QUESTION:
Dear Mr. Armstrong,
What does it suggest when Governments decide to switch from issuing long-term bonds to short-term bonds? Does this occur because of such a collapse in confidence the country/government that even high yields don’t attract investors any longer?
I have read that recently, several South American governments/corporations are having difficulty selling their debt. The Mexican government cut the issuance of long-term bonds (20 and 30 Years) and is instead increasing the amount of short-term bonds. Colombia is doing the same. What is your take on this?
Best Regards
ANSWER: Government first moved short-term because rates were cheaper to say money. Clinton did that and this was to a large extent a major factor in helping to reach a balanced budget with smoke and mirrors. I actually wrote an Op-Ed for the Wall Street Journal on that very issue.
We are preparing a special report because not only do we have this problem, but moving short-term was also done in their mind to stimulate the mortgage industry they thought buying 30 year bonds would create a shortage of long-term so mortgage rates would decline. They failed to understand that they backed themselves into a corner. No they cannot get out. Mortgage rate jumped 1% in 30 days. They are seriously screwed and have now introduced tremendous volatility for the future.
These people are the Demigods of Finance. They screw up absolutely everything perfectly each and every time. The Fed is now advising banks they have to change their models because banks would normally hold Treasuries as the flight to quality but the Fed is warning there may be no such flight because they are so short they cannot even reach the plate on the table. They need a high-chair.
Yes – confidence will collapse in government bonds. This will propel rates higher faster on the long-term. So those refinancing in the States, you better lock-in ASAP. We have been warning rates will rise by mid-2013. They are doing so right on cue.
