By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The U.S. Treasury will lead the way testing the $4.6 trillion mortgage-backed securities market’s mettle. Tim Geithner’s department said on Monday that it will begin offloading $142 billion of mortgage bonds accumulated during the financial crisis. The gradual sale of Treasury’s portfolio could hint at how markets will react when the Federal Reserve comes to sell its nearly $1 trillion stash.

Anyone who had forgotten about the Treasury’s holdings can be forgiven. MBS instruments guaranteed by government agencies Fannie Mae and Freddie Mac were acquired in the name of market stability after their regulator seized the two housing giants in 2008. But the overall crisis at the time and the Fed’s huge intervention are the things that stick in the memory.

The combined purchases had the desired stabilizing effect. Risk premiums on mortgage bonds have tumbled to less than half where they were before Treasury and the Fed started buying in 2008, according to Credit Suisse — with the knock-on effect of keeping mortgages cheap. That hasn’t, however, done much for the broader housing market. Data released on Monday showed the price of existing homes declining and the pace of sales falling nearly 10 percent between January and February. This makes the government’s withdrawal a sensitive matter.

It’s helpful, therefore, that Treasury is testing the water. Its holdings are only about 3 percent of all agency MBS outstanding, so it’s unlikely the sales, set for $10 billion a month starting right away, will cause mortgage rates to climb significantly. And if they do, it’s better to know it before the Fed fires up its own exit strategy — something that’s likely to move more than just the  bond market.

The Fed doesn’t seem to be in any hurry to start selling. The run-off of maturing mortgage bonds has helped trim its portfolio, and the U.S. central bank is still buying Treasuries. Should Treasury’s sales go off with little or no market impact, though, it should encourage the Fed to consider selling its bonds sooner rather than later.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own. By Agnes T. Crane The latest move in the digital revolution looks designed to keep the status quo. The New York Times will finally put up an online pay-wall — $15 to $35 a month for readers who click on more than 20 articles a month. That’s still cheaper than the dead tree edition every day  — which costs around $50 — but not enough to create a huge incentive for inky-fingered readers, and the higher ad dollars they still attract, to switch.

Tactile romanticism, of course, still appeals to older readers, who continued to subscribe to the paper even when content was free on the web. Moreover, those bound by inertia have little incentive to ditch print for digital since current subscribers will be able to read articles from any platform. This matters not just for the Times, which is controlled by the dynastic Ochs Sulzberger family, but for all papers sensitive about prematurely killing the cash cow of print advertising.

The future, however, is pure digital. In 2010, 41 percent of U.S. readers said they got most of their news from the Web, up from 17 percent the year before, and surpassing newspapers for the first time, according to the Pew Research Center. Yet most papers are hardly in the position to shut down the presses tomorrow. The Times, for example, only gets about 17 percent of its $2.4 billion of revenue from its digital businesses.

It’s all about the hand-off, or rather, the timing. The more readers migrate online, the more valuable advertising there should become. Of course, by charging readers online, papers risk becoming less relevant since news junkies may simply migrate to where the news is still free. The Times subscription plan addresses this by keeping articles linked to by bloggers and social media sites free.

But by charging readers, the group should open up a new revenue stream, albeit one that may not be especially significant to the bottom line any time soon — though estimates range as high as $100 million in new annual sales. At the very least, its plan looks to have kept a balance that offers print subscribers little reason to bail for the time being. That’s not a terrible outcome for a business facing revolutionary change.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

It was time for a breather anyway. Volatility is to blame for sub-investment grade companies like Toys R Us yanking more than $7 billion of issuance this week. But after a buoyant spell in the debt markets, the break is no disaster.

The confusion from the catastrophic events unfolding in Japan has forced investors across the globe to reassess risk. Those lending to high-yield companies should welcome the respite from the breakneck pace experienced for most of this year. Investors already had lent more than $140 billion in fresh funds to risky companies, with the once moribund leveraged loan market making up more than half the new deals.

The reach for yield, a powerful driver when the global economy is humming, threatened to whip up additional froth. Standard protections already were being sacrificed. So-called covenant-lite deals, which typified easy borrowing during the boom, comprised 16 percent of total leverage loan issuance this year, according to Thomson Reuters LPC. Volatile markets, though unpleasant, will give enthusiastic investors a much needed time-out to reassess whether such deals are really worth it.

Borrowers, meanwhile, are in good shape to weather a temporary shutdown. Over the last two years, companies have taken advantage of easy money that gets paid back much later. At the end of 2008, a wall of debt cast a long shadow over the market. More than $800 billion was scheduled to come due through 2014, according to Bank of America, which reckons it  will have shrunk to a mere quarter of that by the end of the year.

Toys R Us, for one, hardly looked desperate. A $500 million outstanding bond matures this year, but not until August. Moreover, the bulk of its $1.1 billion deal re-prices an existing loan that doesn’t mature until 2016, according to KDP Advisors.

A forced closing of any credit market will rightly unnerve all participants, who won’t have forgotten the paralysis induced by the subprime financial crisis. But borrowers and lenders are both in better shape to cope with the situation now. The pause might even help cool things down and recalibrate risk expectations when activity restarts.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The U.S. Treasury market could feel financial aftershocks from Japan’s tragic earthquake. Offloading some of the Asian giant’s $1 trillion of foreign reserves could raise cash to help rebuild after Friday’s disaster. Meanwhile, the Federal Reserve is due to end its Treasury bond-buying program in June. If Japan, the second-biggest foreign holder, starts selling that’s another support gone — with the potential to make borrowing more expensive for the U.S. government.

It’s too early to estimate the cost the Japanese government and private sectors will have to shoulder for reconstruction efforts. But bond investors can’t any longer take for granted that Japan will leave its ample reserves intact as it has, broadly speaking, for the past several years. For the government, cashing in could be more palatable than yet more borrowing. Japan’s debt already amounted to more than 200 percent of GDP, according to the International Monetary Fund, before last week’s events.

Between the public and private sectors, Japanese investors owned $882 billion of Treasuries at the end of last year, according to U.S. data — second only to the Chinese with $1.2 trillion. Traders on Monday were already speculating that Japan’s institutional investors could sell liquid Treasury holdings to raise cash. It’s not a stretch to imagine the Japanese government might do the same. Selling dollar-denominated assets could strengthen the yen — an undesirable outcome for the nation’s manufacturers. But at a time of crisis it shouldn’t be ruled out.

If it happened, it would up-end many investors’ faith in the notion that Asian central banks would never sell their Treasuries. In more concrete terms, it could further change the balance of supply and demand in the market for U.S. government debt. And there was already a question about who will step up to buy Treasuries when the Fed ends its buying program in just three months.

The U.S. central bank has accumulated more than $400 billion of government paper since it kicked off its purchasing program in November. It has been buying enough to absorb some three-fifths of new debt being issued by Washington to fund the yawning federal deficit. Prominent investors including Bill Gross of Pimco have warned that interest rates could spike when the Treasury market loses its newest best friend. Now it can’t be sure of one of its oldest supporters, either.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The run-up in global stocks is two years old. The MSCI global index is up 94 percent from March 9, 2009, the post-financial crisis low point. Credit markets, ground zero for the crisis, are thriving, and economic activity is back on its feet. Yet the government actors behind the rebound, notably in Washington, look spent. Financial markets are out on their own for future shocks.

A call to arms from the world’s governments pulled the financial system back from the brink two years ago. Guaranteeing bank debt, slashing interest rates, buying more than $1 trillion of assets and stress testing large U.S. financial institutions were among the myriad moves that restored a measure of stability and brought markets back to life. President Barack Obama may have seen all the activity coming: he called stocks “a potentially good deal” on March 3, 2009.

Even the derivative index used to hedge subprime mortgage loans is up 25 percent, according to Barclays Capital. With oil up more than 120 percent in two years and gold 55 percent higher, commodity prices look frothy. And the International Monetary Fund on March 7 noted what it called “overheating” in emerging markets.

Meanwhile, there remain plenty of potential flashpoints. Turmoil in the Middle East, which has pushed the price of oil well above $100, is the most immediate. Sovereign debt stresses in Europe remain worrying. And rising inflation combined with a ramp-up in U.S. interest rates is another scenario that could torpedo market sentiment.

For investors from banks to hedge funds, however, the safe options that might protect them against these risks just don’t make enough money. Short-term interest rates, for instance, are mostly still very low, especially the Federal Reserve’s zero to 0.25 percent. They prefer, as before the crisis, to shoulder risk in return for more yield.

But this time there’s no real government safety net. Huge budget deficits in the developed world leave little ammunition for governments. And especially in the United States, politics won’t allow further large-scale intervention. True, central banks like the Fed have shown themselves prepared to print money. But even doing more of that would run the risk of further undermining confidence.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

NEW YORK — Rising interest rates are bad for bond investors generally. But in the $3 trillion municipal debt market where U.S. states, cities and other public entities raise funds, hysteria over possible defaults already has investors rattled. When rates rise and more paper losses accumulate, some may simply give up.

For evidence, look back to November. Treasury yields spiked, somewhat ironically, after the Federal Reserve unveiled its second, $600 billion bond-buying program aimed at lowering rates. The move helped ignite big losses in municipal bond mutual funds. Interest rate risk is similar for all bond investors, but muni holders had been, and still are, suffering from agitated talk of defaults. The result was a run for cover. One closely-watched and usually staid muni exchange-traded fund fell nearly 5 percent over a few days — a massive move — as the 30-year Treasury yield drove half a percentage point higher. The ETF still hasn’t recovered.

Fast forward again, and sharply higher rates are almost inevitable before too long. Policy interest rates of zero to 0.25 percent can only eventually go up. The Fed’s bond-buying efforts will end by June. Pimco’s Bill Gross reckons a 4 percent yield on the 10-year Treasury — half a percentage point higher than currently — wouldn’t be unreasonable after the U.S. central bank gets out of the market. And a recovering economy and flickering inflation will tend to push yields higher, and bond prices down.

As of now, the muni bond market has stabilized somewhat after hitting a low point in mid-January. Issuers’ reluctance to test the market coupled with relatively stable interest rates since then have lent steadying hands. A somewhat tempered view of default risk has also helped. Roubini Global Economics estimates $100 billion of defaults could be coming, but over five years and with high recovery rates for bondholders. Earlier scaremongering comments from analyst Meredith Whitney suggested multiples of that volume of defaults, and over a much shorter period.

But the muni bond market is heavily dependent on retail investors. It’s unrealistic to expect that they’ll simply hunker down when interest rates begin their next leg higher. Even institutional investors could hold out for much cheaper valuations before they’re willing to take on both interest rate and credit risk with new money. Throw in the headline-grabbing state and local budget battles still to come, and the muni market faces a testing year.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Selling debt to fund public pensions is a bad idea. Jon Corzine, former Goldman Sachs chief and one-time governor of New Jersey, called it “the dumbest.” Yet Illinois, the exemplar of fiscal train wrecks, wants to borrow $3.7 billion to plump up its chronically underfunded pension schemes.

The troubled U.S. state is, however, caught between a bad decision now and worse ones made in the past. Its politicians tried to fix pension funding more than 15 years ago, but instead made the situation worse. They passed legislation that allowed Illinois to make smaller contributions than necessary provided it made up for the lost ground later. Later has now arrived.

The numbers are grim. The proposed pension borrowing is on top of Governor Pat Quinn’s plan to sell $8.75 billion of bonds so the state can pay its past due bills. And even if Illinois can fix its regular budget issues quickly, the needed pension contributions will rise — to $4.9 billion next year and to $6 billion by 2015.

Skipping this year’s contribution could actually be worse than using borrowed money to top up the funds. Bond investors will probably charge Illinois higher interest rates than other states. But at a possible 5 percent or so for five-year bonds, that could still cost less than the 7 percent plus assumed pension fund returns that the state would have to make up later. After all, the state’s five public funds earned 9.2 percent to 15 percent on their investments last year.

But it’s a risky strategy, especially when the state also needs to borrow heavily for other purposes. A Boston College study found that most debt used to fund pensions proved to be a net drain on governments in 2009. Thanks largely to the financial crisis, the average annual return made by the five Illinois funds over 10 years has been 3.6 percent or less — not enough to cover the likely cost of the state’s proposed new pension bonds.

Illinois is far from the only state that has put off grappling with its long-term obligations for too long. And the federal government has done the same thing. But the Prairie State is among the first to face a real reckoning. With no good options, dumb ideas may be all that’s left.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Agnes T. Crane

America’s mortgage market almost sank the world economy. But no one has yet done anything to fix it. After blowing two deadlines, the government’s ideas are finally due out as early as next week from the U.S. Treasury, and these recommendations will frame the debate. But the danger is they will be premised on dogma that should in fact be seriously questioned. Proposals have been circulating ever since the previous administration seized Fannie Mae and Freddie Mac in 2008. Most agree that both entities should be wound down, one way or another. But whether government should still have a role subsidizing housing finance is still up for grabs — or rather, few seem able to resist the idea that it should. The trouble is that financial types have become accustomed to a government safety net, and few of the constituencies involved are willing to challenge key U.S. housing myths. Myth 1: Significant reform will kill the housing market. Many fear any major overhaul of U.S. housing finance will slam a still tottering housing market. If America scraps its current system tomorrow, that’s what will happen. At a minimum, removing the government subsidy should nudge mortgage interest rates higher, potentially knocking home prices down further. But the UK took more than a decade to phase out tax deductions on mortgage interest. Homeowners, would-be homeowners and mortgage lenders can adapt to even a potentially wrenching change if there’s a five or 10-year transition period. The United States needs to get started on a plan. Myth 2: The U.S. mortgage market is too big for the private sector to handle alone. The $10.6 trillion mortgage market is huge, and Fannie and Freddie own or guarantee roughly half of it. But the size of the market — and the secondary market in securitized mortgages, and so on — was part of the problem in the years leading up to the 2008 crisis. The market is already down from its $11 trillion peak, but it is still nearly twice as big as in 2001. With the national average home price down more than 30 percent from its highs and millions of homeowners in danger of foreclosure, it’s clear only a smaller mortgage market is really sustainable.

Fully private-sector mortgages would be more expensive, but at the right price banks will lend. Studies conducted before the financial crisis suggested that government backing saved homeowners only 0.15 to 0.4 percentage point on their mortgage interest rates. Myth 3: Investors would stop buying mortgage bonds without government guarantees. Bill Gross, bond guru and co-head of Pimco, certainly has said he wouldn’t want to buy mortgages. Gross and others in his industry have grown used to the government guarantee. It reduces volatility and saves them some time-consuming analysis. But there are plenty of deep-pocketed investors looking for good investments and with the capacity to figure out their value. Again, interest rates would have to be a bit higher, and the securitization market would probably be a good bit smaller. But what existed before the crisis was unsustainable. Myth 4: The 30-year fixed-rate mortgage is part of the American Dream. It’s true that the current standard U.S. mortgage — one with a relatively low rate of interest fixed for 30 years but refinanceable at almost no cost — would probably be harder to get. Yet high home ownership rates in other countries prove this structure isn’t necessary to enable people to buy homes. A longish transition period would allow mortgage borrowers to get used to less generous home financing. And that’s preferable to having them pay much more down the line through their tax bills if investors need bailing out.

Myth 5: Government subsidies promote home ownership. This doesn’t seem to be the case at all. Home ownership rates in the United States between 1998 and 2008 averaged 67.8 percent, just ninth highest out of 17 developed nations, according to a study from the University of California, Berkeley. Moreover, the study found that American homeowners paid significantly higher mortgage rates, roughly 1.5 percentage points more, than those in Europe. That means that even if home ownership is a worthy policy goal — a big “if” in itself — then subsidizing mortgages is not the way to do it.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Betting on Treasury yields rising is one thing; trading the chance of default is another. U.S. credit default swap volumes have spiked in recent weeks. The CDS activity around Uncle Sam’s debt is still hardly mainstream. But unsustainable federal borrowing is tarnishing the debt market’s once pristine, risk-free benchmark.

Plenty of investors are concerned about the potential impact of the Federal Reserve’s monetary policies and inflationary pressures on Treasury bond yields. Unlike less liquid corporate bonds, though, there are already many very efficient ways to hedge against a rise in interest rates. Aside from possible arbitrage opportunities, what the CDS market adds is the ability to bet on an actual default by the U.S. government.

Treasury-related CDS contracts worth nearly $1.4 billion in total changed hands in the two weeks ended Jan. 21, according to the Depository Trust and Clearing Corporation — two-and-a-half times the average activity over the prior six months. Trading is still relatively thin. But the surge in activity points to an intensifying investor perception that the possibility of a U.S. government default can no longer be completely dismissed.

The price to protect against a Treasury default has been rising, too. It has reached $51,000 a year for five years for every $10 million of debt, around the highest price in nearly a year.

That’s still less even than protection against default by Germany, reflecting the fact that it’s still highly unlikely America will walk away from its debt, even temporarily. But a projected deficit of a whopping $1.5 trillion this year, a debt load held by the public that could double to $18 trillion in 10 years, and talk in Congress about a possible default if lawmakers can’t agree on an increase in the permitted maximum amount of debt have all made a default seem imaginable. That’s part of the eventual threat to the United States’ top credit rating recently highlighted by rating agency Moody’s Investors Service.

Debt market investors don’t, as yet, have an alternative yardstick for risk-free credit. And America’s obligations may yet recapture that unquestioned status. But CDS activity is one sign that the fallout of the financial crisis is gradually changing perceptions about U.S. creditworthiness — perhaps irreparably.