Friday, May 22, 2009

Curious Interpretation of Rising Treasury Yields

by the Treasury Secretary Tim Geithner, as the yields on long-dated Treasury notes and bonds continue to go up following the huge spike yesterday.

In the article at titled "Geithner Vows to Cut U.S. Deficit on Rating Concern (Update2) " [emphasis mine]:

"Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

"“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year."

Over the medium term - I wish he cared to clarify. That's actually a very subjective term. For stock daytraders, the medium term will probably mean several hours. For patient investors like Mr. Buffet, the medium term may mean two decades. Mr. Geithner's target of reducing the deficit from 12.9% this year to 3% sometime in "medium" future represents 77% decrease. It seems to me like a tough call, without changing some accounting rules (which they already did, by the way). Of course it depends on how "medium" is "medium term".

Mind you, he is talking about the budget deficit based on cash accounting, not accrued. It doesn't include future obligations to be incurred, such as Medicare and Social Security payouts.

Here's the kicker in the article:

"Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.” "

If I remember, Treasury and the Fed were hell-bent on keeping the Treasury yields, particularly on 10-year note and 30-year bond, LOW. That was the whole purpose of the Fed buying Treasuries. The scheme is backfiring, as bond traders and investors here and abroad use the opportunity to unload their holdings onto the Fed. They are losing control.

So what do they do? Spin it. If the rise in yields on Treasury is a sign that things are improving, then 70's should be known as "roaring 70's".

Yields are rising because there is much more supply than the market can absorb easily. There is much more supply not because risk appetite of the investors has returned and they are ditching the safe-haven Treasuries en masse (some of it maybe) but because the government is issuing so much more debt.

Mr. Geithner also mentions the use of TARP money for cash- and credit-strapped state and local governments:

"Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

"The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said. "

Of course we expect them to abide by the law.


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