For the first time in history, not even in 1929, $27 billion of three-month bills were sold at a discount rate of 0.005% and are now trading at negative yields. Investors will get back less than they pay for them for the security of actually being repaid.
What this means is that there isn’t a lot of demand for them which begs the question, who’s going to fund the sprending spree now? Could there be a bond market ‘strike’.
Does it matter? “Countries don’t go broke,” as Walter Wriston, then chairman of Citigroup, said just before Mexico , Brazil and Argentina went broke during the Less-Developed Countries Crisis of 1982. And “governments with large exposures to currency mismatches and interest rate or maturity risks are, of course, particularly vulnerable,” as Arturo Porzecanski, a scholar at New York and Columbia universities, writes in Sovereign Debt at the Crossroads (OUP, 2006).
“Governments tend to default specifically when they must increase spending quickly (for instance, to prosecute a war), experience a sudden shortfall in revenues (because of a severe economic contraction), or face an abrupt curtailment of access to bond and loan financing (e.g., because of political instability).
“It is usually very difficult for governments in such trouble to take the necessary offsetting actions, such as hiking tax collections or cutting spending on an emergency basis.”
None of this points to a looming debt-default by the US Treasury, of course. But jitters in confidence can destroy front-loaded debtors if (or when) lenders go on strike. Witness last summer’s collapse of Northern Rock – a top five British mortgage lender – precisely because it relied on short-term refinancing to keep itself running. Witness the classic “banana republic” structure of short-term debt that needs constant re-funding.
There’s a clear “maturity risk” built into America moving its government debt out of long-dated bonds into ever-closer redemption dates. Not least if the Federal Reserve keeps squashing its short-term interest rates – now way below the rate of inflation – literally destroying the wealth of investors caught holding short-dated bonds.
If the bond market won’t play ball at the long end, will it always play ball for short-term refinancing regardless?
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