Though there is fragmentation in the Bond markets. Even including its regulation. There is yet still need for further Policy Instrument implementation. Indeed, Yesha Yadav’s description of this paradigm is apt when he says: “The rulebook for Treasuries is sparse, lacking basic guardrails common to other markets. Without effective rules and institutional cooperation, regulators are ill-equipped to develop a taxonomy of risks and strategies to mitigate them[1]”. The introduction of Public Investment Acts, such as those pursuant to the United States Securities Act of 1933, has withstood Judicial Review. Even as late as 2020, such as in the United States Supreme Court Case Liu v. Securities and Exchange Commission[2], 2020. The United States Securities Act of 1933 is essential in that “It requires every offer or sale of securities that uses the means and Instrumentalities of interstate commerce to be registered with the SEC pursuant to the 1933 Act, unless an exemption from registration exists under the law.”[3]
This Public, and Private Law strategy, has been upheld by the course of time, and the success of our modern market-based systems of exchange. This treatise however, is not a prelude to any sort of significant structural reforms to the current system. But instead, is an attempt to ameliorate the treasury markets, for significant structural gain, through a Policy of incrementalism, and the introduction of substantive Public Investment Law, to our current system of Fiscal, and Monetary management. Thus, the introduction of a substantive Public Investment Law, to be passed with Congressional approval, which will better the Private Laws which govern the efficient functioning of Monetary Policy, as well as Fiscal Policy, in the United States Government.
The current COVID crisis, has precipitated a new and unique situation in the United States Bond Markets. The loosening of Interest Rates by the Federal Reserve, had the implicit effect of lowering Bond Prices, and increasing Yields to Maturity. This has played itself out in the United States Bond Markets as expected. Though, now analyst and commentators are fretting about what the increase in Real Bond Rates means for the overall health of the Economy. However, the health of the Bond Markets, in no way implies the deterioration of the health of the overall Financial Markets, both here in the US domestically, as well as internationally. On the contrary, the health in the Bond Markets, and the explicit loosening of Interest Rates, which had the added effect of increasing inflationary pressures. Has instead led to an increase not only in inflation overall in the Economy, but also the increase in value, in Equities, and Securities, in the Financial Markets. This is not to say that Bond Yields would deteriorate with these sideways pressures (As they often would in the circumstances of an Ordinary Bull Market). However, with the combination of healthy Economic Outlook, multiplied by strong and resilient Financial Markets, this has led to an unexpected increase in the Yield-to-Maturity of Bond Assets, along with a loosening of Bond Durations, and Convexities. These seemingly diametrically opposed phenomena, the increase of returns on Equities, along with an increase in Bond Yields, is in fact a further maturation of the already strong Bull Market which we have experienced over the last 12 years.
Bond Reinvestment Coupons, or BRICS, can play a valuable role in the overall health of the Economy both now, and in future Bull Markets. Below, is how I envision that they would work.
Their artifice is quite simple requiring only a slight Policy rethink by both the Federal Reserve, as well as the Treasury Department in their implementation. They work, based on the premise of Discounted Savings which accrue from the redemption of Bond Reinvestment Coupons for Dollar Denominated Treasuries, which usually occurs on a Semi-Annual Basis. The main crux of the Instrument would allow for these Coupon Redemptions to be Reinvested into the overall value, and therefore Yields of these Dollar-Denominated Bond Assets. This foregoing of Coupon Redemption, or Bond Reinvestment, would allow for an increase in both the Yield-to-Maturity of the Treasury Product, as well as the Duration, and overall value of any mature Treasury Product redeemed. This Instrument, the Bond Reinvestment Coupon, would be variable, meaning that the ultimate issuer of its availability would be the Treasury Department, as well as the Governing Heads of the Federal Reserve System. What this new Instrument means for Policy in the short term, is that we can expect an increase in Yields generated by Bond Reinvestment. In the long term this means additional measures which can be used, an order to control inflationary pressures from Monetary authorities, as well as Fiscal Agencies. It also means that the Federal Reserve, and the Monetary authorities, will have one more emergency powers Policy tool at their disposal, if need be. The introduction of such an Instrument may in fact allow for the maturation of the Federal Reserve’s so-called Treasury Inflation Protected Securities, or TIPS for short, Instrument. What this means is that we can expect for the Treasury, as well as the Federal Reserve to play a more substantive role in the affairs of Monetary Policy, and Monetary Policy coordination. This coordination of Policy would presumably be overseen by the stakeholders which usually are a part of the Decision-Making Process. This Instrument, BRICS, which would take effect immediately, would require prior approval by the United States Congress, via a bill which would enumerate its powers, which would then delegate these powers to the aforementioned Fiscal, and Monetary Policy making Apparatuses, eventually becoming law. The proposed name for this law would be the Bond Reinvestment Act of 2023.
So, then the most recent correction that we just experienced World Wide, due to the COVID virus, has been perceived by Financial Markets, as only a temporary downturn, with Bond Markets, especially here in the United States, viewing these phenomena, as a strength, rather than a weakness. And if the added effect of a Policy of Selective Bond Reinvestment Coupons (BRICS) takes shape, I expect for Real Bond Maturity Yields to continue to increase, as the US Economy recovers, and I wouldn’t be surprised to see Bond Yield patterns of previous Bull Markets begin to take hold with 10 year, and 30-year Bond Spreads returning to pre 2008 Financial Crisis Levels. With Dollar Valuation surpassing pre-2008 levels, and trending towards 1990’s era Dollar-Yen Swaps. With increased value found in International Markets, and Exporting of Dollar Denominated Services, and Assets.
[1] The Failed Regulation of U.S. Treasury Markets, Columbia Law Review Vol. 121 No. 4, Yesha Yadav, https://www.columbialawreview.org/content/the-failed-regulation-of-u-s-treasury-markets/, Accessed On: 08/17/2021
[2] Liu v. Securities and Exchange Commission was a case which upheld the disgorgement clauses which were pursuant to the Securities Act of 1933. A legal precedent which has been upheld since at least the era of the great depression. For more: https://en.wikipedia.org/wiki/Liu_v._Securities_and_Exchange_Commission
[3] Securities Act of 1933, Wikipedia.org, https://en.wikipedia.org/wiki/Securities_Act_of_1933, Accessed On: 08/17/2021
