Obama and the T Bond Albatross=Gasoline to a Flame

I just wrote about the albatross about to form involving the Treasury Bond and the bailout(s). The Treasury Bond is at record levels and only giving an interest rate of 2.67% on the ten year benchmark. At the same time, we are trying to borrow several trillion Dollars. In other words, we are asking debtors to lend us several trillion dollars even though they would only get 2.67%, at least currently, as their rate. The Treasury bond, especially the ten year, is the pre cursor to most long term rates like mortgages, car loans, student loans, etc. so it's uncontrolled volatility could wreck havoc in all sorts of places. This is a potentially nuclear combination and if Barack Obama handles it wrong it will be like pouring gasoline on a flame.



Unfortunately, so far all indications are that he will likely do the exact wrong thing. He wants a major stimulus right away. They are talking about $500-$700 billion and he still will likely have half of the current stimulus to spend (not to mention that Obama maybe forced to bailout the autos if President Bush doesn't and he now wants to bailout cities and states) In order to do this right, he wants borrow a little at a time on a regular schedule. That way the stimulus from your purchases will be mild at any given time. It also gives the President the ability to monitor what effect his massive borrowing will have on the Treasury bond market. Instead, he is likely to request a bunch and have the Treasury get it for him almost as soon.



The possibilities for disaster if this is done wrong are enormous. There are all sorts of technical scenarios that could be frightening. For instance, there is something known as moving averages. If any investment, of which the Treasury bond is one, takes off in any direction and continues up staying above a certain level it will continue to go up until it breaks through the plane of the so called moving average. In other words, if Barack Obama does it wrong it will ride up for a while and soon the Treasury bond will be holding records only the other way.

If he dumps too much it could shock the system in all sorts of ways. If someone is NOT aware of the fury they are about to unleash all sorts of bad things are possible. Frankly, everything is already volatile and now Barack Obama has an opportunity to explode as volatile a potential combination as I have seen in a while.

The sort of fluctuating interest rate market he could create would make it nearly impossible to do any business especially with the situation as it is. Imagine if banks are locking loans and the rates are a full percentage point higher the next month. In fact, that's how a lot of pseudo banks went out of business back in the end of 2003. Rates went up like crazy and by the time they were able to sell they weren't making enough to get by.

Finally, it will almost certainly make interest rates bad enough that the real estate market won't have a chance to get better. Imagine if several hundred billion Dollars worth of new bonds are issued within three months. That could cost at least a full percentage point to the mortgage rates. If it's handled poorly we could easily see rates at 8%.

The first test of Barack Obama's effectiveness in carrying out the bailout is his ability not to stimulate the Treasury bonds when he borrows the money. I hope I am wrong but so far I anticipate an unmitigated disaster.