How to Extract Interest Rate Projections from a Ten-Year Treasury Auction

Good morning,

For those of us who still periodically dig through the first chapter of our Level Two CFA books to remember how to perform multivariate regressions, I would like to share a little trick I use for projecting Interest rates dots.

The trick I use is simple. The ten year should be a risk-free bond, so I just guess what the coupon is going to be, calculate the IRR of the bond on auction day, and discount it back to present day. If the price ties to the yield of the ten year, I know what the market is expecting the coupon to be. If it does not tie to a specific coupon rate, I can put a number on the chance that the treasury will be issued at a certain rate.

My concern with the growing national debt, is that this trick will no longer work, and I will have to relearn how to calculate multivariate regressions. If the market begins to price in a risk premium on the Ten Year because our politicians are intentionally bankrupting the country, it will become imperative to determine the value of that risk premium to accurately price these bonds.

Related to this, market participants owe a big thank you to the Treasury Secretary Brian Maguire for making the best of an impossible job.

https://home.treasury.gov/system/files/136/Letter-and-CSRDF-Report-January-30-2019.pdf

I cannot imagine having to explain to someone who does not understand that Guam will not tip over if it becomes overpopulated , the importance of keeping a balanced budget.

Rep. worries Guam will capsize? - YouTube

I doubt elected representative, Congressman Johnson, was discussing his concerns with our military pension fund's TIPs holdings in this clip, or a red line he was drawing, regarding US territories in the Pacific.

The intricacies of where money comes from, how it is created, and why Zimbabaweaing the country is a bad idea involves an in depth understanding of fiat monetary systems and the economy in general. It is a travesty our elected officials do not seem to grasp these basic fundamentals necessary to run a country. However, our country is fortunate to have some leaders in non elected positions doing a fantastic job such as Mr. Maguire.

Any who, back to my complaint about determining a risk premium. My first thought on how to measure the determinants of the risk premium, would be to factor out the drivers of that risk. I estimate the four main ones are:

· Inflation caused by congress stealing through MMT policies.

· Creating a fractional banking system on top of a fractional banking system that will increase the money supply, spurring inflation.

· The threat of a World War bankrupting the United States.

· The United States switching back over to a silver standard, making it impossible to pay back its debt with a sustainable currency.

· The systemic financial collapse of the world’s economic system leading to the bankruptcy the United States.

As the first, second, and fourth threats would take too much work to analyze, I began focusing on the third determinant. I did this by looking at the price effect of terrorist attacks on and around the dates of ten-year auctions. Historically, the effects of these terrorist actions have led investors to trade into safe-haven instruments such as U.S. Treasuries. These trades are to hedge against the threat of the economic damage a world war would cause, and to capitalize on the increase in value of already issued treasuries. The value of the already issued treasuries are expected to increase, via comparison to the new ones expected to be issued at with lower coupon payments.

My hypothesis for conducting this research was that the anti-terrorism trade, is an increasingly a non-viable trade to protect one’s assets in an increasingly measurable manner. Since I estimate a World War would finish off the United States economically, price changes of the treasury relating to terrorist attacks should actually have the reverse affect than what most market participants conclude. However, after conducting the research, I was not able to prove my hypothesis by drawing a direct correlation between terrorist attacks and price movement on the ten year. As such, I will not be relying on it for economic predictions.

I did however come across something that was morbid, but interesting. Especially considering our elected officials are trying to take away our second amendment rights. If you look at the frequency distribution of mass shootings in the United States, April is the most common month for them, and almost all the terrorists pulling the trigger are Democrats with leanings evidence by government employment, Sunni sympathies, open border advocation, or affection for the National Socialist Worker Party members who allegedly founded the ACLU.

As gun rights are a politically charged issue, as such I will tread lightly on the subject, and disclose that I am a registered Independent and political parties in general seem like a bad idea to me. However, I am a constitutionalist and believe the first chapter of Ayn Rand’s capitalism explains why everyone not looking to take away people’s rights should be as well. In my opinion, guns keep people safe and free if they are not in the hands of someone with less than an IQ of 85. This has been statistically proven every time a government takes away its citizens basic human right to defend themselves and their families. The most glaring example is the crime statistics in the London before and after they banned guns.

Obviously by banning guns, gun crimes will go down, however in almost all instances, murders, rapes, abductions, stabbings, and violent assaults go way up. By looking at the data, one can only assume that criminals do not like to be shot. If our politicians do manage to take away people’s guns while defunding the police, multivariate regressions may be able to determine how much of the increase in crime can be attributed to defunding the police and how much of the increase in crime can be attributed by stripping citizens of the right to defend themselves and their families.

Also please note I am not accusing Democrats of intentionally orchestrating mass shootings to take away gun rights. I would assume the patterns evident in the frequency distributions of the dates and political leanings of the perpetrators of terrorist acts are a result of Apophenia in Democrats that are mentally disturbed, as well as seasonal population gathering habits.

For those unfamiliar with the term “Apophenia,” Apophenia refers to the human tendency to see patterns and meaning in random information. The term was coined in 1958 by German neurologist Klaus Conrad, who was studying the “unmotivated seeing of connections” in patients with schizophrenia. Unless the National Socialist Worker Party invented psychiatry and used it to wage war on the United States after not getting a "fair deal" after World War One, I think it is safe to say this is the most likely cause of the evident mentioned pattern.

Also, as someone who has spent hundreds of hours volunteering at homeless shelters, if you do come across someone who seems to be delusional, please ask them how they are doing. I have found that just by listening and asking questions, it’s not that hard to figure out if they are delusional or misinformed. The delusional ones will get angry if you correct them with facts, and the misinformed will have a polite discussion and try to figure out the truth.

Warmest Regards,,