The Bond Gods Are Squawking

Almost everyone pays attention to the stock market.  It’s on the news every night.  The stock market is the smallest market when it comes to the big three of financial marketplaces.  Credit markets and foreign exchange markets dwarf the stock market.

The Federal Reserve meets today on interest rates.  I traded short term interest rate futures for 16 years so this day was always one we watched.  I still watch the markets.  Once embedded in you it never leaves your blood.  If you ever have the pleasure of a meeting with Leo Melamed in his office he will interrupt constantly to buy or sell something.

I don’t know how closely you follow the bond market.  When Greenspan was Fed Chair, the US switched from issuing very long term 30 year debt to 10 year notes.  The Fed chair felt they could more efficiently finance the needs of the country by using shorter term instruments.  Other countries also used shorter term debt, so it standardized world wide debt markets.

I wasn’t a fan.  I really think the Fed should react to the market and in many cases can set the market.  By nature, I am a contrarian so when everyone zigs I like to think in terms of zagging.  That mindset worked well for pit trading and it works well in venture capital.

The US is probably the only country that could get away with issuing very long term paper like 50 or 100 year bonds.  Ford has done it. Disney has done it.  Why not the US?

The latest 30 year bond auction in the US was a disaster.  It’s a hiccup to be sure but when rates rise, the debt gets a lot more expensive to finance.  All US debt is a claim against the future income of all Americans.  By the way, this is why people who focus on the demand side of the economy get it wrong.  Governments only get money from taxpayers in the long run.  Lately I have heard that we should increase taxes to pay for infrastructure.  It’s a hollow thought and the argument doesn’t hold up to economic theory that works.

In times of super high interest rates like the late 1970’s, the Fed could issue more short term paper of 5 years or less.   In times of unusually low interest rates like we had from 2009 until today, the Fed could issue very long term paper.  Greenspan was trying to smooth out the interest payments so it was relatively stable over time but I think the financing needs are so large that creating a “fat tail” on each end of the yield curve dependent on market conditions might be a better way to finance the debt.