Market Prices

[_Analytics]

In another thread, BCSpace talks about how he thinks Obama is a bad president because of the way in which he controls interest rates. I find that extremely funny, and am going to argue that risk-free long-term interest rates are the single-most market-driven price in the world.

Consider the following. On August 1, 2012, the United States Treasury issued a press release saying they wanted to borrow $24 billion dollars for a term of 10 years. Here is the press release:

http://www.treasurydirect.gov/instit/an ... 0801_2.pdf

Since the government wanted to only borrow $24 billion, and since people want to lend the government much more, the government set up an auction in a competitive bid to see who would get the bonds.

The results of the auction are here:

http://www.treasurydirect.gov/instit/an ... 0808_1.pdf

The highlights are that one group of people showed up and said they'd lend the government money totaling $80 million, regardless of the interest rate. Another group of people showed up and offered competitive bids, meaning that they’d specify how much they wanted to borrow and what the minimum yield they’d accept. $59.7 billion was offered to the government in this way. This is serious money—all $59.7 billion represented people who understood the precise nature of the current interest rate environment and who submitted serious bids, hoping they’d win the auction.

However, according to the terms of the auction, the government only wanted to borrow $24 billion, so most of the people who were lined up to loan the government money walked away with the cash they were trying to invest.

The results of this auction were that the winning bidders got to lock in a 10-year return at a yield of 1.68%. The government did absolutely nothing to set this rate—it was determined by free market players bidding for interest returns in a totally free auction.

After the winners took possession of their securities on August 15, they were free to hold onto them or sell them. A huge secondary market exists where free-market players freely buy and sell these securities to and from each other. This huge, free market results in very well defined interest yields for government treasuries that mature at various times in the future. Again, the government does absolutely nothing to control these rates. Very rich people and institutions literally have trillions of dollars that they want to lend to the federal government. They fight with each other to do so. The government only needs a fraction of the money they have to lend. So, the losers have to try to find other places to get a positive return on their money, so they drive down interest rates elsewhere, such as in the mortgage market.

This free-market supply-and-demand dynamic is the precise cause of the current interest rate environment.

So how is the result of this auction President Obama’s fault (as BCSpace seems to think), rather than the fault of the free-arket players that participated in it?

[_Bond James Bond]

Channeling Droopy:



Obamacare. Socialism. Leftism. Strategery.