6 ms·

“Nobody wants bonds because the yields are too low” is basically the same statement as “nobody goes to that restaurant because it’s too crowded.”

dannyw 6y ago
This argument doesn't work when the Federal Reserve, an entity unconcerned about ROI, is purchasing bonds out of thin air. They now own $7 TRILLION of US govt bonds. This number was less than $100 billion before the GFC. https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-more-treasury-notes-and-bonds-than-ever-before https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-... So, yes, no investor wants bonds. Why would you buy something that's a guaranteed loss? It's increasingly just the Fed.
- adeelk93 6y ago
  Great counterpoint. I knew the Fed was purchasing a lot of bonds, but I had not grasped the scale of it. I didn’t think it would be that much higher than 08. The Brigewater article would have been a lot stronger with that $7 T figure.
  - ZephyrBlu 6y ago
    I believe that every dollar the Fed has "printed" went into bonds because that is how the US financial system works. The government gets money from the Fed by selling them bonds in exchange for cash.
    - nostrademons 6y ago
      That's not how the U.S. financial system works. The government doesn't "get money from the Fed" - it gets money from the Treasury, which either collects it from taxes or issues government debt to raise funds. The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation. There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.
      - ZephyrBlu 6y ago
        Thank for you explaining it better. > When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation In the case where they buy Treasury bonds, the government itself gets money that they can use as they see fit (I.e. stimulus checks), right? Whereas in this case they just "inject cash into the system" in general.
        nostrademons 6y ago
        But if the Fed hadn't bought the Treasury bonds, some other investor would've, just at a worse price. That's the thing about markets: participants are fungible, as is the money itself. There's a big difference in dynamics between one firm giving money to another in a non-competitive situation (say, a union bargaining with a monopsony corporation) vs. a market of buyers trading with a market of sellers (say, the commodity or stock markets). You get efficient price discovery in the latter situation, you don't in the former. And the concern up-thread about the sheer scale of Fed purchases is that when the Fed becomes the only market participant, it starts to look an awful lot like the former situation, and market mechanisms break down.
      - jl2718 6y ago
        That was a clarification, not a refutation.
      - JumpCrisscross 6y ago
        > Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction Actually, by law the Fed can't buy bonds from the Treasury [1]. It has to buy them on the secondary market. [1] https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm
- riffraff 6y ago
  but the amount of US bonds debt is $20 trillion, no? There seem to be way more bonds around than what the fed owns.
  - nerfhammer 6y ago
    The Fed only owns some percent of Treasury bonds. It's never been anything close to a majority. It's about 16.5% at the moment, which is unusually high.
- nickysielicki 6y ago
  Mind you, this is all before “yield curve control” has been implemented! What a joke. And when it’s not the fed, it’s (increasingly) just financial institutions buying their required allotments. We’re well on the path to a market like Japan, where nobody in their right mind actually goes out and invests in bonds, they just are required by law to have a certain amount on their balance sheets. This is why SLR is a big deal and if the fed does or doesn’t address it tomorrow, you can expect real chaos.
- atombender 6y ago
  What happens to a bond when the Fed buys treasuries? Are they "cancelled"? Or does the Fed actually hold those bonds? The latter sounds nonsensical, but I don't know enough about how the Fed works.
  - obviouslynotme 6y ago
    The Fed isn't part of the US government. They are a private bank with special powers granted by Congress. When they purchase USG bonds, they hold them and receive interest.
    - atombender 6y ago
      But the Fed pays earnings back to the Treasury. And while the Fed is independent, it's certainly deeply intertwined with the US government. The Fed holding US government debt seems intuitively counterproductive to me.
      - obviouslynotme 6y ago
        They don't pay all earnings to the USG, only everything above a certain threshold IIRC. It's only counterproductive if you think like a normal person instead of a central bank. Their mission is to keep the dollar stable. They are doing that by keeping the USG stable. All the central banks are acting in concert right now to save the global financial system. My guess is that we are being slowly transitioned to removing the USD as the world reserve currency and replacing it with a World Bank electronic one.
        spiralx 6y ago
        The US has been trying to reduce the usage of the USD as a reserve currency (it's the largest such currency but not the only one - EUR, GBP and JPY are also used) due to it not having any real benefit to the US while exposing its economy to the effects of financial crises around the world, which tend to lead to countries purchasing dollars and driving the price up which makes imports more expensive. --- Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”? https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d... > A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies... > The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult. --- The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t... > This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world. > The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral. --- The IMF already has a global reserve asset called the Special Drawing Rights: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...
deleted 6y ago
[deleted]
paxys 6y ago
Bond yields aren't low because everyone is buying bonds, it's because the government is keeping them artificially low.
deleted 6y ago
[deleted]
anm89 6y ago
Nobody goes to the restaurant because it's too crowded with the owner and their friends. Or something like that

dannyw 6y ago

This argument doesn't work when the Federal Reserve, an entity unconcerned about ROI, is purchasing bonds out of thin air. They now own $7 TRILLION of US govt bonds. This number was less than $100 billion before the GFC. https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-more-treasury-notes-and-bonds-than-ever-before https://www.pgpf.org/blog/2021/01/the-federal-reserve-holds-... So, yes, no investor wants bonds. Why would you buy something that's a guaranteed loss? It's increasingly just the Fed.

adeelk93 6y ago
Great counterpoint. I knew the Fed was purchasing a lot of bonds, but I had not grasped the scale of it. I didn’t think it would be that much higher than 08. The Brigewater article would have been a lot stronger with that $7 T figure.
- ZephyrBlu 6y ago
  I believe that every dollar the Fed has "printed" went into bonds because that is how the US financial system works. The government gets money from the Fed by selling them bonds in exchange for cash.
  - nostrademons 6y ago
    That's not how the U.S. financial system works. The government doesn't "get money from the Fed" - it gets money from the Treasury, which either collects it from taxes or issues government debt to raise funds. The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation. There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.
    - ZephyrBlu 6y ago
      Thank for you explaining it better. > When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation In the case where they buy Treasury bonds, the government itself gets money that they can use as they see fit (I.e. stimulus checks), right? Whereas in this case they just "inject cash into the system" in general.
      - nostrademons 6y ago
        But if the Fed hadn't bought the Treasury bonds, some other investor would've, just at a worse price. That's the thing about markets: participants are fungible, as is the money itself. There's a big difference in dynamics between one firm giving money to another in a non-competitive situation (say, a union bargaining with a monopsony corporation) vs. a market of buyers trading with a market of sellers (say, the commodity or stock markets). You get efficient price discovery in the latter situation, you don't in the former. And the concern up-thread about the sheer scale of Fed purchases is that when the Fed becomes the only market participant, it starts to look an awful lot like the former situation, and market mechanisms break down.
    - jl2718 6y ago
      That was a clarification, not a refutation.
    - JumpCrisscross 6y ago
      > Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction Actually, by law the Fed can't buy bonds from the Treasury [1]. It has to buy them on the secondary market. [1] https://www.federalreserve.gov/faqs/money_12851.htm https://www.federalreserve.gov/faqs/money_12851.htm
riffraff 6y ago
but the amount of US bonds debt is $20 trillion, no? There seem to be way more bonds around than what the fed owns.
- nerfhammer 6y ago
  The Fed only owns some percent of Treasury bonds. It's never been anything close to a majority. It's about 16.5% at the moment, which is unusually high.
nickysielicki 6y ago
Mind you, this is all before “yield curve control” has been implemented! What a joke. And when it’s not the fed, it’s (increasingly) just financial institutions buying their required allotments. We’re well on the path to a market like Japan, where nobody in their right mind actually goes out and invests in bonds, they just are required by law to have a certain amount on their balance sheets. This is why SLR is a big deal and if the fed does or doesn’t address it tomorrow, you can expect real chaos.
atombender 6y ago
What happens to a bond when the Fed buys treasuries? Are they "cancelled"? Or does the Fed actually hold those bonds? The latter sounds nonsensical, but I don't know enough about how the Fed works.
- obviouslynotme 6y ago
  The Fed isn't part of the US government. They are a private bank with special powers granted by Congress. When they purchase USG bonds, they hold them and receive interest.
  - atombender 6y ago
    But the Fed pays earnings back to the Treasury. And while the Fed is independent, it's certainly deeply intertwined with the US government. The Fed holding US government debt seems intuitively counterproductive to me.
    - obviouslynotme 6y ago
      They don't pay all earnings to the USG, only everything above a certain threshold IIRC. It's only counterproductive if you think like a normal person instead of a central bank. Their mission is to keep the dollar stable. They are doing that by keeping the USG stable. All the central banks are acting in concert right now to save the global financial system. My guess is that we are being slowly transitioned to removing the USD as the world reserve currency and replacing it with a World Bank electronic one.
      - spiralx 6y ago
        The US has been trying to reduce the usage of the USD as a reserve currency (it's the largest such currency but not the only one - EUR, GBP and JPY are also used) due to it not having any real benefit to the US while exposing its economy to the effects of financial crises around the world, which tend to lead to countries purchasing dollars and driving the price up which makes imports more expensive. --- Ben Bernanke (ex-FED Chairman) - The dollar’s international role: An “exorbitant privilege”? https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d https://www.brookings.edu/blog/ben-bernanke/2016/01/07/the-d... > A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies... > The safe haven aspect of the dollar is actually a negative for U.S. firms, since it implies that they become less competitive (the dollar is stronger) at precisely the times that global economic conditions are most difficult. --- The ‘reserve currency’ myth: The US dollar’s current and future role in the world economy https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t https://www.ussc.edu.au/analysis/the-reserve-currency-myth-t... > This safe-haven bid for US dollar assets means that the US dollar often behaves in ways that seem counter-intuitive relative to US economic fundamentals. As Figure 2 shows, the US dollar appreciates in response to economic policy uncertainty. A 1 per cent increase in the Global Economic Policy Uncertainty Index raises the real value of the US dollar by 0.2 per cent, controlling for relative interest rate, inflation and economic growth differentials with the rest of the world. > The appreciation exacerbates trade tensions between the United States and the rest of the world by weighing on US export competitiveness, setting in train a protectionist spiral. --- The IMF already has a global reserve asset called the Special Drawing Rights: https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14...

deleted 6y ago

[deleted]

paxys 6y ago

Bond yields aren't low because everyone is buying bonds, it's because the government is keeping them artificially low.

deleted 6y ago

[deleted]

anm89 6y ago

Nobody goes to the restaurant because it's too crowded with the owner and their friends. Or something like that