But something might change in this process and I could be wrong.

America’s national deficit

Hasen Bao 24/02/2009 16:19

America’s national deficit has been proliferating during the recent economic crisis; with president Obama’s pledge to cut the deficit amount of $1.3 trillion by half during his presidential term can be a difficult task under the current economic calamity. In the outset it is good news to hear about the president’s concern over the nation’s deficit; it gives reassurance that the government is not negligence of the issue and is finding ways to combat the problem.

By initiatives to take responsibility of the current deficit; the president is showing directly his concerns for the next generation, as many of us in the younger generation convict that we should not be liable to pay for deficit created by the previous baby boomers. It is the moment to cease pushing the problem forward and pushing it sideways; waiting for foreigners to help disclose the gap in America’s trade account.

During times of prosperity America has a nation has been spending and shopping as if there is no tomorrow; the people buys on credit only to receive immediate satisfaction, Wall Street leverage outrageously only to make easy money and flee, the government borrows only to fund wars and programs like Medicare and Social Securities that failed because it could not fulfill its own terms.

As President Obama intends to deal with the deficit by spending less on the war in Iraq and raising taxes on those who make more than $250,000 a year. Albeit the reduction of spending on wars; which is totally unnecessary and should be reduced much long time ago, this problem cannot be simply unraveled by raising taxes and cutting government spending; it is almost an impossible task in the current economic climate to reduce national deficit by raising taxes, while jobs are lost, consumer spending is slowing, investors are becoming conservative and businesses are posting quarterly losses, how is raising taxes going to help with anything?

According to experts the outlook on the first half of 2009 is not very promising, with the recession continues to worsen, but signs of solid recovery beginning in 2010. In the meantime the government should focus solely on getting the economy back to its feet; stabilises the housing market and the banking industry and get the economy up and running again with a set of revised and conservative regulations. Of course; this is easily said than done, the Obama administration is doing the best they can at restoring viability to the economy but we should all understand that the current crisis is fundamentally a very complicated mess rooted not only by the housing bubble but by the culture, the history and the habits of the people of this nation.

The most visible role of the government at this moment is the foster parent of all failed corporations that needs taxpayer funding. Even though I do not like the idea of this much government intervention in the economy; but this seems like the role they must take on when capitalism and the geniuses beyond it fails. I also must agree that the national deficit picture will get much worse if the government didn't spend a lot of money to salvage the economy.

President Obama’s proposal on cutting national deficit by half by the end of his presidential term may be too ambitious for me; however this partly depends on how long his presidential term is, 4 years? 8 years? The task of shrinking deficit needs and should be the nation’s long-term commitment; it is important to stress that this will not just be a commitment on the government’s behalf, this requires the commitment of the people of America.

It is also critical that the government stop finding ways to make the deficit look smaller; instead face up to the full exposure of this problem. During this process; the government will need to find ways to either make up for amounts owed on Medicare and Social Securities or restructure or reform the two programs. Setting rules and regulations to limit the level of debt any individual and legal entity can have is the next essential. The government must also be meticulous about which sectors needs to be vastly invested and which needs not to be, we have to allocate government spending accurately and efficiently in order for us to see a real improvement.