Treasury reneges on bonds. This can't be good

[sable302]

Link to the text

http://www.etherzone.com/2004/henr011904.shtml

The U.S. Treasury will default on contracts with investors, mostly individuals, who loaned the government money in 1979 on the agreement that they would receive 9.125 percent interest every year until their bonds mature in the year 2009.

snip...

At a time when the International Monetary Fund (IMF) is already warning the Bush administration about its fiscal irresponsibility, and the Treasury is selling less than half of all securities put up for auction, this action is bound to reverberate negatively through the bond market.

How long will it be before the United States loses the credit rating it has enjoyed for years and investors, particularly foreign nations that hold a significant portion of our national debt, decide it's safer to buy Euros or something else instead of loaning us money?

More...

Has anyone else heard of this?

If so, what are the implications? Like I wrote in the subject line, this can't be good, one would think.

[Timefortruth]

1. My this is serious.

How long can they continue the illusion that everything is fine. It seems hard to believe that they can pull it off until November, but they will no doubt.

[MercutioATC]

2. Actually, it IS a wise fiscal move, and completely legal.

If there is language allowing the government to redeem the bonds early, why wouldn't they take advantage of low interest rates to do so?

I don't see an issue here.

[mistertrickster]

12. I've invested in gov't bonds before, and I don't remember anything

about them being able to cash them out early. That's the whole idea behind _investing_ in long term (30 yr) bonds, you hope to lock in a better rate than you could get anywhere else. And people buy and sell those things as they get more attractive (interest rates fall).

Wouldn't you be very screwed if you bought the last 5 yrs of these 30 year notes at a premium because you were banking on the interest, and then the gov't just pays you the face value of the bond?

[denverbill]

15. I'm with you. I'd never heard about them being callable.

Now, if the govt is going to pay you a premium for the bonds, that's a different story.

A 9 1/2% interest rate on a 30 year bond has to make the bond pretty valuable. The govt either has to pay market rates to buy them back, or the bondowner is getting screwed, bigtime.

[wysi]

3. Hmmmm...

... yet more parallels to the Weimar Republic. This is very frightening indeed.

[MercutioATC]

4. Read beyond the rhetoric of the author. WHY is it frightening?

?

[madrchsod]

14. perception

it`s all about perception..how would you feel if you were not going to get the interest you were counting on...would you start to lose your confidence or go buy more bonds knowing you just got burned?

[MercutioATC]

20. The early cash-in was always a possibility. This is just a hack

capitalizing on the present unrest. Nobody got "burned", they got a good return for the minimum stated term and knew there was a possibility that the bond would be called early.

There are enough legitimate problems with this administration without trying to spin their occasional smart (and legal) moves as oppressive or dangerous.
There is absolutely no "default" here.

[Tandalayo_Scheisskopf]

5. "Full Faith and Credit"

Well, we can now check THAT off the list...

[Toots]

6. I am very suspicious of this

In 1979 interest rates were high but to guarantee a rate that just a few years before had been considered almost usury is doubtful. If the US Treasury defaults on any promise it will have wide ranging consequences.

[tom_paine]

8. I'm afraid I, too, would like to see a corroborating link

[sable302]

11. There's a link

to a PDF file in the article.

Haven't found anything else though.

[htuttle]

13. There was discussion about this in the SMW thread today

The issue at hand wasn't whether it had happened, but what it means.

Here's a link to the news release on the Bureau of Public Debt's website.
http://www.publicdebt.treas.gov/com/comcall.htm

[ewagner]

7. As far a refinancing the debt goes

it IS a good move.

Having said that, it can't be a good signal to the international monetary fund that we're having to "rob Peter to pay Paul".

[madrchsod]

9. so the" state of the union"

is that we are defaulting on contracts. i wonder if screw head will say anything about this. they are saving about a half billion dollars, mostly on the accounts of private investors. this is not unusual ,my parents had to cash out their war bonds- i think the interest was about 5%, but in todays market i would seriously think about euros.

[Robbien]

10. Uh, oh

This is a clear cut sign that the United States Treasury doesn't even have faith in the purchasing power of the dollar.

What effect?

Many pension plans have these instruments and have built their payout rates based on them. They are stealing from seniors.

The next time the US wants to issue long term bonds, where will they find any takers?

[DevilsAdvocate2]

16. You really must read the entire EDITORIAL (not NEWS article)

The author also says this:

<snip>

...It may also be that the fine print of these contracts has a clause allowing for the "call" of these securities at a certain date with sufficient notice or even the remote chance that they are part of a "sinking fund" arrangement. For instance, it may be perfectly legal if the contract contains wording where the government can recall these bonds five years prior to maturity, which would account for the resistance in the Clinton years, and a four month notice of such recall which would account for the January 15th to May 15th exact dates.

Notice the qua;lifying language, "It MAY also be... MAY BE perfectly legal..."

Or this:

<snip>

No matter how you look at it, the little old ladies, pension houses, insurance companies and others who purchase long term bonds (the 30 year bond no longer exists) are very liable to think that the federal government contracted to pay interest at 9.125 percent for 30 years and is now defaulting on that contractual agreement.

Once again, notice the people are "LIABLE TO THINK....."

This sounds much more like the author's opinion rather than fact.

[Robbien]

19. With all the corruption

in insurance and audit firms, do you really believe these companies have done the right thing and built in the expense that these bonds will be called?

The people holding the bonds is not the problem here.

[muriel_volestrangler]

17. This is perfectly standard practice in government bonds

and anyone who invests in bonds will understand that - the recent price will have reflected that the Treasury was bound to redeem the bonds at the earlier date rather than later.

See for instance the list of UK government bonds redeemed recently at http://www.dmo.gov.uk/gilts/data/redemp.htm . The 12.5% 2003-2005 bond was redeemed as early as possible (2003), since current interest rates were below the 12.5%; they waited till 2003 to redeem 3.5% 1999-2004, because the Bank of England base rate was above 3.5% until the middle of 2003, and so reborrowing the money would have been more expensive, until then.

I think this means the EtherZone.com website is either ignorant, or a bunch of con artists. Do not buy anything from them, in any case. As they have Ann Coulter's "Treason" for sale, they look even more untrustworthy.

[yellowcanine]

18. This guy really doesn't know what he is talking about.

The treasury is not "reneging" on the bonds. They are calling them in so they don't have to continue to pay above market interest rates. The bonds undoubtably have a clause in them that allows them to do this. It is no more reneging than it is for a homebuyer to refinance his mortgage to get a lower rate - he pays off the high rate mortgage and substitutes a mortgage at the lower market rate. It would be irresponsible for the treasury NOT to do this. Get a grip, people. Not everything the government does is a scam - let the Freepers "jump" on stories like this. DU posters should be a little more thoughtful, imo.