Tap Dancing on a Tight Wire
February 19, 2008
– Comments (7)
The gross imbalance between long term debt and short term is getting close to endgame.
I am new to learning about how various aspects of the markets work, so, for example, if someone said treasuries bills were safe, I'd compare them to Canada Savings Bonds and agree. But, horror of horrors, they aren't the same at all. Canada Savings Bonds have far less risk built in by design. You don't want them any more, you simply cash them. Some have restrictions about only being able to cash once per year, and a penalty cost of losing interest for cashing early, but the down side is well defined.
So, I only learned how those 30 year treasuries work in the past month, and, omg, what a disaster. The risk people have been taking buying treasuries... They are priced to today's interest rates for 30 years. People have been buying them for short term purposes to get the long term rate because the market has been liquid and there is always someone to buy them. And when the buyers dry up???
That's when you can't get out without taking a huge hit, a hit that reprices the risk for funding 30 year debt.
The more I look, the more it seem the entire lending game has gone to short term intentions for long term obligations and it means that many people are going to be stuck with long term debt at highly depreciating rates that they had no intentions of taking on what-so-ever. To get out will mean taking a significant hit on the face value of the investment. Treasuries may very well be government guaranteed, but 30-year treasuries are only guaranteed to be paid over a 30 year period.
It is the same concept that killed the liquidity in the municipal bond market. I happen to know people vest there for short term purposes that just found that there was no market to buy the debt. I doubt that all this talk about separating the municipal insurance from the mortgage insurance would fix this. Investors just got a wake-up call that their liquidable investments are not as liquidable as they thought. The rates go up for the risk regardless of what happens with the insurance.
But then, I think it is just the municipalities paying their debt servicing costs that is insured, not investors ability to sell that debt, which is an entirely different risk, one that has had the appearance of low risk through the 20 odd year walking down of interest rates.
Here's a link, same kind of thing, long term debt, short term buyers... Of note, this is only showing one side of the economic hit, municipalities having to pay for the real cost of their debt. Investors alreadying holding the underpriced debt are going to be hurting next.
RSS Headlines
Fool UK