Which I hope you have better insight on the difference between
Bush's & Clinton's On The "Money"!!
May 22 (Bloomberg) -- President George W. Bush, who brought
back the budget deficit and presided over a falling dollar, can
claim success in one aspect of fiscal policy: low bond yields.
More than five years into the Bush presidency, the average
U.S. Treasury yield, which helps set corporate and consumer
borrowing rates, averaged about 4 percent. That's the longest
period since the 1960s, and compares with the 6 percent average
yield under Bill Clinton, the president from 1993 to 2001.
``He was able to add a significant amount of stimulus through
his administration without creating an inflation problem,'' said
James Caron, an interest-rate strategist at New York-based Merrill
Lynch & Co., the No. 2 U.S. securities firm by market value.
``What Bush deserves more credit for is he created a tax structure
that helped the economy,'' he said in an interview last week.
The question now is whether low U.S. rates will be enough to
cushion the economy from a slumping housing market and if
international investors will continue to fund the budget deficit
as the decline in the dollar makes holding Treasuries less
attractive.
Ten-year Treasuries rose last week by the most since
September, as comments by Federal Reserve officials including
Richmond Fed Bank President Jeffrey Lacker spurred confidence the
central bank will keep its focus on fighting inflation.
The yield on the benchmark 5 1/8 percent note due May 2016
fell 14 basis points to 5.06 percent, according to bond broker
Cantor Fitzgerald LP. A basis point is 0.01 percentage point.
Treasuries of all maturities have lost 1.32 percent this year,
according to Merrill's U.S. Treasury Master Index.
Clinton's Traders
Clinton's bond market was better for traders, while Bush's
has favored borrowers.
Since Bush took office, Treasuries have returned 27.6
percent, including reinvested interest, compared with 72 percent
during Clinton's administration, according to Merrill's index of
128 bonds valued at about $2.4 trillion.
Investment-grade bonds returned 76 percent and junk-rated
debt gained 81 percent under Clinton, Merrill index data show.
During the Bush presidency, investment-grade debt has handed
investors 38 percent and high-risk, high-yield debt returned 47
percent.
While Clinton was in power, yields on 10-year bonds ranged
from more than 8 percent in 1994 to below 4.5 percent in 1998 in
the wake of the Asian currency crisis and the collapse of hedge
fund Long-Term Capital Management. Treasuries have traded in a
narrower range under Bush, with yields rising to about 5.5 percent
in 2001 before falling to almost 3 percent two years later.
Bush's Lower Yields
Borrowing costs have been lower in the Bush presidency. The
government saved about $20 million in annual interest on each $1
billion borrowed, based on average yields.
Investment grade bonds, on average, have yielded 5.4 percent
under Bush, 1.89 percentage points less than during Clinton's
administration. Junk-bond yields since Bush took office in 2001
averaged 10.2 percent, compared with 10.5 percent under Clinton. A
30-year mortgage cost 6.21 percent under Bush, down from 7.68
percent during Clinton's presidency.
Costs to borrow may rise as international investors reduce
purchases of U.S. debt. The government last week said net
purchases of government bonds in March slowed to the least since
February 2003.
The government may say on March 24 that new home sales fell
5.8 percent in April, according to the median estimate of 50
economists surveyed by Bloomberg News. A day later, the National
Association of Realtors may say sales of previously owned homes
slumped 2.5 percent last month, according to a separate survey.
Real estate was responsible for more than half the economy's
expansion since 2001, Merrill research shows.
No Problem
The Bush administration doesn't see a problem.
``This economy is so strong that some moderation in housing
is entirely consistent with sustained very high'' growth rates,
Treasury Secretary John Snow said in a speech to the Bond Market
Association in New York on May 19. Former Fed Chairman Alan
Greenspan said a day earlier at the same conference there is ``no
evidence home prices are going to collapse,'' while acknowledging
that the ``housing boom is over.''
Gross domestic product will expand 3.4 percent this year,
compared with the 3.3 percent average since 1993, according to the
median forecast in a Bloomberg News survey of economists from
April 28 to May 8.
Thank the Fed and international investors, not Bush, for low
bond yields, said Stephen Stanley, chief economist at RBS
Greenwich Capital in Greenwich, Connecticut.
To help emerge from the 2001 recession, the Fed cut its
benchmark interest rate 5.5 percentage points to a 45-year low in
2003, helping fuel record home sales. The average rate for a 30-
year mortgage dropped to 5.21 percent, according to Freddie Mac.
Thank the Fed
``I don't think the Bush administration would want to take
credit for the fact that the Fed had to lower the funds rate to 1
percent in response to a soft economy,'' Stanley said last week.
``The high rates of the 1990s were correlated with strong economic
growth while the low rates earlier this decade were correlated
with a recession and a slow recovery.''
Clinton learned the power of the $25.9 trillion U.S. bond
market after being elected, according to ``The Agenda,'' Bob
Woodward's account of the aftermath of the 1992 race.
Alan Blinder, who was then the Fed's vice chairman, briefed
Clinton on budget deficits after that election. The talk prompted
the new president, whose face had ``turned red with anger,''
according to the book, to say: ``You mean to tell me the success
of the program and my re-election depends on the Federal Reserve
and a bunch of...bond traders?''
Just two months after Bush took office the economy fell into
recession. It recovered to expand 4.2 percent in 2004 and 3.5
percent in 2005, following Bush's tax cut that will total about $2
trillion over 10 years.
Longest Expansion
Clinton's eight years in office occurred during the longest
expansion in U.S. history. Average year-over-year gross domestic
product growth was 3.7 percent. The unemployment rate averaged 5
percent, and fell below 4 percent his last year in office. The
rate was 4.7 percent in April.
By many measures, Treasury yields should be higher. The
budget deficit reached a record $413 billion in 2004, before
falling to $318 billion last year, the result of tax cuts, wars in
Afghanistan and Iraq and Gulf Coast hurricane damage. The Treasury
has added a net $1.3 trillion in new debt since January 2001 as
spending eroded the $237 billion surplus in 2000.
The dollar has declined 22 percent against a trade-weighted
basket of seven currencies tracked by the Fed in the five years
since the Republicans took over the White House, the biggest drop
since the index was established in 1987.
Bush's job approval rating fell to an all-time low of 34
percent in an April USA Today/Gallup poll, with 63 percent of
Americans saying they disapprove.
Dollar Effect
``You definitely get a sense people's confidence has been
rocked a little,'' said Lewis Alexander, chief global economist at
Citigroup Global Markets Inc. in New York and former chief
economist at the Commerce Department from 1993 to 1996. ``High
rates at end of the Clinton administration were a sign of success
not failure,'' he said in an interview last week.
Ten-year Treasury yields rose above 5 percent last month for
the first time since 2002, and some strategists attribute the
increase to a weaker dollar, which is down 8 percent this year
against the euro. A falling currency boosts the economy by making
U.S. exports cheaper. It also erodes the value of holding U.S.
securities for foreigners.
``There's no question at all that attempts by the
administration to talk down the dollar has contributed to weakness
in the bond market,'' said David Goldman, global head of fixed-
income research at New York-based Cantor Fitzgerald.
Foreign Support
The slowdown in international purchases of U.S. securities in
March came as foreign central banks became net sellers of Treasury
notes for the first time in six months. The $3.07 billion net
increase in purchases of Treasuries during March compared with
$21.9 billion the previous month, the government report showed.
Foreign central banks cut their holdings by $6.3 billion.
International investors and central banks in 2004 and 2005
have scooped up U.S. debt to fund the expanding deficit.
Bondholders outside the America own about half the $4.2 trillion
of Treasuries, up from less than 35 percent in 2002, according to
government data.
The U.S. government is paying about 1.5 percentage points
less to sell 10-year notes as a result of international purchases,
according to a report prepared for the Fed last year by Francis
Warnock and Veronica Warnock, professors at the University of
Virginia in Charlottesville, Virginia. Francis Warnock was a
senior economist at the Fed.
To contact the reporter on this story:
Michael McDonald in New York at
mmcdonald10@bloomberg.net;
Matt Benjamin in Washington at mbenjamin@bloomberg.net.
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