Duration Station

So fun time is over
And I guess it's enough
But just for the record
It was a little too rough
--Til Tuesday

This nifty chart posted by Prof Zucchi shows that the US government has been funding increasing debt levels with instruments of decreasing maturity. This suggest a possible 'duration' problem in the future.

Imagine funding payments on a 30 yr mortgage with those cheap 'teaser rate' loans that credit card companies used to offer (remember those?). Each month, you find a different '6 months @ 0%' offer. You use the proceeds to pay your mortgage and other bills. Seems pretty nice as long as those low rate loans are available.

But what if those cheap sources of credit vanish (as they largely did w/ those teaser offers)? You may only be able to fund your mortgage payments with high cost dollars perhaps much higher than your actual mortgage rate. The underlying cause is that you tried to finance a long term obligation with short term funds. If the conditions surrounding the cost of those short term funds change, then you may have a big problem on your hands.

The US government has been doing this because short term interest rates are so cheap. The Fed has been making this so by buying down short rates (can you say Ponzi?).

The risk of a duration problem surfacing here in the US at some point is rising. If you've been following the Iceland story, you likely know that duration mismatch has been a key factor in this country's financial turmoil.

position in USD