E-piphany

I have a very simple chart to show today, but first I want to give my award.

Of course, by now you know that Time Magazine awarded Chairman Ben Bernanke its “Person of the Year” award, which in the past has been given to such luminaries as Chiang Kai-Shek (1937), Hitler (1938), and Stalin twice (1939, 1942), as well as to some people who didn’t manage to kill or impoverish millions. With that history, it would have been understandable if Dr. Bernanke was loathe to accept the honor, but the Nobel Peace Prize had already been awarded so…

And, in an act of inspired comedic timing, the AP announced that its Athlete of the Decade is…Tiger Woods. I am not sure what the selection criteria here is but it appears to be purely statistical. Check that, since Tiger Woods’ other hobby seems to be generating quite a raft of statistics as well…let’s say…gee, this is hard to write but you know what I mean. His formal job.

So, since the bar has been placed extremely low with awards this year, I decided to award one myself. And so, the inaugural E-piphany Investor of the Century Award goes to … Bernie Madoff. I decided to honor Mr. Madoff because his track record was par excellence, at least if you ignore that last little bit. Basically the same standard as the AP is applying in the Tiger case. Congratulations, Prisoner #61727-054A. Your $10,000 prize (less, of course, a 10% management fee deducted annually) will be waiting for you in 150 years.

Congratulations!

Now for a more-scary picture.

When the deficits began exploding last year the Treasury issuance calendar grew concomitantly crowded. Issue sizes increased sharply; the Treasury even brought back the 3y and 7y securities. Clearly, the government needs to raise money wherever and however it can. Except that there’s one exception.

Treasury doesn’t seem to want to increase the size or number of TIPS auctions. They replaced the 20y TIPS with a 30y TIPS, and increased issue sizes very marginally, but the changes were very slight compared with the wholesale re-jiggering of the nominal Treasury auction calendar.

The result is that the proportion of outstanding debt that is represented by inflation-linked issuance has declined in the last year, as shown in the chart below.

TIPS are suddenly less popular at Treasury

I need to make clear a couple of caveats about the chart. First, the denominator here is total federal debt (Source: Treasury Bureau of Public Debt); if it were only marketable debt then the ratio would be higher but the chart would have the same slope. More importantly, I am using market value for TIPS (Source: Barclays Capital) and the Treasury’s numbers are face value. I could have shown face: face, but that ignores the accretion of the TIPS. The change in market rates, which affects the market value, is important but I had to choose one or the other. Finally, the Barclays index excludes maturities under 1 year, which biases the ratio lower. In other words, I didn’t spend all of Saturday putting this chart together in the cleanest way.

With all that said, the chart makes the salient point: what is of interest is not the level of TIPS issuance relative to other Treasury debt, but the relative change in the level. That is, the Treasury is de-emphasizing TIPS by neglecting their issuance. This is a really peculiar time to be neglecting inflation-indexed bond issuance, when the risks are as great as they have ever been that the government might see some benefit to monetizing the debt. I would argue that, instead, if the powers that be wanted to increase confidence among their debt holders (many of them not dollar-based) that they have no such intention, they should be increasing the issuance of TIPS. Even if it was just a smokescreen, it’s a cheap way to convince people to buy all of the nominal debt at attractive levels!

The Treasury will respond that there just isn’t enough demand for TIPS. Baloney. There are enormous non-domestic holders of Treasury debt who would buy anything offered, I suspect. With TIPS yields at strikingly low levels, it is hard to imagine that there isn’t enough interest to raise a bit more through the TIPS program.

I still think that an inflation-indexed perpetuity would be a great idea. Unless, of course, you are planning to monetize the debt.

Don’t listen to what the Man of the Year says; watch what his colleagues on Capitol Hill do and I think you may find  some cause to be concerned.