BOE/FED/UST debt 'buy backs' = ??? : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Time to connect some dots here. With this and the recent BOE bond buy anouncement we can see that there are some tremendous debt implosions as well as cash demands occuring here that they do not want to see happening on the open markets. Anyone surprised that this 'surplus' all of a sudden 'appeared' from nowhere and now will be diverted to buy outstanding debt? To quote one sage - "Nothing in politics is accidental".

There is a huge debt position in US bonds and treasuries. It is 10's of TRILLIONS of dollars. BOE said they will buy *ALL* British debt regardless of 'rating' or 'origin' so to speak. Totalling $2 or 3 TRILLION. THE FED has been buying bonds (pumping money into the system) at the rate of 10 - 15% increase in M3 per annum. Just bought 5 BILLION back in one night recently.

All this because of the dbet implosion overseas. Also there is concern in the banking sector to minimize debt exposure over Q4 - Q1 rollover. Even the FED intructions to banks suggest this.

What is the problem? All this debt is like a huge, huge reservoir or ocean which has kept soaked up money out of the system. It has taken decades to reach these debt levels. Now this debt is being (in part) 'monetized' or in other words they are printing money. That money will have to go will not seek other debt, it will not seek equities. It will seek safety of the highest order.

One concern here is that 'safety' is relative with regard to Y2K. Having cash accounts in banks or brokerages is not necessarily 'safe'. That money has got to go somewhere and some of it will leak out to buy land, precious metals and other tangibles.

Part of the reason these debts are being bought is because of the debt implosion occuring overseas. Part of it, and an increasing amount of it, will be due to Y2K concerns. The system is under a tremendous amount of stress. The operators of the system are taking alot of valium so that they don't fear in the current chaos. I cana't image that this will turn out very well.

-- ..- (dot@dit.dash), August 04, 1999


I wondered when I saw the new Treasury Secretary (Sommer--Summer?) this morning talking about buybacks. Cause elsewhere I had read an opinion that the move to bonds for Y2K safety would cool down the market in a good way. Obviously this has to do with Y2K and the impact on the economy, but I'm not sure what it means.

BY the way, I expect an uptick in the market--temporary, of course-- after the fed meeting on the 24th. Does anyone else think so?

-- Mara Wayne (, August 04, 1999.

This seems like a peice of some rather large puzzle. I just can't put it together.

Does anyone know who the debt holders are? Who does the Government owe money to?

What happens when the Fed buys back the debt? Do these debtors become liquid?

Is there an econo-geek in the house? Is there an econo-geek in the house?

Keep your...

-- eyes_open (, August 04, 1999.

Also see: 04.html

"Buying Back the Debt - Clinton, Summers Outline Debt Buyback Plan"

-- Linkmeister (, August 04, 1999.

As I understand it, they're going to use the Federal Reserve to "buy back" the debt.

Whenever the Federal Reserve buys a security, where does the money come from?

As Murray Rothbard says in his book "The Case against the Fed":

"Where did the Fed get the money to pay for the bonds? It created the money out of thin air, by simply writing out a check on itself. Neat trick if you can get away with it!


The nation's total money supply at any one time is the total standard money (Federal Reserve Notes) plus deposits in the hands of the public. Note that the IMMEDIATE [sic] result of the Fed's purchase of a $1 billion government bond in the open market is to increase the nation's total money supply by $1 billion."

What this means is that this is an inflationary move. My analysis (for what it's worth) is that the Fed has been able to inflate the money for many many years with low inflation because the US Dollar is the international currency of choice. Since it is nearly ubiquitous, any increase in the money supply has been able to be absorbed world wide - not just by the US itself. That leaves LOTS of room for infating.

Even with the entire world using the dollar, we've still had persistent (though "low") inflation of 4%-6% for the 80's and 90's. So for quite a while, we've been able to have our cake and eat it too.

What they're talking about right now, is a transfer of debt from one place to another. If the FED "buys back" the debt in question, there is no net reduction in debt, rather it will be owed by the Treasury to the Federal Reserve. Clinton just said today, that we're not ELIMINATING this debt, rather we're "refinancing" like a new mortgage at a lower interest rate. Saving taxpayers billions a year in interest.

So, obviously, the debt is still there. Hardly a "buy back".

So the immediate benefits I see for the government are:

1) Increase money supply. The first person to benefit from that is the government. 2) Great PR about the "booming" economy. 3) Less interest paid (from one fed agency to another) = less immediate pressure on budget.

One last thing, the debt interest rate will go down; one thing that frequently happens when interest rates go down in a country, is its currency inflates.

I don't know about the "debt implosion" mentioned elsewhere. Some of that sounds pretty accurate. Along the same lines, we've been seeing deflationary pressures for quite a while in the US. The Yen is down, creating cheaper goods; commodities (corn, soy beans, silver, etc) are almost universally DOWN.

Yet we STILL have [modest] inflation!! So I believe the Fed is able to create more money, for the above stated reasons, AND still yield little inflation as a direct offset to the deflationary pressures.

OK, at this point, I'm confusing myself, so I'll stop here.

Jolly reads too much economics.

-- Jollyprez (, August 04, 1999.

OK, thought of something else, within the context of Y2K.

If the Fed "buys back" a bunch of debt from "Public" sources. Such as bonds, and various Treasury securities owned by the people and say the Japanese and British (for example). Those people have been paid in newly created money, and they benefit.

BUT here's the secret: if there's a large financial crisis (caused by Y2K possibly?), the US may default on some of its debt. Now if it owes the debt to itself, I'm sure the Federal Reserve will "let them slide" until such time as the crisis is over.

You couldn't do that with EE Savings bonds, because it would create a big outcry from AARP among others.

I imagine the government will not have to default on ALL its debt, but could handle a certain amount even in a crisis.

So think about it. The Fed buys a BUNCH of debt, creating NEW money out of nothing. It not only gets that benefit first before inflation sets in, BUT also gets to DELAY PAYING INTEREST on some of its debt.


Jolly needs a prozac.

PS(Depressions/recessions usually start with a deflationary cycle. Thereby keeping the effect of increased money FURTHER in check for an indefinite period of time)

-- Jollyprez (, August 04, 1999.

It is VERY IMPORTANT to distinguish between the Federal Reserve buying US bonds and the Treasury buying them back.

When the Fed buys bonds, it creates money for that purpose out of thin air. It is the equivalent of printing money. The purpose of creating new money is to match the increase in the growth of productive capacity in the economy, roughly.

When the Treasury buys back bonds that it issued, it must pay for them with tax revenues. That is, the money used to buy the debt is money that was circulating already, not new money. The purpose of retiring debt is to either replace it with debt at a lower interest rate, or to essentially "pay off the national debt", by paying off the holder of the debt and retiring the bond.

This is all part of the tug-of-war over what to do with the "surplus" revenues collected this year. This talk is aimed at both the Republicans, and the bond markets, equally. So far, it is just talk.

-- Brian McLaughlin (, August 04, 1999.

IMO, the Y2k connection here is that maybe that private banking system gets a rigged market (i.e., via US taxpayers) into which to sell their government securities for top dollar without driving prices down on the holdings they are all rushing to sell. The article claims a lack of liquidity and a need to maintain a deep treasury market as the reason that these sales are proposed. I don't buy it. I believe the exact opposite is the case, at least in the short to medium term.

And for the umpteenth time, there is no budget surplus. There was no budget surplus last year, as the national debt increased $113 billion. There is no budget surplus this year either, as the national debt increase has been see-sawing around $100+ billion for most of fiscal 1999. So any claims or reasoning based on a surplus is highly suspect, another red-herring. Exactly why this administration persists in this fantasy is both entertaining and mysterious. I guess it provides "cover" for doing a bunch of hideous things.

Think about this logically. What would prompt "private" long bond holders, most possibly enjoying yields of 8-18% on long-term, UNCALLABLE government bonds, to volunteer to sell these back to the US Treasury? Why give up these long yields? Why give up the no call feature? Where else would they put that money...stocks, corporate debt, foreign markets?

The other interesting clue is the declaration to limit the amount of new 30 year debt issued and target an average 7 year maturity. This seems to indicate that the treasury expects rates to be much lower sometime over the next several years, which implies that they're probably expecting a pretty nasty contraction.

Bottom line: the United States Treasury is offering to buy private banks' government paper without "disrupting" the market, and paying (your) top dollar to do it. Once again, the free market is circumvented, taxpayers overpay for the buybacks instead of letting the sudden increased supply drive prices down, and the banks get their needed liquidity at better than market prices. Meanwhile, the reality of the entire proposition is spun backwards and upside down.

-- Nathan (, August 04, 1999.

[Fair Use: For Educational/Research Purposes Only] mart&sv=IS&lk=noframes&col=NX&kt=A&ak=news1486

Wal-Mart comes to Wall Street with big debt offer

06:47 p.m Aug 03, 1999 Eastern

By Nancy Leinfuss

NEW YORK, Aug 3 (Reuters) - Retailer Wal-Mart Stores Inc., which fills its mega-stores with discount goods to lure American shoppers, has investors lining up this week for a $5.0 billion corporate bond deal that promises quality paper at attractive prices.

With the government running a budget surplus, bond investors need safe alternatives to the shrinking supply of U.S. Treasuries. Wal- Mart is the latest to cash in on the trend, which has seen companies such as Ford Motor Co.'s credit arm finance their operations on favourable terms by issuing billions of dollars in high-grade corporate paper.

``It's a AA credit, which serves as kind of a proxy for Treasuries, and it's being priced cheap to the market,'' said one syndicate official. ``It's a nice combination that we haven't seen in quite a while.''

Wal-Mart plans to issue $1 billion of two-year paper; $2 billion of five-year notes and $2 billion of 10-year notes. The offering, underwritten by lead manager Lehman Brothers, was marketed to European and U.S. investors over the past two weeks and is expected to price on Thursday.

``There's an appetite for higher quality, liquid names and at the right spread level, you can get the deal done,'' said Douglas Williams, vice president and portfolio manager at First Capital Group, who is looking to invest in Wal-Mart paper.

``Issues like Wal-Mart and Ford, these are global names that you know every desk on the sell side out there will trade. That's what you want to own,'' Williams said.

While demand for corporate paper is high, so is the supply as companies wary of computer problems in the runup to the year 2000 rush to raise capital in the third quarter of 1999. Meanwhile, investors are looking for paper that is liquid, or easy to trade, in case they have to adjust their portfolios.

``If you're looking for corporate exposure, you have some real concerns going into the fourth quarter with what's going to happen with Y2K, so (Wal-Mart's) a good deal to own. It's a good way to get in and out of your corporate exposure ... a name like that - it's as liquid as a Treasury,'' Williams said.

Wal-Mart said it will use net proceeds from the deal to pay a significant portion of its purchase of the outstanding shares in British supermarket chain ASDA Group Plc, which owns 229 grocery stores in the United Kingdom.

On June 29, Wal-Mart made a public bid to purchase the shares. The news rocked Britain's retail industry, prompting dire warnings of price wars putting the squeeze on domestic players.

Share prices of UK supermarkets such as Tesco Plc and J Sainsbury Plc and pharmacy chain Boots Co. Plc have been battered by fears about Wal-Mart's impact.

Standard & Poor's affirmed Wal-Mart's AA long-term debt ratings following the news. The affirmation was based on the assessment of the retailer's ability to restore and maintain its credit ratios to levels reflective of the current rating, following its $10.8 billion debt-financed acquisition of ASDA.

The rating agency said Wal-Mart's superior credit profile reflected the retailer's leading market position in the discount department store, supercenter and warehouse club businesses; geographic diversity; its long record of high sales and earnings growth; and strong returns on capital.

The good credit rating means Wal-Mart will pay interest of just 100 to 105 basis points -- about one percentage point -- above comparable U.S. Treasuries for the 10-year issue, and less for the two- and five- year paper.

Market players said price talk put the two-year tranche at 60-65 basis points over Treasuries area, at 80-85 basis points for its $2.0 billion five-year note issue and at a 100-105 basis points range for its $2.0 billion 10-year issue.

``A 10-year issue at 100 basis points over (Treasuries), while we're basically hanging out near year highs in yield -- (investors) are getting a relatively cheap piece of paper,'' the syndicate official said.

(( -- U.S. Corporate Bond Unit, 212-859-1675 ))

Copyright 1999 Reuters Limited. All rights reserved.


-- Linkmeister (, August 04, 1999.

Y2K is mentioned in the following statement:

Wednesday August 4, 1:40 pm Eastern Time

TEXT-Gensler remarks on US debt buyback proposals

WASHINGTON, Aug 4 (Reuters) - Following is the full text of a statement by Treasury Under Secretary for Domestic Finance Gary Gensler on reducing the supply of Treasury debt held by the public:

"Good morning. I am pleased to be with you today to discuss the government's refunding needs for the current quarter. We are about to record the nation's first back-to-back budget surpluses since 1956 and 1957. That was before many of us in this room were born. We expect this quarter to pay down $11 billion in privately held marketable debt, bringing the total reduction to an estimated $95 billion by the end of FY 1999. Including changes in non-marketable borrowings, this will result in an overall reduction of $87 billion this fiscal year in our publicly held debt. This is a record decline in publicly held debt.

Treasury debt is taking up an ever smaller share of the capital markets. Prior to President Clinton taking office, privately held marketable Treasury securities represented 31 percent or just under a third of the U.S. debt market. Now, they represent only 23 percent, or just under one quarter of the U. S. debt market. Even more dramatically, Treasury's share of the volume of gross new issuance of long term debt has been cut by more than half. While we still have to issue debt to refund maturing securities, last year that debt represented only 18 percent of new long-term debt issuance in the United States, down from 40 percent in 1990.

The Clinton Administration's policy of fiscal discipline has been critical to achieving this success. As a result of reduced Federal borrowing, the net national savings rate has more than doubled from a low of 3.5 percent in 1993 to 7.2 percent this year. This has made more funds available for the private sector, fueling a surge in private business investment. More investment leads to higher productivity, which over the long term should produce a rising standard of living.

The significant reduction in debt over the last two years has left us with a set of challenges that we are delighted to have. We have needed to seek new debt management methods that will preserve the depth and liquidity of the Treasury markets in this era of budget surpluses. To this end, we have a number of announcements today concerning the manner in which we manage our nation's debt.

First, we are announcing that we are reducing the frequency of our issuance of 30-year bonds. We will no longer issue a 30-year bond in November, but will continue to issue 30-year bonds in February and August. This allows us to continue to concentrate on fewer, but larger benchmark issues. In addition, this will enable us to counter the current lengthening in the average maturity of Treasury's debt.

Second, we will continue to examine the possibility of reducing the frequency of our issuance of 1-year bills and 2-year notes. A further decrease in the number of offerings would allow us to increase the liquidity of Treasury's remaining benchmark issues.

Proposed rules on debt buy-backs

Finally, as Secretary Summers announced, we are publishing a proposed rule that would establish a mechanism for Treasury to conduct debt buy-backs. While Treasury has not yet determined whether it will, in fact, conduct debt buy-backs, publication of the proposed rule is the first step to making buy-backs an actual debt management tool for Treasury. The Treasury's Borrowing Advisory Committee has strongly endorsed publication of this rule to provide Treasury with a full range of policy options.

We are now in our second year of budget surpluses. Thus far, we have managed the paydown of our debt by refunding our regularly maturing debt with smaller amounts of new debt. What we are proposing today would enable Treasury to repurchase debt that is not currently maturing. This new tool would provide us with an important new means of managing the government's debt and responding to our improved fiscal condition. First, the use of debt buy-backs could allow Treasury to maintain larger issuance sizes, enhancing the liquidity of Treasury's benchmark securities. Over the long term, this enhanced liquidity should reduce the governments interest expense and promote more efficient capital markets. Secondly, debt buy-backs could enhance our ability to exert control over the maturity structure of Treasury debt. A buy-back program would provide us with the option of managing the maturity structure by selectively targeting the maturities of debt to be repurchased. Lastly, buy-backs could be used as a cash management tool, absorbing excess cash in periods such as late April when tax revenues greatly exceed immediate spending needs.

The proposed rule will be published tomorrow in the Federal Register and will be available today on the Bureau of the Public Debts website ( Attached is a one page summary of the main features of the proposed rule. We look forward to receiving comments over the next sixty days.

Terms of the August Refunding

I will now turn to the terms of the quarterly refunding. We are offering $37.0 billion of notes and bonds to refund $28.9 billion of privately held notes maturing on August 15, 1999, raising approximately $8.1 billion.

The securities are:

1) A 5-year note in the amount of $15 billion, maturing on August 15, 2004.

2) A 10-year note in the amount of $12 billion, maturing on August 15, 2009.

3) A 30-year bond in the amount of $10 billion, maturing on August 15, 2029.

These notes and bonds are scheduled to be auctioned on a yield basis at 1:00 p.m. Eastern time on Tuesday, August 10, Wednesday, August 11, and Thursday, August 12, respectively.

As announced on Monday, August 2, we estimate that net market borrowing for the July -September quarter will be a paydown of $11 billion. This estimate assumes a $45 billion cash balance on September 30. The Treasury also announced that net market borrowing for the October - December quarter will be approximately $65 billion with a cash balance of $80 billion on December 31.

We anticipate a larger than usual year end cash balance as part of our planning related to the Year 2000. Congress recently enacted legislation to ensure that there would be liquidity of up to approximately $20 billion available to credit unions at this year end. As a result, the Federal Financing Bank has entered into a note purchase agreement with the National Credit Union Administration (NCUA) to provide that liquidity should it be needed. The NCUA has indicated that they do not believe that there will be a need to access funds under the facility, but we plan to be prepared to fulfill our obligation should the need arise.

In addition, there is more uncertainty than historically related to Treasury's forecasts of daily receipts and outlays for the period around year end. Thus we plan additional funding to provide for the possibility that the timing of receipts or outlays do not follow historical patterns. As with the credit union facility, we do not anticipate any problems, but we believe it is appropriate to be prepared. All major Treasury financial systems, including those used to collect taxes, disburse payments, and auction marketable securities are Y2K ready. The Federal Reserve has also indicated that its systems supporting Treasury programs are Y2K ready.

The additional funding in the fourth quarter will be done by modestly increasing weekly bill offerings and through cash management bills.

We also expect to issue two cash management bills this quarter to bridge seasonal low points in our cash position, one in mid-August and another in late August or early September. Both will mature after the September 15 tax date."


-- Linkmeister (, August 05, 1999.

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