Posts Tagged ‘United States Treasury security’

US Treasury Bond prices rise on weaker economic data

Treasurys prices rise on weaker economic data
May 26, 2011, 4:21 p.m. EDT
Associated Press

Journal By Calvin Lee Ledsome Sr.,

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NEW YORK (AP) — Investors sent government bond prices higher Thursday after reports on unemployment claims and first-quarter economic growth reinforced expectations that the economic recovery may be moderating.

The price of the 10-year Treasury note rose 62.5 cents per $100 invested in late trading. Its yield, which moves in the opposite direction to the price, fell to 3.06 percent from 3.13 percent late Wednesday.

It was the lowest level for the 10-year yield in a year. The yield is used as benchmark on a wide variety of loans for businesses and consumers including home mortgages.

The government reported that more people applied for unemployment benefits last week, the first increase in three weeks. Analysts had expected a drop.

The government also said that the U.S. economy grew at a relatively sluggish rate of 1.8 percent in the January-March quarter, due partly to a spike in gas prices above $4 a gallon. Economists had forecast an upward revision to 2.2 percent.

Traders tend to buy Treasurys when economic growth appears to be losing momentum.

The Treasury Department also auctioned off $29 billion in seven-year notes at a yield of 2.43 percent, the lowest yield of the year. Investors placed bids for 3.24 times the amount offered, higher than the previous four auctions this year.

The yield of the seven-year note was 2.36 percent late Thursday.

In other trading, the price of the 30-year bond rose $1.03 per $100 invested, while its yield fell to 4.22 percent from 4.27 percent late Wednesday. The yield on the two-year note slipped to 0.50 percent from 0.54 percent.


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The US government has maxed out its credit card. Setting up 11-week fight to raise the threshold or …

US hits credit limit, setting up 11-week fight
May 16, 2011, 6:28 p.m. EDT
Associated Press

Journal By Calvin Lee Ledsome Sr.,

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WASHINGTON (AP) — The government has maxed out its credit card.

The United States reached its $14.3 trillion limit on federal borrowing Monday, leaving Congress 11 weeks to raise the threshold or risk a financial panic or another recession.

Treasury Secretary Timothy Geithner formally notified Congress that the government would halt its investments in two federal pension plans so it won’t exceed the borrowing limit.

Geithner said the government could get by with bookkeeping maneuvers like that through Aug. 2. After that, the government could default on its debt for the first time, threatening the national credit rating and the dollar.

Geithner sent Congress a letter saying he would be unable to make the pension investments in full. He urged Congress to raise the debt limit “in order to protect the full faith and credit of the United States and avoid catastrophic economic consequences for citizens.”

Republican leaders in the House have said they won’t raise the debt limit unless the Obama administration first agrees to big spending cuts or to steps to lower the debt over the long run.

House Speaker John Boehner repeated the pledge in a statement Monday. The statement did not address Geithner’s warning about what would happen if the limit were not raised.

“Americans understand we simply can’t keep spending money we don’t have,” Boehner said. “There will be no debt limit increase without serious budget reforms and significant spending cuts.”

Republicans have also ruled out any tax increases, including any plans to end tax cuts for high earners enacted in 2001 and 2003.

“We need to have a vote to lift the debt ceiling because the consequences of not doing so would be quite serious,” White House spokesman Jay Carney told reporters. “And those who suggest otherwise are whistling past the graveyard.”

If it doesn’t raise the limit, Congress would have to come up with $738 billion to make up for what it planned to borrow through the end of the fiscal year on Sept. 30. The options are drastic: Cut 40 percent of the budget through September, which might mean defaulting on payments to investors in government bonds; raise taxes immediately; or some combination of the two.

“In the economic area, this is the equivalent of nuclear war,” says Edward Knight, who was the Treasury Department‘s general counsel during a standoff over the debt ceiling in the mid-1990s.

Here are some questions and answers about the federal debt limit:

Q: What is the debt ceiling?

A: It’s a legal limit on how much debt the government can pile up. The government accumulates debt two ways: It borrows money from investors by issuing Treasury bonds, and it borrows from itself, mostly from Social Security revenue.

In 2010, Congress raised the limit to nearly $14.3 trillion from $12.4 trillion. Three decades ago, the national debt was $908 billion. But Washington spent more than it took in, and the debt rose steadily — surpassing $1 trillion in 1982, then $5 trillion in 1996. It reached $10 trillion in 2008 as the financial crisis and recession dried up tax revenue and as the government spent more on unemployment benefits and other programs.

Congress created the debt limit in 1917. It’s unique to the United States. Most countries let their debts rise automatically when government spending outpaces tax revenue. Raising the debt ceiling doesn’t usually create much of a stir. Congress has raised it 10 times since 2001.

A refusal to raise the debt ceiling wouldn’t mean that Congress had begun to solve the nation’s budget problems. It would just mean that lawmakers were refusing to let the government borrow more money to finance programs and tax cuts already approved.

“Having voted to run up the bill, it is utterly irresponsible to prohibit the government from borrowing the money to pay it,” writes Howard Gleckman, resident fellow at the Urban Institute.


Q: What is the federal debt, and how does it differ from the deficit?

A: The deficit is how much government spending exceeds tax revenue during a year. The government is expected to run a record $1.5 trillion deficit in the current fiscal year. The debt is the sum of deficits past and present. If Congress raises the limit, the debt will reach $15.5 trillion by Sept. 30, the end of the fiscal year. The huge deficits and debt reflect tax cuts, wars, the Obama administration’s stimulus program, higher costs of federal health care programs and the recession, which shrank tax revenue and led the government to spend more on social programs.


Q: What happens now that Treasury has hit its debt limit?

A: It can free up $232 billion by taking what Geithner calls “extraordinary measures.” Besides suspending contributions to federal employee pension funds, the government can halt payments to a government fund that buys and sells foreign currencies.

The most serious debt-ceiling showdown was in 1995. At the time, the debt limit was just $4.9 trillion. Treasury Secretary Robert Rubin used gimmicks and juggled the government’s books to keep government finances afloat for four and a half months before Congress and the Clinton White House reached a deal to end the impasse.

Geithner’s Treasury Department won’t have as much cushion because the debt is growing much faster than in the mid-1990s. Geithner estimates he’ll run out of options Aug. 2.


Q: What would happen if Congress doesn’t raise the debt ceiling by Aug. 2 or whenever Treasury exhausts all its short-options?

A: Things would get ugly fast. “When bills became due, we could not pay all of them,” says Maya MacGuineas, president of the Committee for a Responsible Budget, a bipartisan group that advocates cutting the debt. “If that happens, you shake up markets as you’ve never seen before. … It’s inconceivable we would willingly walk ourselves over the cliff.”

The government needs to borrow $738 billion to get through the fiscal year that ends Sept. 30, according to the Congressional Research Service. Somehow, it would have to close that gap. It could:

— Cut government spending dramatically. To put things in context, $738 billion is equal to 40 percent of the $1.7 trillion that the government is expected to spend in the last six months of the fiscal year. Everything from military salaries to Medicare and Social Security benefits to interest payments on the debt would be vulnerable.

— Come up with $738 billion in new tax revenue, increasing by 66 percent the $1.1 trillion the government is expected to collect in taxes in the second half of the fiscal year.

— Choose a combination of draconian spending cuts and tax increases.

If investors become convinced the U.S. will renege on its debts, they’ll sell Treasurys to avoid the risk that the government might not make good on them. That would drive Treasury prices down and push interest rates up, raising the borrowing costs on everything from mortgages to cars. Higher rates would likely slow the economy.

So far, bond investors are taking the threat in stride; the yield on 10-year Treasury notes remains low at 3.17 percent. U.S. Treasurys are still considered perhaps the safest available investment, a haven for investors worldwide.

As Aug. 2 approaches, there’s a bigger risk that investors will become nervous.

“It would tell the world that the U.S. can’t get its act together, that this is basically a circus,” says William Gross, an influential investor who is managing director of the world’s biggest bond fund, Pimco. “Investors ultimately won’t want to be held hostage by a bunch of clowns.”


Q: If the consequences are so dire, why is Congress suggesting it might not raise the limit?

A: As the political divide between Republicans and Democrats has widened, the debt ceiling has emerged as a divisive issue. In recent years, the party that doesn’t control the White House has used the issue to whack the party that does.

In 2006, for instance, Senate Democrats voted unanimously against raising the debt limit for President George W. Bush to protest his tax cuts and the invasion of Iraq — a vote that President Barack Obama, then a senator, says he regrets. The situation reversed in 2010: No Senate Republicans supported a higher debt limit for Obama, accusing him of reckless government spending. Congress approved the higher limit anyway because Democrats had a majority in both the House and Senate.

Congress has always ended up raising the debt ceiling before a financial crackup.

Republicans, many of them elected in November on a pledge to slash spending, are betting that the debt-ceiling deadline offers leverage to demand deep budget cuts from the Obama administration.

Obama wants to narrow the federal gaps and reduce debts, in part by reducing spending, in part by ending tax cuts for higher-income Americans enacted under President George W. Bush. But Republican lawmakers say they refuse to consider tax hikes.


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Social Security fund will be drained by 2037

Social Security fund will be drained by 2037

Jan. 27, 2011, 5:50 a.m. EST

Information Published by Associated Press Writers
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WASHINGTON (AP) — Social Security’s finances are getting worse as the economy struggles to recover and millions of baby boomers stand at the brink of retirement.

New congressional projections show Social Security running deficits every year until its trust funds are eventually drained in about 2037.

This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday.

That figure swells to $130 billion when a new one-year cut in payroll taxes is included, though Congress has promised to repay any lost revenue from the tax cut.

The massive retirement program has been feeling the effects of a struggling economy for several years. The program first went into deficit last year, but the CBO said at the time that Social Security would post surpluses for a few more years before permanently slipping into deficits in 2016.

The outlook, however, has grown bleaker as the nation struggles to recover from the worst economic crisis since Social Security was enacted during the Great Depression.

In the short term, Social Security is suffering from a weak economy that has payroll taxes lagging and applications for benefits rising.

In the long term, Social Security will be strained by the growing number of baby boomers retiring and applying for benefits.

The deficits add a sense of urgency to efforts to improve Social Security’s finances. For much of the past 30 years, Social Security has run big surpluses, which the government has borrowed to spend on other programs.

Now that Social Security is running deficits, the federal government will have to find money elsewhere to help pay for retirement, disability and survivor benefits.

“It means that Social Security is increasingly adding to our long-term fiscal problem, and it’s happening now,” said Eugene Steuerle, a former Treasury official who is now a fellow at the Urban Institute think tank.

It’s a bad time for the nation to be hit with more financial problems. The federal budget deficit will surge to a record $1.5 trillion flood of red ink this year, congressional budget experts estimated Wednesday, blaming the slow economic recovery and a tax cut law enacted in December.

A debt commission appointed by President Barack Obama has recommended a series of changes to improve Social Security’s finances, including a gradual increase in the full retirement age, lower cost-of-living increases and a gradual increase in the threshold on the amount of income subject to the Social Security payroll tax.

Obama, however, has not embraced any of the panel’s recommendations. Instead, in his State of the Union speech this week, he called for unspecified bipartisan solutions to strengthen the program while protecting current retirees, future retirees and people with disabilities.

Senate Republican leader Mitch McConnell of Kentucky said he is ready to work with Obama on Social Security and other tough issues.

“I take the president at his word when he says he’s eager to cooperate with us on doing all of it,” McConnell said.

Social Security experts say news of permanent deficits should be a wake-up call for action.

“So long as Social Security was running surpluses, policymakers could put off the need to fix the program,” said Andrew Biggs, a former deputy commissioner at the Social Security Administration who is now a resident scholar at the American Enterprise Institute.

“Now that the system is running deficits, it simply becomes clear that we need to act on Social Security reform.”

More than 54 million people receive retirement, disability or survivor benefits from Social Security. Monthly payments average $1,076.

The program has been supported by a 6.2 percent payroll tax paid by both workers and employers.

In December, Congress passed a one-year tax cut for workers, to 4.2 percent. The lost revenue is to be repaid to Social Security from general revenue funds, meaning it will add to the growing national debt.

Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s.

Benefits will be safe until that money runs out. That is projected to happen in 2037 — unless Congress acts in the meantime. At that point, Social Security would collect enough in payroll taxes to pay out about 78 percent of benefits, according to the Social Security Administration.

The $2.5 trillion surplus, however, has been borrowed over the years by the federal government and spent on other programs. In return, the Treasury Department has issued bonds to Social Security, guaranteeing repayment with interest.

Social Security supporters are adamant that the program will be repaid, just as the U.S. government repays others who invest in U.S. Treasury bonds.

“It’s an IOU that is backed by Treasury bonds and the faith and credit of the United States government,” said Sen. Bernie Sanders, I-Vt. “It is the same faith and credit that enables us to borrow from rich people and from China and from other countries. As you well know, in the history of this country, the United States has never defaulted on one penny owed to a creditor.”

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Fed says economy needs $600B bond-purchase program

Fed says economy needs $600B bond-purchase program

Jan. 26, 2011, 4:17 p.m. EST
Information Published by Associated Press Writers

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Fed likely to keep $600B bond-purchase plan intact
WASHINGTON (AP) — The economy isn’t growing fast enough to lower unemployment and still needs the benefit of the Federal Reserve’s $600 billion Treasury bond-purchase program.
That was the assessment Wednesday of Fed policymakers as they ended their first meeting of the year.
The Fed made no changes to the program, and the decision was unanimous.
The decision came from a new lineup of voting members that includes two officials who have criticized the bond purchases.
They have said the purchases could eventually ignite inflation or speculative buying in assets like stocks.
The bond-buying program is intended to lower rates on loans and boost stock prices, spurring more spending and invigorating the economy.
Chairman Ben Bernanke faces the challenge of trying to boost hiring and growth without creating new economic threats.
The tax-cut package that took effect this month is easing pressure on the Fed to stimulate growth through its bond purchases.
The measure renewed income-tax cuts and cut workers’ Social Security taxes, boosting their take-home pay.
The Fed’s assessment of the economy was nearly identical to its last meeting in December.
Fed policymakers seemed to downplay recent improvements in the economy including stronger spending by consumers and more production at factories.
Instead, the Fed noted that the economy continues to faces risks. The biggest: that high unemployment will damp consumer spending, which accounts for 70 percent of national economic activity.
Fed policymakers observed that the “economic recovery is continuing, though at a rate that has been insufficient to bring about a significant improvement in labor market conditions.”
One of the Fed’s main reasons for launching the bond-buying program was to lower high unemployment, now at 9.4 percent.
The Fed noted a recent increase in the prices of commodities, such as oil and gasoline, but said it isn’t likely to spark high inflation.
The prospect that inflation will remain tame gives the Fed leeway to stick with its program, announced Nov. 3, to buy $600 billion worth of Treasury debt by the end of June.
On Wall Street, stocks were little changed after the Fed statement.
The Fed kept its pledge to hold a key interest rate at a record low near zero for an “extended period.”
The Fed has kept rates at ultra-low levels since December 2008 to try to encourage people and businesses to spend more.
In crafting its message on the economy, the Fed avoided sounding too optimistic, which might have led investors to think it would cut short its bond-buying program. But it didn’t send a downbeat message, either.
“The Fed can’t take anything granted at this point,” said economist Brian Bethune at IHS Global Insight.
“The economy has shown signs of strength before and then it fizzled.” The Fed’s show of unity Wednesday could erode by spring.
At its next meeting March 15 or the following one on April 26-27, the Fed will probably want to signal whether it will end the bond-purchase program on schedule or extend it.
Any push to renew the program would likely face stiffer resistance. Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas, have spoken out against the program as a threat to trigger high inflation.
Plosser and Fisher might even pressure Bernanke to scale back the program before June. Fed policymakers said Wednesday they’ll continue to monitor the bond-buying program.
They have left open the option of buying more bonds if the economy weakens, or less if it strengthens.
Plosser and Fisher have reputations as inflation “hawks” — more concerned about the threat of high prices than about the need to stimulate the economy.
They are among four regional Fed presidents who are voting members this year on the Fed’s main policymaking group, the Federal Open Market Committee.
The two other new voting members — Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, and Charles Evans, president of the Federal Reserve Bank of Chicago — have backed the Fed’s bond-buying program.
Fed watchers think Kocherlakota, a first-time voting member, will lean toward hawkishness on inflation. Evans’ reputation puts him among the “doves”— those concerned more about strengthening the economy than about warding off inflation.
In mid-February, the 11 members of the Federal Open Market Committee will issue updated economic forecasts for this year.
Growth is expected to strengthen. Unemployment is likely to stay high, around 9 percent.
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