The U.S. Treasury Department has stated a goal of extending the average maturity length of its debt holdings. From a public or civic view point I applaud this effort during a time when rates are low. It saves Uncle Sam a lot of money.
Let's look at few things that make this a great idea and that gives us some information that can help investments in this environment. Look at the graphic below from the U.S. Treasury web site.
In the weeks leading up to October 2008 we saw an unprecedented amount of government short-term borrowing. This is evident in the waterfall downward in maturity length of the entire U.S. government debt portfolio.
Treasury debt rates are determined at auction by demand, or coverage ratio. The more buyers that are in the auction the lower the rates go. So let's add the rate chart from the Treasury web site.
It is immediately apparent that bond demand was very strong during the 2008-2009 time frame and much of this demand was focused in the short term. When buyers entered the bond market under stress in 2008 it was the short-term auctions that got flooded first.
Some interesting information that I want to add to this discussion is the sharp decline in 10-year rates at the end of 2008 and the subsequent volatility in the 10-year rates after that point. Federal Reserve Bank intervention (or QE1, 2, and 3) has caused some increased rate volatility by adding outside of the market influence. Conversely, the removal of that intervention causes a return of normal demand.
As I stated earlier the Treasury Department's involvement in all this is to take advantage, on behalf of the people, to re-finance some rather amazing levels of debt at much lower rates and locking those lower rates into longer terms. As the surge in short-term bonds from 2008 has been cleared in to longer terms the debt maturity average has moved up quickly. (Look at the first chart: +32% since the low point)
The Fed (not to be confused with the Treasury Department) has announced an open-ended bond purchase plan; the media is calling it QE3. QE3 will mostly be directed at purchasing more MBS, longer term Treasuries and such from the market. That plan should put continuous upward demand into the longer-term debt market or auctions, thus lowering the rates. During this environment the Treasury is proceeding with its goal to increase average maturity length. More long-term bonds for sale with increasing demand will continue to flatten the yield curve between long and short rates.
A good article to capture some of the Fed's actions in the long-term bond market is at ZeroHedge by Tyler Durdan. I picked up this chart there. Go read that article. This chart is not shown over a time period but rather the current Fed holdings of differing maturities. QE3 expansion will continue to fill these long side holdings.
As an investor I have come to actually believe a few things that I hear all the time. One of those things is that you "never bet against the Fed." This is an engineered rate environment delivered by some smart powerful people. It should be inflationary to assets that are advantaged by long-term debt. Real estate, mergers, infrastructure and such should benefit. On the other side of the coin, the interest rate market itself should suffer. This market will be increasingly under pressure and will soon be occupied by only government agencies, civic groups and very highly leveraged players. Money earned in the future in the debt markets will continue to favor, more and more, the sellers of debt, not the purchasers of debt. Maybe we will even see 40- or 50-year mortgages show up in the market. Distortions caused by parties that are not interested in profit (governments) are very interesting.
REITs should be better than mREITs going forward as the basic difference begins to favor the business of property owners and not the business of debt owners. Stocks should be better than bonds. Income from high-yielding bonds should stay stable in capital value for another couple of years and that means municipals are still good for tax reasons. I also feel like utilities and telecoms and other large capital needs businesses should be able to expand and refinance under beneficial rate conditions. Companies with access to good credit may decide to expand for needed growth, Altria (MO) comes to mind for this. Do your due diligence, but don't bet against the Fed.