Thursday, July 21, 2011

The Black Swan Isn't the Debt Ceiling, It is Holders of U.S. Treasuries Asking for Cash Rather Than Rolling the Paper

And don't think it can't happen.
Here's TIME Magazine, February 16, 1959:
Business: Bond Failure
The U.S. Treasury offered $9.1 billion in new securities last week to private holders of maturing debt and got a shock. It had hoped to persuade most of the holders of maturing issues, bearing 1⅞% and 2½% interest rates, to trade them in for new Government securities paying 3¾% and 4%. Instead, owners of more than 20% of the old issues demanded to be paid off in cash, the biggest such demand in six months.

To help make up the difference, the Treasury must go to the public this week with a $1.5 billion emergency issue.

The failure of the latest debt "rollover" attempt was a fresh sign of softness in the Government bond market—and of the size of Secretary of the Treasury Robert Anderson's task of refinancing $42 billion of Government securities falling due this year. At a time when most investors want to buy stocks, real estate or other things as a hedge against inflation, Anderson is finding the public increasingly uninterested in bonds.

Furthermore, Wall Streeters thought he had made a mistake in trying to sell securities with one year as the shortest maturity. At a time when investors were trying to figure how high interest rates might go, too many of them did not want to tie up their cash for a year.

Anderson's troubles began last spring when it became clear that the Treasury would have to raise up to $12 billion to cover the Government's deficit for this fiscal year....MORE 
We're racking up $12 Billion every three days.