Negative Rate Posted on a T-Bill Auction

[haha]

Bloomberg.com: Worldwide

Another thing I never thought I would see.

Ha

 

[ziggy29]

Based on the comments in the article, I wonder if the Treasury bubble will pop in January. Sounds like a lot of institutions are trying to dress up their year-end balance sheets to look like they've been in cash through it all.

 

[clifp]

IIRC, Japan had 0 and even negative interest rates for much of the last decade or so.

I must say why anybody in there right mind would loan money to Uncle Sam at these ridiculous interest rates is beyond me. I hate to say it but there is a chance (albeit very small) that Uncle Sam may default on the trillions of dollars it owes.

 

[FIRE'd@51]

According to the Ibbotson/Sinquefield database, investors who rolled 1-month T-bills in 1938 lost 2 basis over the year. The returns to someone who rolled one-month T-Bills from 1938-1941 were:

1938 -0.02%
1939 0.02%
1940 0.00%
1941 0.06%

That's a total return of 6 basis points over 4 years.

 

[samclem]

I hate to say it but there is a chance (albeit very small) that Uncle Sam may default on the trillions of dollars it owes.

I don't think that would ever happen. I wonder if there are historical cases in which a country with the authority to print fiat currency has defaulted on their bonds. If it has happened, it has been rare. It's less embarrassing to just run the presses a little longer than to not pay the bondholders.

 

[clifp]

Outright defaults have been rare but restructuring is not uncommon. In recent times we have seen.
Russia back in 1998 restructured rubble debt.
Iceland 2008, try cashing in your Iceland bonds (aptly named Glacier bonds)
Argentine defaulted on some of its external debt in 2001.

This rather interesting Harvard paper "This time its different" gives some truly scary data on the frequency of government saying sorry no money. Countries like the US, and Canada which have never defaulted on debt are actually pretty unusual according to the authors. Most of Europe has defaulted (albeit back during the days of Monarchs for countries like England, and France), but Germany, Greece, Austria all defaulted in the 20th century as have virtually every Latin American country.

Note for purpose of the bond holder there is almost no difference between an outright default and hyperinflation (50% a year) for several years. In the case of US, hyperinflation won't happen in 3 months but in 10 years a definite possibility.

 

[FIREd]

The US has a HUGE advantage over other countries: we get to repay our debt in our own currency, the dollar (foreigners clamor to lend us money!). And since we are the ones printing the said dollars, defaulting is very unlikely. We just print more! Hence hyperinflation is the more likely outcome.

Countries like Iceland don't have this luxury. Their debt is denominated in dollars, euros or whatever and when the krona gets devaluated and plummets, it becomes impossible to repay foreign debts. Default becomes the only option.

 

[Architect]

Strange how folks willingly can believe in hyperinflation, but dismiss low Treasury interest rates - not unusual historically - as a bubble. OK 0% bills is odd, but that's just extreme stress in the credit markets. If you've got a few billion you don't want to lend you have to park it somewhere.

Hyperinflation has never occurred in this country, but deflation has frequently. It's not hard to see the evidence.

 

[ziggy29]

Hyperinflation has never occurred in this country, but deflation has frequently. It's not hard to see the evidence.

Pretty much all the other significant, long-lasting deflationary periods in U.S. history had their roots in eras before the government could "fight" deflation by running the printing presses to introduce "anti-deflationary" monetary pressures on the economy.

So as much as I hate the term "this time it's different" (because it's usually wrong), the dynamics leading up to the current deflationary pressures could be actively challenged with monetary policy and printing lots of money like never before in this country's history.

 

[FIREd]

Strange how folks willingly can believe in hyperinflation, but dismiss low Treasury interest rates - not unusual historically - as a bubble. OK 0% bills is odd, but that's just extreme stress in the credit markets. If you've got a few billion you don't want to lend you have to park it somewhere.

Hyperinflation has never occurred in this country, but deflation has frequently. It's not hard to see the evidence.

I personally don't believe we will see hyperinflation, as in "out of control inflation" Zimbabwean style, I am just saying that if you have to pick between hyperinflation and US credit default, then hyperinflation is more likely. I think we are likely to see some deflation in the short term, but over the longer term, inflation is a much bigger risk IMO. That's why I have loaded up on TIPS and commodities lately, 2 asset classes I have never owned before.

 

[NW-Bound]

Dunno about Zimbabwean style, but I am old enough to live through periods of 14-15%/year inflation. My first morgage rate was 14% FHA (30-year) in 1980. I thought we were lucky to get in at that rate, because a few months after we closed, it jumped to 16%. My credit union at work paid double-digit interests for a while. My employer gave 6-month raises so people wouldn't jump ship.

 

[clifp]

Dunno about Zimbabwean style, but I am old enough to live through periods of 14-15%/year inflation. My first morgage rate was 14% FHA (30-year) in 1980. I thought we were lucky to get in at that rate, because a few months after we closed, it jumped to 16%. My credit union at work paid double-digit interests for a while. My employer gave 6-month raises so people wouldn't jump ship.

My first mortgage was 13.75% in 1983, and while it was nice to see double digit pay raises,house appreciation etc there was a loser in my situation.
Namely the folks (backed by taxpayers) who owned my 5% student loans.

By the time I got finished paying back the loans 10 years after graduating they were worth $.43 on the dollar.

 

[clifp]

The US has a HUGE advantage over other countries: we get to repay our debt in our own currency, the dollar (foreigners clamor to lend us money!). And since we are the ones printing the said dollars, defaulting is very unlikely. We just print more! Hence hyperinflation is the more likely outcome.

I agree this is a huge advantage to the US. But since we have a moved to the worlds biggest debtor nation, I can see the US dollar being replaced by the Yuan, the euro, or a barrel of oil.

 

[FIREd]

I agree this is a huge advantage to the US. But since we have a moved to the worlds biggest debtor nation, I can see the US dollar being replaced by the Yuan, the euro, or a barrel of oil.

If that happens, it would indeed be a big blow for the US. But, as I have posted in an earlier thread, America's debt as a percentage of GDP, is still reasonable compared to most western countries. I am very familiar with the Eurozone and its economic policies and believe me, I would not buy a single 30 year bond from any Eurozone government. Europe has the same long term debt problems we do, but worse. So I personally don't see the Euro take over the dollar as the reserve currency of choice. As for the Yuan, I think it could become a real contender the day China becomes the world's largest economy. But they still have some ways to go before that happens and that gives us some time to get our act together. I know, the doom and gloomers are going to get irritated with my enthusiasm for the dollar...

 

[NW-Bound]

...
I am very familiar with the Eurozone and its economic policies and believe me, I would not buy a single 30 year bond from any Eurozone government. Europe has the same long term debt problems we do, but worse. So I personally don't see the Euro take over the dollar as the reserve currency of choice.
...
As for the Yuan, I think it could become a real contender the day China becomes the world's largest economy. But they still have some ways to go before that happens and that gives us some time to get our act together. I know, the doom and gloomers are going to get irritated with my enthusiasm for the dollar...

I don't profess to know what currency will be the winner, and I am not ready to write off the dollar. Even if it deteriorates, hopefully it won't be overnight.

However, my philosophy always has been to hedge. If you try to be 100% right, you might end up being 100% wrong. How many times have I told the story of a couple of my friends going to 100% gold coins in the 80's? Brrr... The thought gives my goosebumps. I can live with myself (and my portfolio) if I am just 30% wrong, or perhaps even 50% wrong.

I never trade currencies, but have bought commodity producers in Canada, Brazil, and Australia. Hope that helps.

Diversify, baby, diversify...

 

[FIREd]

I don't profess to know what currency will be the winner, and I am not ready to write off the dollar. Even if it deteriorates, hopefully it won't be overnight.

However, my philosophy always has been to hedge. If you try to be 100% right, you might end up being 100% wrong. How many times have I told the story of a couple of my friends going to 100% gold coins in the 80's? Brrr... The thought gives my goosebumps. I can live with myself (and my portfolio) if I am just 30% wrong, or perhaps even 50% wrong.

I never trade currencies, but have bought commodity producers in Canada, Brazil, and Australia. Hope that helps.

Diversify, baby, diversify...

I have about 33% of the portfolio invested abroad. And for full disclosure I will receive a very sizable inheritance in Euros / Swiss Francs, so I maybe more protected than most against a dramatic USD blowout. Still I don't see it, at least not in the near / intermediate future. But who knows? Better be safe than sorry...

 

[clifp]

Just to clarify a bit.
I think there is a very remote chance g that US is going to default on the debt, I think in the next 30 years there is a 50/50 chance that the US dollar will no longer be the sole primary currency in the world, I do think it more likely than not that we will see a period of double digit inflation similar to the late 70s or 80s in the next 30 year.

The point being that in order for US government bonds to be a good investment at the current rates ~0% short term 2.6% 10 year, 3.1% 30 year, none of my concerns can come true. A few years ago people (including myself) were significantly underpricing risk, now I think they are overvaluing perceived safety of US debt.

 

[lazygood4nothinbum]

YouTube - Victor Borge - Inflationary Language

 

[ChrisC]

I wonder if there are historical cases in which a country with the authority to print fiat currency has defaulted on their bonds. If it has happened, it has been rare. It's less embarrassing to just run the presses a little longer than to not pay the bondholders.

Some people insist that the Confederate States of America was a separate country between 1861-1865 in North America. The CSA had hyperinflation and defaulted on bonds that were placed in the European market. There are numerous economic studies on the CSA.

 

[Architect]

Still, listen to the ideas on this thread. The U.S.A could a) default, b) cause serious runaway inflation or c) suffer deflation. Seriously, is it thinkable that the US would default? That would be Armageddon, they would monetize the debt before that!

And with regards to inflation - haven't we proven ourselves to be quite good at stopping inflation? It's not to hard for a central bank, at that. Simply raise interest rates and drain money from the system.

Deflation is much harder to fight, and on the whole it's not nearly as bad as the other two. It's harder to fight because you can lead a horse to water, but you can't make him drink. That's the problem right now and why the Fed isn't able to prevent the deflation we're already seeing. Stopping inflation is pulling the punch bowl away from the horse.

And I guess defaulting on the debt is like shooting the horse. Oh wait - stop me! Hyperinflation is like drowning the horse, lol ... OK I'm getting stupid ...

 

[samclem]

Some people insist that the Confederate States of America was a separate country between 1861-1865 in North America. The CSA had hyperinflation and defaulted on bonds that were placed in the European market. There are numerous economic studies on the CSA.

The CSA case is interesting, but I'm not sure it directly applies here. They had only two small bond sales in Europe: One in Amsterdam ("junk" bonds) denominated and payable in pounds sterling (so, not backed by CSA fiat currency). The other sale was of "Cotton Bonds," which were denominated in pounds sterling but payable in a specific amount of cotton (so, these were not backed by fiat currency). The value of these bonds held up quite well, even with the considerable "hitch" that they bearer had to take delivery of the cotton in the CSA, and there was a blockade in place. The CSA serviced these bonds throughout the war--I don't know if you could say they defaulted on them, since the CSA "went away" before the bonds were due to be paid off.

These cotton bonds were an interesting case of attempting to buy political influence. They were targeted to wealthy and influential British buyers, and the South sold them at an attractive price. The idea was to give some influential folks in England a stake in supporting the South in the war, and there is some evidence that it worked.

More here and here.

 

[ChrisC]

I don't know if you could say they defaulted on them, since the CSA "went away" before the bonds were due to be paid off.

The reason for the nonpayment is not simply that the CSA "went away." Admittedly, the original issuer could not make payment on the bonds because that issuer was no longer on the scene, so to speak. But no one else could step up to make payment, in pounds sterling or cotton, as section 4 of the 14th Amendment forbade payment of these bonds: "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

 

[haha]

The CSA case is interesting, but I'm not sure it directly applies here.

An understatement if one ever existed.

 

[FIRE'd@51]

Just a point of clarification. The actual auction itself did not result in a negative rate on 3-month bills. The auction result was a discount of 0.005% and an issue price of 99.998736.

Auction Results

Evidently, it was in subsequent trading that the bills traded above par, resulting in a negative rate to some buyers in the secondary market.

 

[Darryl]

TIPS TIPS TIPS

Guys the printing presses are working and there is no way the greatest country in the world is going to say "sorry I can't pay back the money I borrowed" it just ain't gonna happen.
At the same time we have little self restraint or ability to hold ourselves accountable so it turns out an apology "yes we know our policy is driving down the dollar but we also have an obligation to meet our domestic obligations". Is much more palatable for our rerpresentatives. I see maybe too much grey but on this it is crystal clear there is only one way for this to play out. It's the way I'm playing my bet, unfortunately my forecast may be 5 or 10 or 15 years ahead of it's time.