Dear Reader,
Today I want to talk about a little story that wasn’t picked up by many people…
This week PIMCO, the world’s biggest active bond fund manager, came out and said they’re pulling back from lending the U.S. government money.
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This is a big deal – like a major escalation when the largest active bond manager on Earth says we’re not buying long-term U.S. Treasuries.
That’s a first.
As we’ve been talking about here for a few months, the U.S. government is basically offering 30-year bonds at 4.5%...
While you can buy 1- or 2-year bonds at 4.1%.
What would you rather do?
Lend the government money for a year at 4% or for 30 years at 4.5%?
4.5% is just not enough.
Not when the U.S. government is paying a trillion dollars a year in interest costs…
Not when the last two presidents, Trump in his first term and then Biden, added $14.5 trillion in new debt.
So, I’m ringing the alarm on this again because when a company like PIMCO is buying bonds no longer than a year or two, and treasuries even under a year – 30 days, 60, 90 days…
I want to tell you again what I’ve said here before – don’t go beyond a year or two.
That’s been my policy; personally, with my own money, and what I’ve told readers.
A lot of people out there and companies are doing the same.
Now, here’s where this gets very dangerous for the United States…
Imagine a scenario where everyone’s shying away from long-term bonds, piling into one-, two-, maybe five-year bonds…
So the Treasury is forced to issue short maturity bonds. Say, one- and two-year, because that’s where investor demand is…
That means every year or two the Treasury has to refinance that debt.
Now, imagine conflict with China breaks out, or Russia gets more insane…
Imagine something bad happens – we call them a “Six Sigma event” – something unexpected…
And that spikes interest rates…
When the Fed goes to borrow money again, say in a year or two, and something really bad is happening, they’re going to have to pay outrageous rates to borrow from investors.
This is a real problem.
The more you lend short-term, the sooner you’re going to have to deal with that.
Unless you adjust your long rate, your 30-year bond, up to where it probably makes sense – 7%, 8% right now – which, of course, explodes interest costs.
I believe, as a lot of people do, that the Federal Reserve is purposely holding down the long end.
And this speaks to complete market manipulation by the Federal Reserve.
But that is a topic for another day.
For now, our guidance remains – avoid long-term debt. Stick to short-term treasuries.
That’s what I have for you today.
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