treasury securities

Shares Suffer Again in a Blow to Market Confidence

August 11, 2011 by NewsMaker Leave a Comment

After the rebound in the markets a day earlier when the Federal Reserve promised to keep interest rates near zero for two years, investors appeared to pay closer attention to the Fed’s grim assessment of the prospects for the economic recovery and jobs growth.

Investors fled any form of risk and poured into safe-haven investments like Treasury securities and gold, resuming the trend of the last few weeks. Confidence was shaken in the financial health of some of Europe’s banks and what their problems might mean for banks in the United States. Bank stocks led the sell-off in the United States, shedding nearly 7 percent.

Most European markets have entered bear territory, dropping more than 20 percent from recent highs, and the S. P. 500-stock index is not far behind, lopping off 18 percent since its recent April 29 peak.

Meanwhile, signs of stress are emerging in the short-term financing markets in Europe, where banks borrow billions of dollars everyday from one another and other lenders to finance loans and investments.

Although borrowing costs for banks in the United States and Britain have risen modestly, those for European banks that lend dollars to one another have doubled in the last 10 days to their highest level in the last two years. Still, borrowing costs are roughly one-fourth of where they were during the peak of the financial crisis.

On Wednesday, concerns about Europe’s debt crisis swirled across trading floors in New York. For yet another day, the stock market swung back and forth with ranges of hundreds of points. Stocks tried a late afternoon rally, only to plunge anew toward the close.

They finished steeply lower on Wednesday as each of the three main indexes dropped more than 4 percent, generally wiping out the gains of the previous day.

The last time there were three consecutive days of 4 percent moves in the S. P. was in October 2007.

The Standard Poor’s 500-stock index lost 4.4 percent to close at 1,120.76. The Dow Jones industrial average ended down 519.83 points, or 4.6 percent, at 10,719.94.

Few are risking a prediction that the market has hit a bottom. It will take a strong dose of rosy economic reports to start to pull stocks up. But instead of being buoyed by positive sentiments, investors are increasingly worried that governments in the United States and in Europe are unable to solve economic problems that may now be getting out of hand.

The fear is that policy makers have few weapons left to reignite growth now that United States interest rates have been pushed close to zero and any fiscal stimulus appears to be off the table in Washington.

“The market psychology is such that investors no longer seem to know who or what to root for, and all that they do know is, according to the Fed, that rates will remain low until the middle of 2013,” said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan Company.

As Europe’s debt crisis has spread into nations at the heart of the euro zone like Italy and France, it has added a new level of anxiety to markets. There are concerns that France could be overwhelmed if it is called upon to participate in any support for heavily indebted nations like Spain or Italy, and also bail out some of its own banks that hold large amounts of government debt from those shaky countries.

Some French bank stocks fell sharply after there were signs of some stress in bank funding rates in Europe.

Borrowing costs for European banks that lend to one another have doubled to 60 basis points since the end of July, although that is still well below the nearly 200-basis-point level hit at the height of the financial crisis.

Nevertheless, banks were the hardest hit sector in the United States stock market over fears of how vulnerable they are to the troubles in Europe.

Article source: http://feeds.nytimes.com/click.phdo?i=348a68f6672d77c3bda1255f9cfa5ce5

Filed Under: Business News Tagged With: bank stocks, market confidence, treasury securities

Economix: The Debt Limit and National Security

July 19, 2011 by NewsMaker Leave a Comment

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

One curious thing about the debt limit debate is the virtual silence of the foreign policy establishment. It’s curious because the potential for a default on our debt owing to Republican intransigence in Congress is a very big foreign policy issue indeed.

Today’s Economist

Perspectives from expert contributors.

This becomes obvious when one realizes that foreigners own close to half of all Treasury debt held by the public, and a lot of it is owned by countries –- China, in particular –- that are America’s most aggressive competitors on a wide variety of political, economic and military issues.

As Treasury data show, at the end of April, foreigners owned more than 46 percent of all Treasury securities held by the public. China is our largest creditor, with a fourth of all foreign-held debt and 12 percent of the total.

Treasury Department

Not surprisingly, Chinese officials have long expressed concern about the quality of Treasury debt, for both economic and political reasons.

Last year, the Dagong Global Credit Rating Company, a China-based credit-rating agency, downgraded Treasury debt, and last week it issued another warning, citing fears about the “actual ability and intention to repay its debts” of the United States. Chinese government officials have also publicly expressed concern about how the debt limit negotiations may affect them.

The situation is reminiscent of debates during the founding of our republic on the role of debt. Alexander Hamilton, the first Treasury secretary, was adamant that the United States must never default on its foreign debts. As he wrote in Federalist No. 30, “who would lend to a government that prefaced its overtures for borrowing by an act which demonstrated that no reliance could be placed on the steadiness of its measures for paying?”

A key reason why the Chinese own so much of our debt is that they are risk-averse and would rather get a low rate of return on Treasuries, even though higher rates are available on corporate bonds and other securities, because the Treasuries are assumed to have zero risk of default and the market for them is the largest and deepest in the world.

We don’t know how the Chinese will react if their faith in Treasury securities is shattered by a default –- and remember, a default occurs the moment the precise terms of a loan are not met and either principal or interest is not paid exactly when due.

The idea floated by Republicans such as Representative Paul D. Ryan of Wisconsin, the chair of the House Budget Committee, that the Chinese won’t mind if there is a “technical default” and they get their money a few days late is total nonsense and gross self-delusion.

In April, J.P. Morgan surveyed its clients that are large buyers of Treasury securities to see what their reaction would be to a temporary default resulting from failure to raise the debt limit. It found that foreign buyers would likely demand a 55-basis point increase in interest rates (0.55 percentage points) and that this increase could be permanent.

That is consistent with the experience in 1979 when the Treasury defaulted for two weeks over a debt limit increase delay and technical problems with its computers. It caused a 60-basis point rise in interest rates that lasted for years, according to academic research.

More worrisome to Morgan’s analysts is the possibility that foreign investors may permanently reduce their Treasury holdings. The analysts note that foreigners had previously been large buyers of securities issued by Fannie Mae and Freddie Mac. But they reduced their holdings by 40 percent after these agencies were placed under Treasury’s conservatorship.

It goes without saying that national defense is a core government function, one that has long included America’s economic interests, such as protecting the supply of oil. It would be myopic in the extreme to view the flow of oil to the United States as a legitimate national security issue but to view the flow of foreign capital into Treasury securities as a matter of no particular concern.

For these reasons, many legal scholars, like Jack Balkin of the Yale Law School, view the debt limit as a national security issue that would justify a presidential response equivalent in magnitude to what would be justified by a foreign invasion or an oil blockade. Sanford Levinson of the University of Texas law school notes that Franklin D. Roosevelt justified his extraordinary actions on the economy in 1933 on the grounds that the economic crisis was as important as war.

Although this view has been rejected by the Treasury, Professors Balkin, Levinson and other legal scholars assert that if Congress adamantly refuses to raise the debt limit until default is the only option, then the Constitution gives the president the authority to act unilaterally. This could be done under Section 4 of the 14th Amendment, which says the “validity” of the public debt “shall not be questioned.”

Even Laurence Tribe of Harvard, who rejects the Section 4 option, says failure to raise the debt limit would empower the president to take actions that would normally be illegal, such as impounding funds in order to prioritize debt payments.

Throughout our history, great presidents have pushed the limit of what the Constitution permitted when circumstances demanded it –- as when Thomas Jefferson bought the Louisiana Territory from the French despite lacking any constitutional authority to do so.

A debt crisis resulting from Congressional irresponsibility may force the onetime constitutional law professor Barack Obama to do the same.

This post has been revised to reflect the following correction:

Correction: July 19, 2011

An earlier version of this post misspelled the given name of a Harvard law professor. He is Laurence Tribe, not Lawrence.

Article source: http://feeds.nytimes.com/click.phdo?i=74e152b0234213d92067ec6696375b73

Filed Under: Economy News Tagged With: limit debate, policy establishment, treasury securities

Bucks: Online Treasury Sales Challenge Elderly Investors

May 20, 2011 by NewsMaker Leave a Comment

The federal government has started shifting the purchase of Treasury securities to the Internet to cut costs, which means many elderly investors are facing an unwelcome change.

The United States Treasury Department has begun phasing out its older Legacy Treasury Direct program, which allows users to buy Treasury bills and other securities by mail or phone and receive paper statements. It has started limiting use of the system and will completely shut it down on Nov. 1, 2012. Users must switch to the newer, Web-based TreasuryDirect system, or arrange to buy Treasury bills, notes and bonds through a bank or broker — which typically involves a fee. Slightly more than 200,000 people are affected, according to the Bureau of the Public Debt, the Treasury arm that handles the sale and redemption of Treasury bills and other government securities.

“As a convenient alternative, I encourage you to open a TreasuryDirect account to continue investing in Treasury securities,” says a letter to investors from Paul V. Crowe, assistant commissioner of retail securities for the bureau, that went out at the beginning of April.

The problem is that most users of the older system are elderly — their average age is 75, and many are over 80. Many lack computers, or the inclination to use one. The department acknowledges that the shift will be challenging for these people and encourages them to have their children, grandchildren or other trusted helpers assist them with the change. The letter advises investors who need help to call 304-480-7711 and select Option 2. There’s also a toll-free number available through one of the Federal Reserve banks, 800-722-2678.

It’s not just the technology that poses hurdles for some users. Investors who want to move their existing securities into the new TreasuryDirect system have to submit a form authorizing the transfer, and their signature on the form must be certified by their bank, a bureau spokeswoman, Mckayla Braden, said. That means elderly people who aren’t mobile have to find someone to take them to the bank. Or if they’re lucky enough to have a long-term relationship with an accommodating bank, they will have to persuade a bank representative to come to them. “It’s difficult,” Ms. Braden acknowledged.

Paradoxically, the letter also notes that information is available on the Web at www.treasurydirect.gov. “We hope you’ll enjoy the benefits of our newer system,” it concludes.

One 85-year-old Treasury bill investor from Queens, who would talk only if his name was not used, is decidedly not enjoying the prospect of change. He said in a telephone interview that he and many of his acquaintances were unhappy about the switch, and were at a loss about what to do. He has a significant part of his life savings in Treasuries, he said, because they are a very safe investment. For decades, he has bought them by punching in information on his telephone keypad and having the purchase amount automatically deducted from his bank account. He doesn’t own a computer, and has had limited success learning about them at his local library. The Internet makes him uncomfortable, he said, and he doesn’t like the idea of “my savings floating in the air somewhere.” He may consider getting a brokerage account to buy them, if he’s forced to, he said, but he’s holding out hope that the Treasury Department may grant investors like him a reprieve.

That appears unlikely at this point. The “new” TreasuryDirect system is almost 10 years old and the government has been encouraging users to switch to it for more than six years, Ms. Braden said, because the government can’t justify the cost of maintaining the older system. In addition to simplified transactions and record keeping for most users, TreasuryDirect doesn’t charge any annual fee for large account balances (the old system charges $100 for accounts over $100,000). “We are looking in every corner to find ways to save money,” Ms. Braden said, “and this is one decision we had to make.”

As of May 1 of this year, no new accounts may be opened in the legacy system, and existing Legacy Direct account holders may purchase, or reinvest in, only 13-week and 26-week Treasury bills. So, for instance, if an investor has a two-year note that matures in June, the proceeds can be reinvested only in short-term Treasury bills, not in another longer-term investment. If account holders don’t make arrangements to switch to the new system by November of next year, or arrange for an account with a broker, the government will hold longer-term investments until maturity and deliver payments according to the instructions in the account.

Are you a user of Legacy Direct, or do you know someone who is affected by the change? Have you made alternative plans for buying or reinvesting in Treasury bills?

Article source: http://feeds.nytimes.com/click.phdo?i=1b917c8b420e46559b48b6a68a61027f

Filed Under: Your Money Tagged With: treasury bills, treasury department, treasury securities

Economix: Who Cares About the Fed?

April 20, 2011 by NewsMaker Leave a Comment

Casey B. Mulligan is an economics professor at the University of Chicago.

Short-term interest rates have an obvious effect on the housing market, but not the rest of the economy.

Federal Reserve policy affects short-term interest rates, bank regulation and eventually inflation. I will write about inflation next week, and my fellow Economix blogger Simon Johnson has written much about bank regulation, so today I focus on short-term interest rates.

The Federal Reserve, especially its New York branch, is actively engaged in buying and selling Treasury securities, and it lends money to banks on an overnight basis. As a result, it is widely thought that the Federal Reserve is an important determinant of the rate of interest paid on short-term Treasury securities.

By reducing the supply of Treasury securities and overnight loans, so-called “tight” monetary policy raises short-term interest rates. High short-term interest rates are said to discourage borrowing, and thereby curtail private sector investment projects. The idea is that private sector projects are undertaken only when their expected return exceeds the cost of borrowing.

In theory, high short-term interest rates result in relatively few capital projects, with high expected returns, and low short-term rates result in more capital projects, including those with lower expected returns.

But the effect of high short-term interest rates on Main Street’s economy has been exaggerated. Although it is commonly assumed that today’s rock-bottom rates should help strengthen a business recovery, it appears that business conditions actually have little to do with short-term money markets.

Many important private sector investment projects are relatively long term — it most likely takes a year or more for a project to be completed and deliver a positive cash flow to investors. As a result, many capital projects are financed through long-term borrowing, with equity financing, or out of corporate retained earnings, rather than borrowing in the short-term market where the Fed’s fingerprints are so obvious.

In theory, long-term interest rates could rise as the Fed tightens the short-term money market, because some savers would be on the margin of saving in either the short- or long-term markets. Equity capital markets and retained earnings could, in theory, also be subject to similar indirect effects.

Thus, the effects of Federal Reserve interest-rate policy on investment are indirect, and it is an empirical question as to whether the expected effects — tight money discourages investment projects — are significantly reflected in preventing capital projects with low expected returns.

Luke Threinen and I have measured national average profitability of capital projects from the national accounts by dividing total interest and profits in the economy during a year by the total capital stock in place at the beginning of the year. In doing so, we have distinguished residential capital (i.e., houses) from business capital.

Capital produces value over a number of years. In the case of housing capital, the value is in the form of shelter and the convenience of a home. For any piece of capital, profitability (capital’s marginal product, as economists call it) can be calculated as the dollar value it creates during a year — after subtracting depreciation, costs of labor, maintenance and intermediate goods — per dollar invested.

Owners of capital prefer their capital to be more profitable, rather than less. It’s the profitability of capital (after taxes and subsidies; more on those below) that makes an owner willing to purchase capital in the first place.

Chart 1 compares the profitability of housing capital to the inflation-adjusted return on one-year Treasury bills (for comparability with T-bills, housing profitability is adjusted for property taxes). Consistent with the view that tight monetary policy both raises Treasury bill rates and reduces housing investment, the two series are positively correlated. The home-mortgage market appears closely linked, so high Treasury bill rates cause banks to charge more for home mortgage loans, which discourages homeowners and landlords from building homes unless the demand for homes is sufficient (i.e., landlords can earn enough rent from their tenants to cover a high mortgage rate).

Among other factors, easy credit from the Federal Reserve in the early and mid-2000s made it easy to buy and build homes, and as the inventory of homes grew the amount of rent that each home could earn (many homes went vacant, for example) fell, which shows up in Chart 1 as especially low values for the red series. In this way, the housing cycle of the 2000s confirms the usual story about how monetary policy can affect housing investment.

The usual story about Federal Reserve policy and business investment says that a similar process works on the business sector: High Treasury bill rates cause banks to charge more for business loans, which discourages business from investing unless demand for their product is sufficient (i.e., businesses can earn enough profit from their operations to cover a high loan rate).

Our findings for the business sector are quite different from the usual story. Chart 2 compares the profitability of business capital to the inflation-adjusted return on Treasury bills, and the correlation is negative.

One way that easy monetary policy could hurt business investment is by encouraging home-construction activity, and home construction takes resources away from business construction.

The evidence in Charts 1 and 2 suggests that the housing market can be stimulated by easy monetary policy, at least in the short run. But the link between monetary policy and the business sector is much weaker, and our data are consistent with the view that, holding constant the rate of inflation and the amount of banking regulation, monetary policy does not have a discernible effect on the cost of business capital.

Article source: http://feeds.nytimes.com/click.phdo?i=e1406475c6a886c77563d5e2d63b0a9e

Filed Under: Economy News Tagged With: business conditions, investment projects, treasury securities

Fed Minutes Show No Haste to End Stimulus

April 6, 2011 by NewsMaker Leave a Comment

WASHINGTON — The Federal Reserve shows few signs of easing its aggressive efforts to stimulate growth before the middle of the year, according to the minutes of the most recent meeting of the central bank’s policy-making committee, released on Tuesday.

While some members of that committee have suggested in recent speeches that the Fed might reconsider its plans to buy $600 billion in Treasury securities by the end of June, the minutes show little evidence that the idea has gained traction among a majority of the 10 officials who sit on the committee.

Indeed, the Fed increasingly seems locked into its current plan — neither less nor more — in part because the economic recovery remains tentative and in part because of a stalemate between advocates of less and more.

The minutes portrayed skeptics of the program as increasingly resigned.

“A few members remained uncertain about the benefits of the asset purchase program,” the minutes said, “but judged that making changes to the program at this time was not appropriate.”

The Federal Open Market Committee, which meets eight times a year to set monetary policy, has been on a war footing since 2007, authorizing a series of extraordinary efforts to contain the financial crisis and restart growth. The next major decision confronting the committee is when to begin the return to normal.

The minutes make clear that a majority of the committee — comprising members of the Fed’s board of governors and selected presidents of the regional reserve banks — continues to believe that the economy needs help. Moreover, that majority is portrayed as relatively sanguine about the chances of unleashed inflation.

With so many people out of work, those with jobs have little leverage to demand higher wages. They lack the means to drive up prices. As a result, the Fed regards the recent increases in food and gas prices as unsustainable.

The chairman of the Fed, Ben S. Bernanke, on Monday described the price increases as “transitory.”

The prospects for the economy, which appeared to be growing strongly at the beginning of the year, also seem increasingly murky. The minutes said the committee viewed the chances of faster growth, and the risk of a slowdown, as “roughly balanced.”

Evidence of growth is accumulating, including reports of factories planning to hire workers and increase production, and consumers spending more on cars and other goods.

But home prices keep falling and governments at every level are cutting spending. In addition, Europe is ailing, there is a risk that oil prices will continue to rise and the effect of the disaster in Japan is “not yet clear,” the minutes said.

The committee next meets April 26.

Article source: http://feeds.nytimes.com/click.phdo?i=12fb052d343cdc9098f9ae628594701d

Filed Under: Business News Tagged With: economic recovery, treasury securities, wages