Does Buffett have the power to command a higher rate on Treasuries?

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millennialinvestor
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Does Buffett have the power to command a higher rate on Treasuries?

Post by millennialinvestor »

He has $150B in cash after all. He could finance almost 10% of next year's deficit (estimated at $1.8T).

Could he conceivably ask for 2% on 1 year Treasuries?
dbr
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by dbr »

Treasuries are sold at auction rather than negotiated.

https://www.treasurydirect.gov/instit/a ... 20security.
Last edited by dbr on Sat Jun 12, 2021 4:21 pm, edited 1 time in total.
Grt2bOutdoors
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by Grt2bOutdoors »

millennialinvestor wrote: Sat Jun 12, 2021 4:06 pm He has $150B in cash after all. He could finance almost 10% of next year's deficit (estimated at $1.8T).

Could he conceivably ask for 2% on 1 year Treasuries?
He can do it now, at auction. The treasury market at auction sets the rate offered through a competitive bidding process. You can offer to buy at 2% but there is zero chance the Treasury will accept that offer when the other participants are willing to part with their cash for lower yields. As you can see though, there is so much liquidity and demand sloshing around in the global markets, that the market rates are much lower than 2% for nearly almost all terms - bills, notes or bonds.
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millennialinvestor
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by millennialinvestor »

Well he could push prices up? Maybe offer 5% and hope for 2%?
MarkBarb
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by MarkBarb »

millennialinvestor wrote: Sat Jun 12, 2021 4:24 pm Well he could push prices up? Maybe offer 5% and hope for 2%?
Wouldn't that be pushing down prices? The more you pay for a treasury, the lower the yield. So to get a higher yield, he would have to offer to buy a bunch at below market rates. I don't see how that would work.
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by telemark »

One can always ask.

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Grt2bOutdoors
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by Grt2bOutdoors »

MarkBarb wrote: Sat Jun 12, 2021 4:26 pm
millennialinvestor wrote: Sat Jun 12, 2021 4:24 pm Well he could push prices up? Maybe offer 5% and hope for 2%?
Wouldn't that be pushing down prices? The more you pay for a treasury, the lower the yield. So to get a higher yield, he would have to offer to buy a bunch at below market rates. I don't see how that would work.
He's making the comparison between current market prices and the auction price. Assume the current yield in the market is 1%, he offer's 5% but the market clears at 2%, if purchasing T-Bills, the discount will be higher than a T-Bill at 1%, that pushes prices down and yields up.
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by Valuethinker »

millennialinvestor wrote: Sat Jun 12, 2021 4:24 pm Well he could push prices up? Maybe offer 5% and hope for 2%?
There are national sovereign wealth funds that hold say $1 trillion of US govt debt (Treasuries but also Agency bonds ie Freddie Fannie GNMA etc).

Conceivably by doubling their annual buy, or dropping it to zero, they could alter the rate at auction.

It might be possible to alter the market price with a smaller amount, at a more thinly traded auction.

But consider the political implications of doing same, and the disruption to markets. If you are the UAE and you have $1 trillion or so of assets, and you meaningfully distorted the US Treasury yield, you could cause the US government to strike back (even to the extreme of freezing your funds) OR you could cause a fall in the USD which would wipe out a huge amount of value from your portfolio.

As to a company doing this. Even Apple, with a lot more cash than Warren Buffett's Berkshire Hathaway, is not in the position of buying $150bn of US Treasury bonds *every year*. And if it became known to the market that you had done this *once* unless you were in a position to keep buying (or selling) the market would be very likely to simply move to correct the distortion you had caused.

In a way, this is what happened with the Hedge Fund Long Term Capital Management, whose $150bn collapse in 1998 was the largest HF failure in history (so far). They became the "crowded trade" -- everyone else in the market figured out what they were doing, and jumped on the bandwagon.

The reality is the US Treasury can always print money to buy unsold bonds (the Fed would do that for them). That's the "exorbitant privilege" of borrowing in your own currency. Do that too often, and your currency might plummet, but it's a solution to a one-off effort to fix the US Treasury bond market.
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Re: Does Buffett have the power to command a higher rate on Treasuries?

Post by MarkBarb »

Grt2bOutdoors wrote: Sat Jun 12, 2021 4:39 pm
MarkBarb wrote: Sat Jun 12, 2021 4:26 pm
millennialinvestor wrote: Sat Jun 12, 2021 4:24 pm Well he could push prices up? Maybe offer 5% and hope for 2%?
Wouldn't that be pushing down prices? The more you pay for a treasury, the lower the yield. So to get a higher yield, he would have to offer to buy a bunch at below market rates. I don't see how that would work.
He's making the comparison between current market prices and the auction price. Assume the current yield in the market is 1%, he offer's 5% but the market clears at 2%, if purchasing T-Bills, the discount will be higher than a T-Bill at 1%, that pushes prices down and yields up.
I'm still confused. I'm with you on the "current yield in the market is 1%". But "He offer's 5%" doesn't make sense to me. I know that 5% sounds higher, but it's a lower bid. He's demanding a much higher return than the market. With enough money, I can see how he could push yields lower by offering to accept lower yields. I don't see how he can raise the yield by demanding a higher return than the market is offering.

In stock equivalent, it's like saying that Company X is trading for $100/share and you want to move the market by flooding the market with offers to buy at $95/share. Why would that have any effect at all?
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Re: Does Buffett have the power to command a higher rate on Treasuries?

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