Feb 022012
 February 2, 2012  Posted by at 4:03 pm Finance

Dollar21.jpgWhen creditors start paying high-quality borrowers to hold on to their money at debt auctions, you know the world is in the midst of an unprecedented debt deflation. The highest quality debt out there still remains that issued by the U.S. Treasury. Rates on 4-week Treasury bills went negative on the secondary market in December of last year. It’s not that we have never seen this before, but that it is occurring in the context of obvious deleveraging concerns in all parts of the world.

Now, the Treasury Borrowing Advisory Committee has unanimously recommended that the Treasury officially allow investors to bid negative rates at bill auctions, and it looks likely this advice will be adopted. Note that the Committee is comprised of the 21 primary dealer financial institutions, so it’s not as if Wall Street is being forced into anything here. As the following Reuters report makes clear, investors are actually clamoring for this option.


Treasury may let investors pay to lend to U.S. government

“In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

“It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible,” according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.

The European debt crisis and worry about global prospects is fueling investor demand for safe assets like short-term U.S. government debt. Treasury said modifying its auction rules would require overcoming “operational issues” but they were related to accounting rather than to legal questions.

The Treasury has sold four-week bills with a zero percent rate several times in recent months. One-month bills traded with a negative yield on the secondary market in December, according to Reuters data.

Treasury yields this low may also become a long-term fixture in U.S. markets after the Federal Reserve promised to keep borrowing costs exceptionally low until at least late 2014.”

A decision on a policy change could come in May.

We have now reached the stage where the return of capital, rather than return on capital, takes precedence over everything else. The near-term HI advocates will say this development is a clear sign that gold is the only asset worth holding any more, but they are not thinking like the big money investors. The latter not only have investment guidelines to follow, but they also want to stay as liquid as possible and avoid the risk of another 2008-style price collapse across all risk assets, including commodities and precious metals.

The Treasury is simply providing multiple avenues for them to do so, including a proposal for floating rate notes.

“Miller said Treasury also “continues to study the possibility of issuing Floating Rate Notes (FRNs)” and would announce a decision at the May refunding. A Treasury official said the 21 primary dealers who are part of a committee that advises Treasury on market conditions made a strong case in favor of floating rate notes.

The official said that, at this point, it was not looking at the potential issue of ultra-long bonds of 50 years or more and instead preferred the idea of floating-rate notes.

The borrowing advisors felt that a decline in available global high-quality government bonds as well as rising demand for safe assets would make U.S. government-issued floating-rate notes “extremely attractive” to investors.”

The FRNs provide investors a method of preserving capital without exposure to interest rate risk. There is only credit risk, and the primary dealers are correct to point out that the U.S. will enjoy relatively little credit risk in the current global, risk-riddled environment. All of this, of course, is a way to extend the USD-based sovereign debt ponzi for a few more years, and will make the collapse that much more painful when it occurs. For now, though, everyone must pay the global Mafia Don protection money to stay safe from the credit contraction monster.

Home Forums Paying for $Protection

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    When creditors start paying high-quality borrowers to hold on to their money at debt auctions, you know the world is in the midst of an unprecedented
    [See the full post at: Paying for $Protection]

    el gallinazo

    I have heard that there was a time when the Swiss banks charged a negative interest for the privilege of stashing your loot there, though I do not know about Swiss sovereign debt. I agree with Ash that negative interest rates are a sure sign of deflationary collapse. There are some who claim that the Fed does not set interest rates but rather follows the market to give it the appearance of more clout than it actually has. OTOH, the MSM and some of the quasi alternative media (Jim Puplava) are insisting that the green shoots have arrived and that 2012 will be nominally quite bullish for stocks, if simply because of more QE. Motha Global has sent a warning sign to anyone with two synapses and two pennies to rub together that privately held bank accounts headed up by “private” bankstas such as Jaime are not a safe place to stash your cash. Glad the article referred to the 21 primary dealers. I remember when the number was 22 – about three months ago.



    With the election upcoming I would think there will be every effort made by the current occupant to keep markets humming along, printing and making cash seem foolish to hold, for instance, the current talk of costs to be placed on holding money market funds. If Markets are weak leading to the election I would look for a bookie and start placing some serious money on the other guy and make my dough that way instead:)


    From sidebar https://jessescrossroadscafe.blogspot.com Jesse’s Cafe

    Fed Playing Favorites With Wall Street in Secretive Bond Deals: Mortgages

    “Goldman Sachs held onto almost all of the bonds the New York Fed sold to it for at least a day, rather than mainly fulfilling client orders as Credit Suisse did last month, based on data from Trace, the transaction reporting system of the Financial Industry Regulatory Authority.

    Goldman Sachs told some investors who bid on the bonds through the bank that, while they had offered the best prices on individual securities, the firm had bought the debt for itself, according to three money managers with knowledge of the matter. Goldman Sachs then offered the securities for sale to the investors, they said. The prices were between 1 and 3 cents on the dollar higher, said one of the people, who declined to be identified because the transactions aren’t public.

    el gallinazo

    I think that too much is made of the election in terms of financial decisions by the powers that be. The elections are set up so that anyone who might be nominated by the red or blue team is a puppet. I think in the last election, the Owners favored Obama simply because he was a wolf in sheep’s clothes and thus could inflect a lot more damage to the common man with a lot less resistance. But to make my point: The collapse of Lehman which according to all the pundits brought the global Ponzi within hours of a total meltdown, the $80B bailout (for starters) of AIG (of course a pass through of public money to the TBTF banks), the shifting of Merrill Lynch to Bank of America to form Lynch America, and the Tarp Heist as well as the $14-24? trillion Fed alphabet soup all transpired within 60 days prior to the last presidential election. And the nationalization of Freddie and Fannae, the bazooka that was never to be fired, occurred only a few weeks earlier. So much for the positive calm pre-election theory.


    I think in the last election, the Owners favored Obama …

    I think it is like football or hockey club owners where it might make some substancial monetary and prestige difference to the owners about which team wins, for the dweeb sports fan all he is gets is to pay the freight and a hangover. The same as goes for the dweeb electorate. (of course he coud put a few dollars with the bookie so it isn’t a total waste)

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