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100-Year Treasuries Really Bad Idea


Misguided attempt to get investors to take on more risk.

Those not thrilled with the prospect of getting 3% for 30 years on the long bond can now entertain the possibility of getting 3% for 100 years.

BlackRock's Peter Fisher says the Treasury should consider 100-year debt in the form of bonds, particularly given the fact that it now faces a budget deficit of more than $1 trillion.

Artificial Demand

Fisher is badly mistaken. The only demand for 100-year treasuries would be from Bernanke attempting to hammer interest rates lower in a misguided move to get investors to take on more risk and to get banks to lend.

Artificially Low Rates Affect Pension Plans And Insurance Companies

Unfortunately, Bernanke's helicopter-drop play of purchasing longer-term Treasury on the open market in substantial quantities to force down long-term rates (and Fisher's proposal to carry the idea to even more ridiculous extremes) is bound to blow up insurance companies and pension plans - while doing nothing to stimulate demand.

Think of all the insurance companies that promised annuities guaranteeing 6% or more. Think of all the pension plans with assumptions of 8.5% annual returns. There's nothing like matching up those needs and assumptions with treasuries yielding 3% for 100 years.

Please see Search For Stimulus In A ZIRP World and Helicopter Ben Pulls Out Bazooka for more on Bernanke's efforts to force down long-term rates after having run out of room to lower the short end of the curve.

New Jersey Insolvent Over Pension Plans

Consider: The state of New Jersey is insolvent because of pension-plan issues.

New Jersey is $60 billion in the hole on pension funding ($118 Billion needed and only $57.8 billion in the fund) yet the Governor proposing skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%.

New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will be sitting on $31.8 billion. But what happens if the S&P falls to 450 or 600?

At $5.2 billion a year, New Jersey 's pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.

Repercussions of Ill-advised Stimulus

Bernanke's efforts to stimulate the economy are having serious repercussions elsewhere, while doing nothing much to stimulate anything except additional losses.

Deflation is the market's way of forcing an unwind of malinvestments and leverage.
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