Good News For Bond Traders
It wasn't that long ago that I was getting lots of calls from bond traders on Wall Street who needed career counseling. This was 1998-2001 when, for the first time in 70 years, the federal government had run 4 consecutive budget surpluses and there was talk about paying off the national debt by the end of the decade.
The bond market, which had been riding high the previous decade, suddenly looked like it was going to dry up. Even the Federal Reserve started to explore how it could do what it is supposed to do if there were no more bills, notes, and bonds to buy and sell. As hard as it is to believe now, there was serious talk about the Fed using Fannie Mae and Freddie Mac bonds.
This concern faded as quickly as the budget surpluses disappeared and serious talk about changing jobs and careers was replaced with discussions about bonuses and real estate.
So here's an update for the bond market: You have nothing to wory about; there will be plenty of new supply of federal debt to trade for as long as any of you are in the business.
There are four reasons you should be thinking about a larger condo and a new vacation home.
First, federal domestic and military spending will be rising in the coming years. It makes no difference who is elected president and which political party controls Congress. Spending for almost everthing the federal government does has been artificially (and in some cases disasterously) kept low in recent years. That will change starting in 2009.
Second, there continues to be little political appetite for additional revenues to pay for the increased spending. Call them fees, revenues, or bananas, the politics of raising taxes are still poisonous.
Third, in large part because no one has yet figured out how to reduce it painlessly, the budget deficit is likely to remain a nonissue for some time to come. It will still be a problem, just not an issue.
Fourth, because so much of the close to $3 trillion that will be borrowed during the Bush administration has been short-term debt, the amount that will have to be refinanced each year will be substantially greater than has typically been the case in the past. Even though it was in a position to lock in relatively low rates for years, the White House chose to ride the yield curve with shorter-term debt that cost less while George W. Bush was in office. As a result, the next president and Congress will suffer; the bond market will benefit.
So all that talk about chucking it all and opening up that doggie daycare center you always wanted to own, finally getting into shape, and volunteering more can be put on hold. If you're a bond trader, you're going to be doing fine for quite some time.