If you are a dividend investor, automatically you focus on the equities or the stock market. If you are invested in utilities, banks, oil and gas companies, both the stock price and the dividend to equal a total return has done well. However, the alternative to investing in the stock market is buying bonds which is much larger than the stock market.

In an article by Jamie McGeever of Reuters, President Trump’s administration has been focusing on borrowing more at the ultrashort end of the curve, while pushing the Federal Reserve to cut rates. The ultrashort end of the curve is US Treasury bills. Every week there are sales of the 4 week T-bills and the size has reached $100 billion for the 5th consecutive week.

In the article the benchmark 10-yield is the lowest since April’s Liberation Day, while the 30-year bond is backing away from 5%. Investors lending to Uncle Sam for 10 years are getting 4.08%, while investors lending to Uncle Sam for 4 weeks are getting 4.2%. The good news for Uncle Sam is the the $100 billion sale was 2.78 times over scribed or there is very healthy demand.

The big problem is rollover risk. Concentrating sales at the front end of the curve means the government has to refinance a large portion of the debt more frequently. An extreme case of rollover risk was in 2008, when real estate mortgage back securities went into default, all short term paper connected with real estate did not rollover. We are nowhere near that, but a risk is a risk.

Increase T bill issuance has been well absorbed so far, but cash going into bills is depleting liquidity pools and buffers in other parts of the system. The Fed’s overnight reverse repo facility is almost empty, and total bank reserves at the Fed are declining.

No one knows what the lowest comfortable level of reserves for the banking system is. In 2019, a sudden drop below $1.5 trillion triggered significant money market volatility and a spike in overnight rates. At the present time, the reserves are in the $3 trillion area,

The result of moving to the issuance of more T bills is the total outstanding portion of federal debt is 21%, slightly below the historical average of around 22.5% but above the recommended range by the Treasury Borrowing Advisory Committee of 15 to 20%.

As long as there is constant demand for the debt, then the issuance of $1 trillion of new issuance coming soon will not be a concern to the market.

In the world of finance, there are many moving parts and as long as the market has confidence in the system, then it all works. If the market finds a good reason to be worried, then interest rates have to go to ensure demand continues. Politically President Trump can call for lower interest rates but the market will determine what he has to pay. Given interest rates have a direct reflection of dividend stocks, if the government has going to ensure you 7%, would you buy stocks or bonds? Fortunately, the rates are low and should be going down because the economy is slowing, which makes buying a profitable company that can pay dividends a valuable thing to do.

There are more questions than answers, till the next time – to raising questions.