Thursday, May 28, 2009

If Only the Treasury were a Bank

First lets rewind to see one of the ways Citi was able to turn a profit in its most recent quarter (per Calculated Risk):

Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.
Now lets take just one segment of the HUGE new U.S. Treasury issuance, the long bond (i.e. 30 year Treasury). According to data from Treasury Direct, the Treasury has had four 30 year auctions since last Fall.

30 Year Auctions

As a refresher, the price of a bond is inversely related to the interest rate (when interest rates go down, the coupons are discounted at a lower rate resulting in the higher price). The chart below details this phenomenon for the 30 year long bond for various interest rates. When the market rate (i.e. yield) is equal to the interest rate of the bond, the price of the long bond is PAR (i.e $100).

Price of a Long Bond at Various Interest Rates and Market Rates

The relevance? With 30 year rates spiking above 4.6% these bonds have lost a TON of market value. How much? Over 30% from their peak, but as much as 18% since February's auction.

Change in Long Bond Prices Since Issuance

That means February's $14 billion auction alone has already netted the government a cool $2.5 billion. Throw in the mass amounts the U.S. has made issuing 10 year bonds as low as 2.2% (now yielding 3.7%), thus making 15%+ profit as well, then according to "Citigroup accounting" we should be out of debt in no time...

The interesting takeaway of all of this... the U.S. doesn't need actual inflation to decay the value of the national debt.


  1. The accounting assumes the bonds will be repurchased below issue price. Is the Treasury really likely to start retiring debt? I'll plump for "no".

  2. And to that I would add, does the US follow GAAP?!

  3. Unfortunately it's not only the liabilities that loose market value when the intrest rates rise. The assets do as well.

  4. Anon1- you really think Citi is buying back their debt?