If there has ever been a time for legitimate confusion in the government bond market, now is that time. Questions abound concerning the health of the economy, continuous monetary growth, the Federal Farm Credit Bank System, problems with Third World countries, the viability of insurers of mortgage programs and the possible curtailment of Japanese purchases of U.S. securities. All of these concerns are a result of various economic and financial factors over which mortal men, at this stage of the ball game, have little control. But there is one cloud that is presently hanging over the government bond market over which mortal man can exercise direct control if he so chooses, and that is the raising of the U.S. debt ceiling by Congress. But alas, as it always turns out, the people who preach fiscal responsibility and the need to lower interest rates seem unable to help themselves or the country and practice what they preach when it comes time to raising the debt ceiling. Political hay must be made regardless of the consequences and to hell with the country and the taxpayers.
It is anticipated that the current debt ceiling of $1.824 trillion will be reached around the end of September. Analysts figure that the Treasury at that time will have about $20 billion in the till, which should last until mid-October. At that point, in theory, if the debt ceiling isn't raised (the Treasury will ask for an increase of about $250 billion to carry them a year), the federal govenment runs out of money, government workers will have to be laid off, contributions to the Social Security System and other government pensions funds would cease, and all of Washington would come to a halt. Silly isn't it, but stand by for the annual congressional theatrics of "Embarrass the Administration."
But the most serious abuse of the system is what these childish pranks do to the government bond market, which is the reason for this article in the first place. At the end of September, the Treasury usually holds its "mini-refunding," when four-year and seven-year notes, plus a 20-year bond, are sold. Then, during the last week of October, the Treasury holds its quarterly refunding, when two-year and 10-year notes are sold, along with a 30-year bond. In all likelihood, only the four-year note will be sold, but only on the amount of the issue that is outstanding; no new cash will be raised.
By the way, during the last quarter of 1985, the Treasury has a large financing need since it must raise between $50 billion and $55 billion of new money. At any rate, depending on the length of time Congress holds the debt-ceiling issue as its political hostage, the Treasury conceivably may have to do three months of financing in just two months. The added supply compressed into two months will probably cause interest rates to move higher and be an added burden to U.S. taxpayers.
And so the drama will unfold; the Hill people will have played their clever games and made political hay at our expense. This charade shouldn't go too far past mid-October, because, after all, the Hill people like to draw their paychecks, too.
The Treasury will offer a two-year note in minimums of $5,000 on Wednesday, one of the last issues to slip in under the current ceiling. It should return 9.10 percent.