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News Link • Government Debt & Financing

Treasury Wants 100 Year and GDP-Linked Bonds to Fill $2.4 Trillion Hole

As we have long speculated, Basel III is nothing more than an elaborate mechanism for artificially increasing demand for sovereign debt and globalizing banking regulation. Indeed, the minutes of the prior TBAC meeting revealed that new regulations aimed at "reducing banks' risk profile" are expected to generate at least $400 billion in increased US Treasury debt alone by 2015. However, this estimate has now exploded and has Treasury salivating (emphasis ours): The member recommended that Treasury develop products that target the needs of three different investor classes, specifically banks, pension funds/insurers, and retail investors. The member estimated that demand from these three investor classes could total $2.4 trillion over the next 5-years, if the right products were offered. And just where is this new demand coming from? Why, the very markets that have imploded are are teetering on implosion thanks, in no part, to the actions of the central planners: On the supply side, opportunities to expand the investor base have developed due to market dislocations following the financial crisis. Adecline in GSE debt issuance, the wind-down of bank debt issued under the Temporary Liquidity Guarantee Program (TLGP), dislocation in the municipal market, and the contraction of the commercial paper market have resulted in a shortage of high quality assets. For further evidence that Treasury lusts to crowd out private investment (or is it "crowding in", as Paul Krugman hallucinates--paging Bob Murphy) and become the #1 investment in its citizens' portfolios: Expanding the Treasury investor base to include more domestic investors by offering new products is desirable and would reduce overall funding risk. The presenting member noted that other sovereigns’ debt(Italy, Japan, and the UK) is largely funded by domestic investors. The member further noted that it was important to avoid cannibalizing the current auction process and that any new products should add to demand.

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