S&P says 'I told you so' about US credit rating

[deltasigma]

@Damuri_Ajashi

For someone who doesn’t understand treasury auctions (one of the basic building blocks of our financial markets), you seem to be pretty critical of others.

I suspect you know a little something but a little bit of knowledge is a dangerous thing. A little bit of humility on this board is usually well advised, I learned that the hard way.

What is it that you think I don’t understand about Treasury auctions? If you’d like to explain them to us, I think that would be very helpful because if you believe that I’m ignorant on the topic, I think there’s a very good chance that you’ll be helping a lot of other people as well.

[deltasigma]

For a preview of what would happen if the US actually defaulted, here’s a great article from a UC Berkeley economist and former IMF senior policy adviser.

The impact on market liquidity would also be severe. Fedwire, the electronic network operated by the US Federal Reserve to transfer funds between financial institutions, is not set up to settle transactions in defaulted securities. So Fedwire would immediately freeze. The repo market, in which loans are provided against Treasury bonds, would also seize up.
For their part, mutual funds that are prohibited by covenant from holding defaulted securities would have to dump their Treasuries in a self-destructive fire sale. Money-market mutual funds, virtually without exception, would “break the buck,” allowing their shares to go to a discount. The impact would be many times more severe than when one money-market player, the Reserve Primary Fund, broke the buck in 2008.
Indeed, the entire commercial banking sector, which owns nearly $2 trillion in government-backed securities – would be threatened. Confidence in the banks rests on confidence in the Federal Deposit Insurance Corporation, which insures deposits. But it is not inconceivable that the FDIC would go bust if the value of the banks’ Treasury bonds cratered.
The result would be a sharp drop in the dollar and catastrophic losses for US financial institutions. Beyond the immediate financial costs, the dollar’s global safe-haven status would be lost.

[Damuri_Ajashi]

@deltasigma

What is it that you think I don’t understand about Treasury auctions? If you’d like to explain them to us, I think that would be very helpful because if you believe that I’m ignorant on the topic, I think there’s a very good chance that you’ll be helping a lot of other people as well.

http://boards.straightdope.com/sdmb/showpost.php?p=16740170&postcount=54

I’m no expert but I do know that treasury auctions do not typically involve bidding on the principal amount, they involve bidding on the interest rate.

One of the harebrained schemes for dealing with the debt ceiling is to overturn this practice and instead issue premium bonds by stating an insanely high interest rate and getting a premium over the face amount over what the bond pays at maturity. Perhaps this is what has you confused but this confusions leads me to think that you don’t “understand the financial market” very well either.

I’m just saying that running around calling everyone on this board stupid or ignorant is pretty sure formula for looking stupid or ignorant yourself. Even if you’re an expert, a little humility is not a bad idea around here.

[deltasigma]

@Damuri_Ajashi

http://boards.straightdope.com/sdmb/showpost.php?p=16740170&postcount=54

I’m no expert but I do know that treasury auctions do not typically involve bidding on the principal amount, they involve bidding on the interest rate.

Yes, it would appear that you are indeed no expert.

Government bonds are usually sold by means of auctions. Investors submit bids to buy a certain number of bonds at a certain price. There are different ways of allocating the bonds; the usual way is that the people who bid the most get all the bonds that they want, then the people who get the next highest amount get all they want, etc., until there is a certain price at which not everyone can get all the bonds that they bid for. At that price, bids are allocated pro rata, i.e. you get an amount proportionate to how much you bid for.

Very good example provided at link

[Jonathan_Chance]

Except, of course, that article you linked is about ‘government’ bonds in general and the example is in EUR, and is not indicative of how the US Treasury handles the issuance of US federal debt.

A quick check to refresh myself (I haven’t had to buy treasuries for years) shows that T-bills, the short term US debt instruments, are indeed sold based on discount and yield to maturity…i.e. their real interest rate of return.

Things get more complicated for both Treasury notes and Treasury bonds - both of which have longer maturities - but at least the first are usually quoted at a discount based on interest rate.

So learn, my sort-of-educated friend. All - I think - most of us are asking is that you keep the arrogance down while you’re doing so. We value you. But you’re making it difficult.

[deltasigma]

@Jonathan_Chance

Except, of course, that article you linked is about ‘government’ bonds in general and the example is in EUR, and is not indicative of how the US Treasury handles the issuance of US federal debt.

A quick check to refresh myself (I haven’t had to buy treasuries for years) shows that T-bills, the short term US debt instruments, are indeed sold based on discount and yield to maturity…i.e. their real interest rate of return.

Things get more complicated for both Treasury notes and Treasury bonds - both of which have longer maturities - but at least the first are usually quoted at a discount based on interest rate.

So learn, my sort-of-educated friend. All - I think - most of us are asking is that you keep the arrogance down while you’re doing so. We value you. But you’re making it difficult.

I’m afraid you’re wrong about that. Treasury auction success is always cited in terms of its bid to cover ratio so unless you have a better cite than wikipedia . . .

[Jonathan_Chance]

Well, I provided the wiki site for you edification. I can’t link to where I did look it up, my friend.

Here’s another one for you, then. Will investopediado?

T-bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

So the bid process provides the interest rate of return.

Of course, that’s T-Bills, the shortest term debt issued. Procedures vary for Treasury Bonds vary a bit:

A competitive bid states the rate that the bidder is willing to accept; it will be accepted depending on how it compares to the set rate of the bond. A non-competitive bid ensures that the bidder will get the bond but he or she will have to accept the set rate.

I honestly don’t know where you’re coming from with the bid-to-cover. That’s generally used as an indicator of the strength of demand for an issuance of debt but isn’t the way that the auction is settled. It’s an after-action reporting and the sort of thing you hear on market-oriented radio and such after all the excitement is over.

The bid-to-cover ratio is an indicator of the strength or demand for a Treasury offering relative to investor bids deemed suitable in the auction process.

[deltasigma]

@Jonathan_Chance

Well, I provided the wiki site for you edification. I can’t link to where I did look it up, my friend.

Here’s another one for you, then. Will investopediado?

So the bid process provides the interest rate of return.

Of course, that’s T-Bills, the shortest term debt issued. Procedures vary for Treasury Bonds vary a bit:

I honestly don’t know where you’re coming from with the bid-to-cover. That’s generally used as an indicator of the strength of demand for an issuance of debt but isn’t the way that the auction is settled. It’s an after-action reporting and the sort of thing you hear on market-oriented radio and such after all the excitement is over.

My example showed a discount from par. The only difference with treasuries is that they are single-price auctions.

[Damuri_Ajashi]

@deltasigma

Yes, it would appear that you are indeed no expert.Very good example provided at link

http://www.treasurydirect.gov/instit/auctfund/work/work.htm

“At the close of an auction, Treasury awards all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order of their rate or yield (lowest to highest) until the quantity of awarded bids reaches the offering amount. All bidders will receive the same rate or yield at the highest accepted bid.”

[deltasigma]

@Damuri_Ajashi

How Auctions Work — TreasuryDirect

“At the close of an auction, Treasury awards all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order of their rate or yield (lowest to highest) until the quantity of awarded bids reaches the offering amount. All bidders will receive the same rate or yield at the highest accepted bid.”

Do you understand the relationship between par and coupon values? If you do, then you’ll understand my example and why it accords perfectly with what you’ve cited. If you don’t then you won’t.

Debt instruments generally have a stated face value and coupon or interest rate based on that face value. The auctions however are bid based on the face value. But the bidders understand that the effective rate will vary inversely with the price.

[robert_columbia]

@The Great Sun Jester

Germany can fix that. All they have to do to strengthen the Euro to is incorporate Greece under their own flag and run things The German Way. And since a broken border is untidy they could probably improve things by working Austria and Italy into the same plan. What could possibly go wrong?

Or get Greece to apply to become a US State and get Congress to admit them (could we get Congress to agree on that?). Our country is already discontiguous anyway, another chunk isn’t going to cause new kinds of border issues that we don’t already have.

[Damuri_Ajashi]

@deltasigma

Do you understand the relationship between par and coupon values? If you do, then you’ll understand my example and why it accords perfectly with what you’ve cited. If you don’t then you won’t.

Debt instruments generally have a stated face value and coupon or interest rate based on that face value. The auctions however are bid based on the face value. But the bidders understand that the effective rate will vary inversely with the price.

Wow, the hubris just doesn’t end with you does it?

Both par and coupon values are numbers that are written on the face of a bond when it is issued. There is a relationship between interest rates and price (its an inverse relationship), is THAT what you are talking about?.

OK, so are you saying that the coupon and face value is set before the auction and people bid on how much they will pay for that particular stream of income? And the way they do it is by bidding for a particular rate of return which means that if they are willing to take a lower rate then they have to bid higher than par and if they want a higher rate of return then they bid less, right?

Then how come bonds are only issued at discount or par. They are not issued at premium. It seems like what you are saying is that the treasury puts a floor on the rate of return at auction (but no cap)??? Does that make sense to you?

http://www.treasurydirect.gov/instit/auctfund/work/work.htm

"Issuance

On issue day, Treasury delivers securities to bidders who were awarded securities in a particular auction. In exchange, Treasury charges the accounts of those bidders for payment of the securities.
Treasury bills are issued at a discount or at par (face amount) and are paid at par at maturity. The purchase price is listed on the auction results press release and is expressed as a price per hundred dollars.
Treasury notes, bonds, and TIPS are issued with a stated interest rate applied to the par amount and have semiannual interest payments. For TIPS, the interest payments and the final payment at maturity are based on the inflation-adjusted principal value of the security. In some cases, the purchaser may have to pay accrued interest."

So why are bonds only issued at par or a discount? Because treasury bonds (or notes) are issued with interest rates in eighths of a percent. You can bid 3.43678% but you will not see treasury bonds issued at 3.43678%. They issue the bond at 3.375% and sell at a slight discount to achieve that 3.43678% yield (or whatever the highest winning bid is). In any event, your bid is in the form of an interest rate, not a purchase price, you always end up paying close to par.

I am only talking about bonds with fixed coupons, short term securities are simply sold at discount and TIPS work differently.

If this isn’t how you think it works, then how exactly do you think it works?

[deltasigma]

If you’d bothered to look at my example, you would have seen that all bids were either at par or at a discount. Obviously you didn’t bother.

By bidding below par, the bidder is demanding a higher yield - which by the way is not the same as a higher rate. Anyone with any understanding of finance knows that the rate and yield to maturity are not the same things. Look at these recent auction results if you don’t believe me.

The bids are made based on the face value as I’ve already stated. That’s why treasury auctions are call single-PRICE auctions rather than single-RATE auctions.

United States Treasury security auctions are conducted using the single-price auction method. In a single-price auction, all successful competitive bidders and all noncompetitive bidders are awarded securities at the price equivalent to the highest rate or yield of accepted competitive tenders.

If you want to claim to know more than I do, that’s fine. I hope you do because I’m eager to learn. But at least make a more convincing showing of that being the case.
[URL=“http://www.treasurydirect.gov/RI/OFNtebnd”]

[deltasigma]

I’d just like to point out that it’s completely irrelevant whether bidding is done based on price or yield. That should be pretty obvious by now to anyone following this discussion. If you bid on price then a lower price will give you a higher yield. If you bid on yield, then a higher yield will produce a lower price. So in the end, the point is completely moot. Whether you approach the issue from the yield end or the price end, you arrive at the same result. Therefore I personally never would have made an issue of this, but then this wasn’t my call.

[deltasigma]

For anyone who is still interested, Fitch has put US debt on credit watch negative.

The House Republican plan emerged as Fitch Ratings put the U.S. AAA credit grade on ratings watch negative, citing the government’s inability to raise the debt ceiling in a timely manner, according to a statement after New York markets closed.

[Damuri_Ajashi]

@deltasigma

If you’d bothered to look at my example, you would have seen that all bids were either at par or at a discount. Obviously you didn’t bother.

By bidding below par, the bidder is demanding a higher yield - which by the way is not the same as a higher rate. Anyone with any understanding of finance knows that the rate and yield to maturity are not the same things. Look at these recent auction results if you don’t believe me.

The bids are made based on the face value as I’ve already stated. That’s why treasury auctions are call single-PRICE auctions rather than single-RATE auctions.If you want to claim to know more than I do, that’s fine. I hope you do because I’m eager to learn. But at least make a more convincing showing of that being the case.
[URL=“http://www.treasurydirect.gov/RI/OFNtebnd”]

You cite things and its never really clear what you think your cites are supposed to prove. Your cites support what I am saying.

Single price auctions have nothing to do with bids being made at face value, it just means is like a dutch auction on ebay.

:smack:

@deltasigma

I’d just like to point out that it’s completely irrelevant whether bidding is done based on price or yield. That should be pretty obvious by now to anyone following this discussion. If you bid on price then a lower price will give you a higher yield. If you bid on yield, then a higher yield will produce a lower price. So in the end, the point is completely moot. Whether you approach the issue from the yield end or the price end, you arrive at the same result. Therefore I personally never would have made an issue of this, but then this wasn’t my call.

When you say that you might not be able to refinance the national debt by rolling the debt because its an auction, it displays a deeply flawed understanding of how treasury auctions work. YOU are implying that you would need to increase the principal value of the outstanding debt to refinance it. YOU will ALWAYS raise the amount of money you want (because like you say its a market clearing auction) but you might have to pay higher interest rates to clear that much principal at market.

I wouldn’t have picked this particular nit if you weren’t so horribly arrogant and i might not have kept picking at this nit if you didn’t dig in and insist on wallowing in your ignorance. I wouldn’t be calling you out now if you weren’t trying to pretend that you were saying something else all along.

You realize there is a pit thread dedicated to you where at least half a dozen folks seem to have all noticed this same tendency in you. You’re earning yourself a reputation.

[Learjeff]

I thought they just might be right right to downgrade the US when they downgraded the US in the first place, and I agree that the current situation corroborates the downgrade. I wouldn’t be surprised if another agency downrates them.

I must have missed the earlier thread, too bad.

[deltasigma]

@Damuri_Ajashi

[1]You cite things and its never really clear what you think your cites are supposed to prove. Your cites support what I am saying.

[2]When you say that you might not be able to refinance the national debt by rolling the debt because its an auction, it displays a deeply flawed understanding of how treasury auctions work. YOU are implying that you would need to increase the principal value of the outstanding debt to refinance it. YOU will ALWAYS raise the amount of money you want (because like you say its a market clearing auction) but you might have to pay higher interest rates to clear that much principal at market.

[3]I wouldn’t have picked this particular nit if you weren’t so horribly arrogant and i might not have kept picking at this nit if you didn’t dig in and insist on wallowing in your ignorance. I wouldn’t be calling you out now if you weren’t trying to pretend that you were saying something else all along.

[4]You realize there is a pit thread dedicated to you where at least half a dozen folks seem to have all noticed this same tendency in you. You’re earning yourself a reputation.

1. It doesn’t matter who’s right as I’ve already explained. If the bid is based on rate, the rates will go from low to high, that means the prices will start at par and then go to below par. The only way the auction raise the full amount offered is if all competitive offers are at or above par - which almost never happens. I’ve already given you a link that proves that, so here it is again. If you want to call someone arrogant, I think it behooves you to at least look at the evidence they provide you first, don’t you?

2. So the only alternative is to offer MORE at auction than the rollover amount but obviously that’s not an option - why? Because then it wouldn’t be a simple rollover anymore - even though you know almost certainly there will be a short fall. Why? Because you have no way of predicting the amount of the shortfall or event to an absolute certainty if there will be one. You just know to a very near certainty there will be one.

3. :rolleyes:

4. That’s nice.

[deltasigma]

Sorry - just noticed I forgot the linkfrom post 93. It’s obvious that the price per $100 is virtually always less than $100, and sometimes less than $90.

[Damuri_Ajashi]

@deltasigma

1. It doesn’t matter who’s right as I’ve already explained. If the bid is based on rate, the rates will go from low to high, that means the prices will start at par and then go to below par. The only way the auction raise the full amount offered is if all competitive offers are at or above par - which almost never happens.

Once again, YOU ARE ASSUMING A SET COUPON RATE. If the coupon rate is not yet set then bidding the rate should have NO EFFECT on the price of the bond.

For a guy that goes around insulting all of SDMB as being financially illiterate, you seem to have a LOT of trouble understanding simple concepts.

2. So the only alternative is to offer MORE at auction than the rollover amount but obviously that’s not an option - why? Because then it wouldn’t be a simple rollover anymore - even though you know almost certainly there will be a short fall. Why? Because you have no way of predicting the amount of the shortfall or event to an absolute certainty if there will be one. You just know to a very near certainty there will be one.

No, you’re simply wrong. They can always raise the amount they want, they just don’t always know how much they will have to pay in interest to raise that amount of money.