RE: Bond rally and government interest payments

Discussion in 'Economics' started by Kramer_Hedge_LA, Oct 18, 2007.

  1. I read somewhere that when there is a rally in government bonds that it becomes cheaper for the government to finance debt.
    Obviously yields go down when bond prices go up, but how does this affect the interest payments on outstanding issues that the government pays out?
  2. The outstanding issues pay fixed interest. Callable bonds could be replaced with shorter-duration, lower-coupon issues.
  3. Are government bonds callable?
  4. ntt


    "Treasury securities generally are not callable prior to maturity.
    The exception is that prior to 1985, the Treasury issued marketable, callable long-term bonds, and many of them remain outstanding. The Treasury can redeem those callable bonds on their first call date, which is five years prior to the maturity date, or on any semiannual interest payment date thereafter. The Treasury must provide four months' notice before calling a bond; in fact, it has called a number of bonds during their call periods."
  5. Let me see if get this correct: Assuming that there still are many outstanding callable bonds out there prior to 1985, the government bond rally is helping the government refinance debt for much cheaper depending on how long this rally lasts and whether there are callable periods within the rally for the government?
  6. Jaxon


    No, there are very few remaining callable bonds outstanding. They are pretty much all high coupon bonds and it is a foregone conclusion that they will all be called at their first call date. They are all priced to call, and have been priced to call for a long time. I can't recall off the top of my head, but they have coupons like 9% and 13%. There are only a few left anyway, and the total amount outstanding is probably around 10 - 20 bil ? Not even a full drop in the bucket.

    The treasury auctions tbills every week, and 2 year notes every month. 5yrs, 10yrs, 30 yrs, every quarter or more frequently (I can't keep up with the changing schedule)

    A bond rally only lowers the cost of newly issued debt, so on the margin a 2 week, or one month flight to quality rally has a negligible effect on the total debt service cost to the federal government.
  7. Thanks for the info. Is it correct to deduce that corporate bonds (and therefore investment banks) would tend to benefit the most since they release issues more often than the government?
  8. the US treasury is more than happy to sell bonds in a depreciating currency...

    it makes refi a profitable venture as long as there are suckers out there buying the crap...

    so let's say you buy a 2 year at par and you redeem the thing in a currency worth 85 cents at the end of 2 years

    the Treasury is glad to see suckers lining up for that...