Those not thrilled with the prospect of getting 3% for 30 years on the long bond can now entertain the possibility of getting 3% for 100 years.
Peter Fisher Says Treasury Should Consider 100-Year Debt.
BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds to ease the federal government’s borrowing costs as it faces a budget deficit expected to top $1 trillion.
“If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up,” Fisher, managing director and co-head of fixed income at BlackRock in New York, said in a Bloomberg Radio interview.
“There are a lot of investors, pension funds, endowments, who would love to get a long-term annuity like that,” Fisher said. “They love to get an interest-only stripped off the 30- year, and they’d love to get something even longer. I think there would be a lot of demand from investors for that.”
Fisher is badly mistaken. The only demand for 100 year treasuries would be from Bernanke attempting to hammer interest rates lower in misguided moves to get investors to take on more risk and to get banks to lend.
Artificially Low Rates Affect Pension Plans And Insurance Companies
Unfortunately, Bernanke’s helicopter drop play of purchasing longer-term Treasury on the open market in substantial quantities to force down long term rates (and Fisher’s proposal to carry the idea to even more ridiculous extremes) is bound to blow up insurance companies and pension plans while doing nothing to stimulate demand.
Think of all the insurance companies that promised annuities guaranteeing 6% or more. Think of all the pension plans with assumptions of 8.5% annual returns. There’s nothing like matching up those needs and assumptions with treasuries yielding 3% for 100 years.
Please see Search For Stimulus In A ZIRP World and Helicopter Ben Pulls Out Bazooka for more on Bernanke’s efforts to force down long term rates having run out of room to lower the short end of the curve..
New Jersey Insolvent Over Pension Plans
Consider that the State of New Jersey Is Insolvent because of pension plan issues.
New Jersey is $60 billion in the hole on pension funding ($118 Billion needed and only $57.8 billion in the fund) yet the Governor proposing skipping payments in a “pension payment holiday” until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%.
New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will be sitting on $31.8 billion. But what happens if the S&P; falls to 450 or 600?
At $5.2 billion a year, New Jersey’s pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.;
Repercussions Of Ill-advised Stimulus
Bernanke’s efforts to stimulate are having serious repercussions elsewhere, while doing nothing much to stimulate anything except additional losses.
Deflation is the markets way of forcing an unwind of malinvestments and leverage. Sadly, I am confident that many Keynesian and Monetarist currency cranks will be quick to support Fisher’s perpetual motion idea on the grounds “we will owe the money to ourselves” or some other nonsensical reason. In fact, they will probably want to spend the “savings” in interest for other proposals. The whole thing makes as much sense as me sticking an IOU in my piggy bank for $1 billion and attempting to spend it.
Mike “Mish” Shedlock
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