Treasury talks small, acts big on rates
Washington — ''I wish that the Treasury would not demonstrate lack of faith in the future by selling 30-year bonds at 12 percent, with 25-year call protection,'' says a senior US monetary official.
''This means,'' he says, ''that the Treasury guarantees a 12 percent return to the buyer for 25 years, after which it may redeem the bonds. This tells the market that 12 percent can be had for 25 years.
''If inflation falls well below that rate, the bonds will become valuable property in the open resale market - bringing 150 or even 200 percent of their face value.''
Corporate bond rates, by contrast, the official says, are offered with only five to 10 years of call protection. The Treasury, in short, is offering buyers higher long-term interest rates than corporate managers are willing to do.
Businessmen, uncertain about the future course of interest rates and inflation, will not commit themselves to pay high returns on their corporate bonds over 25 years. They want an escape hatch, or protection, in the event that rates generally drop.
Treasury officials, too, would like protection. But they do not share the luxury possessed by corporations of deciding whether or not to issue bonds.
To finance huge government deficits into the future, the Treasury must borrow enormous sums from the public - at interest rates that investors are willing to accept.
With no clear sign that government deficits will shrink, investors - including institutions with millions of dollars to invest - are wary. They see a rapid economic recovery leading to a borrowing clash between the Treasury and the private sector.
Some key Wall Street experts have told Federal Reserve officials that such a clash may develop before next year's presidential election, especially if the economy continues to grow at anything near its current pace.
The Fed, meanwhile, reports that factory output rose a spanking 1.8 percent in July, with the strongest gains in durable goods, including autos and machinery.
The latest production figures coincide with other signs, including sharply lower unemployment, that the economy is growing at roughly the 8.7 percent rate experienced in the April-June quarter.
Growth at this pace is much faster than had been anticipated. Interest rates, as a result, have climbed by 1.5 to 2 percent since late May. Interest charged on a 30-year, fixed-rate mortgage, for example, has risen from 12.5 to 14 percent.
Treasury yields have floated up along with other interest rates, causing a paradox. Treasury Secretary Donald T. Regan predicts that interest rates will drop, while the Treasury issues long-term bonds at high yields.
''The Treasury secretary wears a political hat,'' says Edward Yardeni, senior vice-president and director of economics at Prudential-Bache Inc. ''Debt managers in the Treasury can't be in the business of setting their rates on the basis of (such predictions).''
''If you really believe that rates are coming down,'' he says, ''you should issue short-term notes, then roll them over (at longer terms) when rates decline.''
Treasury officials charged with debt management auction their notes and bonds at whatever rates investors will buy. For 30-year bonds maturing in 2013 that means 12 percent.
''The unknown ingredient here,'' Yardeni said in a telephone interview, ''is whether the rise in interest rates so far has been enough to slow the recovery without another climb in rates.''
Government statistics report what was happening in the economy a month or more ago. A lag exists between published figures and what American consumers may be doing now.
The latest batch of government figures shows the economy growing rapidly. Analysts accept this evidence, but some believe a slowdown may already have begun in interest-sensitive sectors like housing.
At the heart of investor concern is what will happen to the economy if neither Congress nor President Reagan takes meaningful action to compress the deficits in ''outyears,'' meaning 1985 and thereafter.
Such action would include scaling back defense outlays, putting a cap on the growth of entitlement programs, and raising taxes. Only thus can the gap between government income and outgo be reduced.
This involves tough political choices which, on present evidence, both Mr. Reagan and Congress have shelved until after the 1984 elections.
''I think,'' Yardeni says, ''it may take one more interest-rate scare before there is action on the deficit.''
''The primary cause of high real interest rates,'' says Jack Carlson, chief economist and executive vice-president of the National Association of Realtors, ''is the prospect of federal budget deficits of $200 billion or more for several years.
''Overall,'' said Dr. Carlson, ''it is estimated that current and future deficits are adding 3 to 4 percentage points to long-term interest rates.''