35 ms·

The Great Steepening

118 points by makaimc 5y ago

francisofascii 5y ago
Yep. The BND ETF (Total Market Bond ETF) saw a huge downturn the last few months.
msandford 5y ago
I'm confused how a still significant net issuance of new treasuries constitutes QT. I'm sure it's me missing something but I don't know what I'm missing.
- r3drock 5y ago
  Consider this example: The Fed has issued $2 worth of treasuries in the past, which mature today. If the Fed then issues only $1 of new treasuries today, the overall amount of treasuries in circulation shrinks.
  - FredPret 5y ago
    I was wondering what is meant by a $9t balance sheet - 9t in assets, or equity? I found this cool chart that shows the history and confirms it is 9t in assets: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
    - nickles 5y ago
      > 9t in assets, or equity? The Fed purchases securities like treasuries, mortgage backed securities, and (in emergencies under 13(3)) things like commercial debt. NY Fed offers a breakdown of policies taken during covid [0]. [0] https://www.newyorkfed.org/medialibrary/media/research/blog/2020/LSE_2020_COVID-fed-response_fleming https://www.newyorkfed.org/medialibrary/media/research/blog/...
    - incomingpain 5y ago
      The big question is 'are they assets'? They bought 'assets' which literally nobody else wants. They did this in 2009 and over 10 years never exited those 'assets'. Are these in reality liabilities and worse yet, to 'buy' these 'assets' they had to issue liabilities in balance. So really this balance is not so.
      - JumpCrisscross 5y ago
        > The big question is 'are they assets'? They bought 'assets' which literally nobody else wants The Fed made massive profits on its crisis-era purchases. Many were held to maturity. Your "literally nobody else" is a multi-trillion dollar pool of buyers. > They did this in 2009 and over 10 years never exited those 'assets' The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels. [1] https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/agency-debt-securities https://www.newyorkfed.org/markets/domestic-market-operation... [2] https://www.newyorkfed.org/markets/omo_transaction_data#ambs https://www.newyorkfed.org/markets/omo_transaction_data#ambs
        incomingpain 5y ago
        >The Fed made massive profits on its crisis-era purchases. Many were held to maturity. The graph from multiple OPs literally say otherwise. >Your "literally nobody else" is a multi-trillion dollar pool of buyers. Like normally there's a multi-trillion dollar pool of buyers and the market is healthy. The fed came in when they stopped buying. That's kind of tautological. >The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels. The balance sheet is not some spot where the government makes investments for profits. Sure they had to cycle assets but they certainly didn't exit anything. Why did the fed not do this pre-2009. why was this only during economic disasters like covid as well? This isn't some brilliant play by the government. This is them taking on the highest risk securities and eating the cost during bad time. If they didn't take these actions the situation would have been worse. It's good they did what they did but this was certainly not some brilliant profitable play.
  - nickles 5y ago
    > The Fed has issued $2 worth of treasuries in the past The Fed doesn't issue treasuries. That's the job of the US Treasury, which is responsible for making decisions about how to issue debt. When Fed purchases treasuries, it increases the quantity of bank reserves (which are less fungible) and also increases flows of capital to money markets.
- nickles 5y ago
  > significant net issuance of new treasuries constitutes QT The Fed doesn't make decisions about treasury issuance. Congress decides to spend money and instructs the Treasury to figure out how to finance it. That determines the net level of issuance. QT entails reducing the size of the Fed's balance sheet, which means Fed reduces net purchases of these treasuries. These treasuries must be purchased by other market participants who do so at whatever price the market clears.
- JumpCrisscross 5y ago
  > confused how a still significant net issuance of new treasuries constitutes QT When the Fed sells a bond, it's taking cash out of the system and exchanging it for a bond. In monetary terms, it's destroying cash. That's tightening. When the Treasury issues a bond, it swaps it for cash. Same as the Fed. Whether the Treasury or the Fed sells a bond, it has the same monetary effect. The difference is the Treasury's issuance is twinned to public spending, making the net effect neutral. (When the Treasury spends it creates cash.) In the short term, however, when spending precedes issuance (or vice versa), the gross effects can be real.
  - VirusNewbie 5y ago
    Can someone not borrow against a bond?
    - JumpCrisscross 5y ago
      > Can someone not borrow against a bond? Yes. But that cash has to come from somewhere. If there's less cash in the system in aggregate, those with it gain leverage. Which means they can get a higher rate. Which raises rates. The leaky bit in this equation are banks. They can magic money out of nothing to lend against a bond. The patch to the problem is capital requirements.
      - VirusNewbie 5y ago
        so really what likely happens is that for every dollar of bond the fed sells, you're really only reducing pennies in circulation, given capital requirements for secured loans.
  - paganel 5y ago
    > it for a bond. In monetary terms, it's destroying cash. Too lazy to search for the exact link but I seem to remember reading some editorial in the financial section of The Economist about 3-4 months ago where they were saying that bonds are sort of cash-like, or were sort of cash-like when that article was written and when the papers on which that article was based had been written. If that premise were to hold true (even in part, meaning bonds are sort-of-cash), maybe most of the "rules" economists have written down until now when it comes to the cash vs. bonds relationship would need to be re-written. For the matter, I don't take much of what it's written down in The Economist at face-value anymore but their financial stuff is still pretty spot on.
- gniv 5y ago
  The key is this observation from the article: "QT does not change the size of the Treasury market but does change the composition of ownership. By the end of QT Non-Fed investors should hold $2t more Treasuries as Fed holdings decline by $2t." Basically QT means fewer bonds owned by the Fed and correspondingly more bonds owned by others (banks, investors, other countries).
  - Victerius 5y ago
    The article also notes that private investors have no appetite for more bonds and prices will crater as a result. Could this lead to higher yields and thus higher borrowing costs for the government? Are interest payments about to make a major jump in the federal budget?
    - RobertoG 5y ago
      If they do it would be because the Fed has decided so and could decide the opposite at any point in time.
    - gniv 5y ago
      If you ask me, yes and yes. But I don't think they will get very high. I've seen claims of low demand for US bonds before and it turned out the exact opposite.
      - kansface 5y ago
        Right, I supposed we should consider bonds compared to where else would you put the money atm - nothing looks particularly attractive.
- quickthrowman 5y ago
  What you’re missing is the Fed does not issue bonds. The government issues bonds to borrow money. If the Fed sells bonds they currently hold and reduces their balance sheet, it’s QT.
bubbleRefuge 5y ago
I think the slope of the yield curve is determined by the expectations of future fed rate policy.
- nickles 5y ago
  The front of the yield curve is driven much more by Fed policy than the tail end of the curve. QE was utilized to try and influence longer tenors. Ultimately the term structure is driven by supply and demand, so the composition and size of the Fed's balance sheet has a direct impact on the shape of the curve.
  - bubbleRefuge 5y ago
    well, i'd say all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables. The fed can manufacture as much 'funding' of demand as it wants to as it has an unlimited buying power.
    - nickles 5y ago
      > all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables The Fed frames its policy response in terms of the somewhat nebulous natural rate, which implies that there is some exogenous component to rate policy. Additionally, rates have consistently trended downwards for 500 years, well before the invention of central banks [0], supporting the notion that rates are driven by exogenous factors. [0] https://econreview.berkeley.edu/the-long-decline-of-global-interest-rates/ https://econreview.berkeley.edu/the-long-decline-of-global-i...
- JumpCrisscross 5y ago
  > the slope of the yield curve is determined by the expectations of future fed rate policy Entangled with is a better way to think about it. The Fed strongly influences the rate curve. But the rate curve also influences the Fed. And trading rates isn't just about predicting what the Fed will do (though that's a big piece of it).
01100011 5y ago
It will be interesting to see how long the fed can do this without having to reverse course due to a struggling economy. Things are tricky right now, as the economy has been dependent on a loose fed for quite a while. We're heading towards a demographic crisis as boomers retire and need more service workers. I think this is inflationary, perhaps stagflationary. I've heard worries that the government will run into budgetary issues if bond rates climb too high. On the other hand, any profits the fed makes on lending flow back to the Treasury, so maybe that's not an issue. Does anyone know the deal with that?
- JumpCrisscross 5y ago
  > a demographic crisis as boomers retire and need more service workers America is blessed as far as this crisis goes. Virtually everyone else will hit it first. That creates a policy testbed. It also means others must violently re-gear for the necessary automation (or reduction in lifestyle expectations for the bulging generation). > heard worries that the government will run into budgetary issues if bond rates climb too high To the extent the future U.S. budget is constrained, it's by inflation. (More pointedly: the politics of inflation.) If the Congress wants to spend, it can spend. Rates be damned.
  - pphysch 5y ago
    > America is blessed as far as this crisis goes. Virtually everyone else will hit it first. This doesn't pass the smell test. Human productivity hasn't been a function of food calories and muscle mass (i.e. healthy 15-35yos) for at least a century. While America might have a marginally younger population than China or Germany, it is not even close to competitive in terms of actual productivity. Among the younger generations there is a lot of confusion and feeling lost. Anecdotally, almost everyone from my high school graduating class -- young people! -- are floating aimlessly through university, dead-end service jobs, or unemployment. They are not "productive" in any real sense of the word. Unless there is a revolution in public policy and culture within this decade, America will face a genuine economic crisis long before Germany or China. Many parts of America (Rust Belt) have been feeling it for over a decade. Looking solely at the two-dimensional demographic chart is a fatal error in the 21st century.
thematrixturtle 5y ago
Until now we're been in quantitative easing (QE), which has driven up stock prices and pushed bonds down. Does transitioning into QT imply the reverse?
- JumpCrisscross 5y ago
  > Until now we're been in quantitative easing (QE), which has driven up stock prices and pushed bonds down. Does transitioning into QT imply the reverse? Yes.
  - dsauerbrun 5y ago
    I dont think this is right.... QE means the fed is buying up bonds like crazy which should push bond prices up. I'm not very knowledgeable here so please correct me if I'm wrong please.
    - JumpCrisscross 5y ago
      > QE means the fed is buying up bonds like crazy which should push bond prices up Correct. When bonds go up rates go down. This is mathematical fact. (If a bond at 100 pays a $1 coupon, i.e. 1%, it pays ~0.91% when that bond trades at 110.) When rates go down, asset prices go up. This isn't mathematical fact, but it's close to economic fact. (If rates are 5%, a bond yields the same as the earnings on a stock at P/E 20. That limits P/E ratios which caps stock prices.) QE means buying bonds so rates go down. QT is the inverse. Selling bonds so rates go up.
    - JackFr 5y ago
      The Fed's balance sheet is an amazing thing from an accountings standpoint -- they're the only entity which counts currency as a liability. But the real amazing part is that when the Fed buys something (and the only thing they ever buy is bonds) they just wish the money into existence. They take your bond and write a number in your account. And when they sell something back, the bond goes to the buyer and the money disappears.
misja111 5y ago
Tl;Dr; Fed will continue with Quantitative Tightening -> market interest rates will go up
incomingpain 5y ago
During covid, the bond market inverted. To avoid collapse of the bond market the fed was the only one who could step in and print money to buy assets. It's the right thing to do. Nobody is saying they were wrong to do this. Nixon made this possible to do and was inevitable to happen. Though Nixon placed it on manufacturing in the USA. Since his time, manufacturing was shipped out of the borders. https://tradingeconomics.com/united-states/central-bank-balance-sheet https://tradingeconomics.com/united-states/central-bank-bala... The problem is that they had to do this during the financial crisis and they were clearly unable to exit these 'assets' literally casting shadow on them being labelled assets to begin with. You can even see in 2013-2014 they had to buy more. They had over 10 years to exit these 'assets' and failed to do so. Even in 2019 there was a temporary dip and then rebuy right before covid. They say they will be doing $1T/year but that isn't anywhere near where they must go. You can extrapolate where they must go by tracking the line pre-2008. At $1T a year, it will take minimum 7 years to exit. You'll notice that this 7 years is too long. It's 100% certain that another event will occur before they are complete in which they must buy more. Even ignoring that future prediction, it's 7 years of pain. So what's about to happen for sure? The bond market will be taking some hits bigtime. We're talking about major negative real yields. The money will come out of retirement funds. Not exactly a prediction given bonds have taken a -2% hit already. Here's the real prediciton: https://tradingeconomics.com/united-states/money-supply-m2 https://tradingeconomics.com/united-states/money-supply-m2 M2 says there's 40% inflation coming. At 7.9% that's in the area of 3 years. BUT that 40% doesn't just stay 40%. How does it increase? It actually requires the Fed to exit that ~$7trillion right this month to keep it at 40%. If they don't and they clearly are not planning to do so. We can look at M1 and see where it might go. https://tradingeconomics.com/united-states/money-supply-m1 https://tradingeconomics.com/united-states/money-supply-m1 So there's about 400% to deliver. In their current plan of 1 trillion/year. The USA is saying they are locking in ~200% over the next 3 years. They are saying inflation is going MUCH higher. Mid term election won't have any major impact on this. 2024 on the otherhand? The real inflation numbers will be out then. Practically handing the election to the republicans. Meanwhile those of us who aren't in the USA. What are we about to do? We're going to look at new reserve currencies that are more stable. Hence why biden is talking about the new world order. USA will no longer be top dog.
- 5y ago
dash2 5y ago
Asking a stupid question here, so nobody knows how little I understand macroeconomics. Inflation is 8% or more. Interest rates are about 0.25%. How can we possibly tame inflation by (e.g.) raising them to 3% or 4%? At that level, it still makes sense to borrow all you can, buy the basket of goods or gold or anything that holds its value in dollar terms, sell it later on, and pay the loan back. Put another way: the Taylor rule says that the optimal rate is r = p + 0.5y + 0.5(p - 2) + 2 where p is inflation and y is the output gap. So for p = 8% we get r = 13% + 0.5y. Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low. Why does the Taylor rule not apply?
- misja111 5y ago
  The general consensus is still that the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine and the uptick of the economy after Corona: they have pushed the energy prices up a lot, which in turn drive other prices up etc. So central banks don't feel the urgency to raise interest levels above 8% and consequently the market interest rate doesn't get too high either.
  - jbay808 5y ago
    > the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine 8% was from data as of February. By the way, shelter inflation is steadily climbing at 0.3% per month. That's going to be a fearsome trend to reverse.
- JumpCrisscross 5y ago
  > Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low Markets are profoundly convinced the output gap is/was huge. This is true in financial markets, which aren't dumping everything yielding less than 8%. It's true in the real economy, where inventories are being spun down [1]. It's true according to CBO [2] for the time period in which that eight percent registered. (Inflation was 7.9% February 2021 to '22. The CBO output gap was, in Q1 2021, roughly where it was in Q1 2003. After 9/11 and the dot-com crash.) Side note: this is probably the smartest question on this page. [1] https://fred.stlouisfed.org/series/ISRATIO https://fred.stlouisfed.org/series/ISRATIO [2] https://fred.stlouisfed.org/graph/?g=f1cZ https://fred.stlouisfed.org/graph/?g=f1cZ
paulpauper 5y ago
Interest rates are gonna remain rock bottom forever , and be raised very very slowly even as inflation and GDP rips higher. this is incredibly bullish for stocks cuz it means all fixed income is yielding negative in real terms, so the only way to not lose money to inflation is to own stocks or real estate. Crazy.
- throwaway1777 5y ago
  Interest rates for real estate have already doubled from 2020. In my opinion with prices still rising we either aren’t pricing this in enough yet, or else inflation is still beating the rising rates.
RockyMcNuts 5y ago
Fed is more likely to target the shape of the yield curve and adjust policy accordingly, so it would be a little backwards to say that based on their forecast pace of selling longer-dated paper and supply, the yield curve will do X. really, the question is whether a soft landing can be achieved, bringing inflation down without a recession or crisis. When CPI inflation is 8% before the Russian shock even hits those numbers, that is quite hard to achieve. in soccer, when you have to make a saving tackle in the penalty area, you've already made a mistake.
pphysch 5y ago
> By the end of QT Non-Fed investors should hold $2t more Treasuries as Fed holdings decline by $2t. Who, exactly, is going to foot the bill? China? Hell no. They did partly in 2008, and they got Obama-Hillary "China pivot" and Trump's trade war as a reward, and who knows what else. Japan? Maybe a little more (they are currently #1 US debt holder at $1.3T). Europe? Amid a sanctions-driven economic crisis? Big Tech? I don't see a way out.
- nostromo 5y ago
  The only way out is to cut spending. The Fed is sending a signal to congress.
- snuxoll 5y ago
  > Who, exactly, is going to foot the bill? Remember that the vast majority of US government debt is held by....the American public. The Fed was buying treasuries that normal investors would have to regulate rates, it's not like suddenly there's 0 demand domestically for US bonds. If the Fed wants to take a haircut and start offloading their balance sheet at a discount I'll happily throw a treasury ladder together in my retirement account, stock market gains are about to get incredibly volatile and I'll take a guaranteed yield over what I predict to be a major correction in the making.
  - pphysch 5y ago
    According to some napkin math, the average American household would need to buy ~$20k in bonds over the QT period. This is on the order of the average amount of savings/investments per household.
- gniv 5y ago
  Domestic investors and banks, I suspect. Me personally I'm thinking of buying 2-year notes once they reach 3%.
throw8383833jj 5y ago
the market for treasuries is now dominated by the fed, right? if demand for treasuries dries up, they'll just keep buying more until they achieve the interest rate they want. I mean we're basically just 1 step away from full blown yield curve control. how can the media keep pretending that market forces have anything to do with it anymore?

118 points by makaimc 5y ago

Yep. The BND ETF (Total Market Bond ETF) saw a huge downturn the last few months.

I'm confused how a still significant net issuance of new treasuries constitutes QT. I'm sure it's me missing something but I don't know what I'm missing.

r3drock 5y ago
Consider this example: The Fed has issued $2 worth of treasuries in the past, which mature today. If the Fed then issues only $1 of new treasuries today, the overall amount of treasuries in circulation shrinks.
- FredPret 5y ago
  I was wondering what is meant by a $9t balance sheet - 9t in assets, or equity? I found this cool chart that shows the history and confirms it is 9t in assets: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
  - nickles 5y ago
    > 9t in assets, or equity? The Fed purchases securities like treasuries, mortgage backed securities, and (in emergencies under 13(3)) things like commercial debt. NY Fed offers a breakdown of policies taken during covid [0]. [0] https://www.newyorkfed.org/medialibrary/media/research/blog/2020/LSE_2020_COVID-fed-response_fleming https://www.newyorkfed.org/medialibrary/media/research/blog/...
  - incomingpain 5y ago
    The big question is 'are they assets'? They bought 'assets' which literally nobody else wants. They did this in 2009 and over 10 years never exited those 'assets'. Are these in reality liabilities and worse yet, to 'buy' these 'assets' they had to issue liabilities in balance. So really this balance is not so.
    - JumpCrisscross 5y ago
      > The big question is 'are they assets'? They bought 'assets' which literally nobody else wants The Fed made massive profits on its crisis-era purchases. Many were held to maturity. Your "literally nobody else" is a multi-trillion dollar pool of buyers. > They did this in 2009 and over 10 years never exited those 'assets' The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels. [1] https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/agency-debt-securities https://www.newyorkfed.org/markets/domestic-market-operation... [2] https://www.newyorkfed.org/markets/omo_transaction_data#ambs https://www.newyorkfed.org/markets/omo_transaction_data#ambs
      - incomingpain 5y ago
        >The Fed made massive profits on its crisis-era purchases. Many were held to maturity. The graph from multiple OPs literally say otherwise. >Your "literally nobody else" is a multi-trillion dollar pool of buyers. Like normally there's a multi-trillion dollar pool of buyers and the market is healthy. The fed came in when they stopped buying. That's kind of tautological. >The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels. The balance sheet is not some spot where the government makes investments for profits. Sure they had to cycle assets but they certainly didn't exit anything. Why did the fed not do this pre-2009. why was this only during economic disasters like covid as well? This isn't some brilliant play by the government. This is them taking on the highest risk securities and eating the cost during bad time. If they didn't take these actions the situation would have been worse. It's good they did what they did but this was certainly not some brilliant profitable play.
- nickles 5y ago
  > The Fed has issued $2 worth of treasuries in the past The Fed doesn't issue treasuries. That's the job of the US Treasury, which is responsible for making decisions about how to issue debt. When Fed purchases treasuries, it increases the quantity of bank reserves (which are less fungible) and also increases flows of capital to money markets.
nickles 5y ago
> significant net issuance of new treasuries constitutes QT The Fed doesn't make decisions about treasury issuance. Congress decides to spend money and instructs the Treasury to figure out how to finance it. That determines the net level of issuance. QT entails reducing the size of the Fed's balance sheet, which means Fed reduces net purchases of these treasuries. These treasuries must be purchased by other market participants who do so at whatever price the market clears.
JumpCrisscross 5y ago
> confused how a still significant net issuance of new treasuries constitutes QT When the Fed sells a bond, it's taking cash out of the system and exchanging it for a bond. In monetary terms, it's destroying cash. That's tightening. When the Treasury issues a bond, it swaps it for cash. Same as the Fed. Whether the Treasury or the Fed sells a bond, it has the same monetary effect. The difference is the Treasury's issuance is twinned to public spending, making the net effect neutral. (When the Treasury spends it creates cash.) In the short term, however, when spending precedes issuance (or vice versa), the gross effects can be real.
- VirusNewbie 5y ago
  Can someone not borrow against a bond?
  - JumpCrisscross 5y ago
    > Can someone not borrow against a bond? Yes. But that cash has to come from somewhere. If there's less cash in the system in aggregate, those with it gain leverage. Which means they can get a higher rate. Which raises rates. The leaky bit in this equation are banks. They can magic money out of nothing to lend against a bond. The patch to the problem is capital requirements.
    - VirusNewbie 5y ago
      so really what likely happens is that for every dollar of bond the fed sells, you're really only reducing pennies in circulation, given capital requirements for secured loans.
- paganel 5y ago
  > it for a bond. In monetary terms, it's destroying cash. Too lazy to search for the exact link but I seem to remember reading some editorial in the financial section of The Economist about 3-4 months ago where they were saying that bonds are sort of cash-like, or were sort of cash-like when that article was written and when the papers on which that article was based had been written. If that premise were to hold true (even in part, meaning bonds are sort-of-cash), maybe most of the "rules" economists have written down until now when it comes to the cash vs. bonds relationship would need to be re-written. For the matter, I don't take much of what it's written down in The Economist at face-value anymore but their financial stuff is still pretty spot on.
gniv 5y ago
The key is this observation from the article: "QT does not change the size of the Treasury market but does change the composition of ownership. By the end of QT Non-Fed investors should hold $2t more Treasuries as Fed holdings decline by $2t." Basically QT means fewer bonds owned by the Fed and correspondingly more bonds owned by others (banks, investors, other countries).
- Victerius 5y ago
  The article also notes that private investors have no appetite for more bonds and prices will crater as a result. Could this lead to higher yields and thus higher borrowing costs for the government? Are interest payments about to make a major jump in the federal budget?
  - RobertoG 5y ago
    If they do it would be because the Fed has decided so and could decide the opposite at any point in time.
  - gniv 5y ago
    If you ask me, yes and yes. But I don't think they will get very high. I've seen claims of low demand for US bonds before and it turned out the exact opposite.
    - kansface 5y ago
      Right, I supposed we should consider bonds compared to where else would you put the money atm - nothing looks particularly attractive.
quickthrowman 5y ago
What you’re missing is the Fed does not issue bonds. The government issues bonds to borrow money. If the Fed sells bonds they currently hold and reduces their balance sheet, it’s QT.

bubbleRefuge 5y ago

I think the slope of the yield curve is determined by the expectations of future fed rate policy.

nickles 5y ago
The front of the yield curve is driven much more by Fed policy than the tail end of the curve. QE was utilized to try and influence longer tenors. Ultimately the term structure is driven by supply and demand, so the composition and size of the Fed's balance sheet has a direct impact on the shape of the curve.
- bubbleRefuge 5y ago
  well, i'd say all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables. The fed can manufacture as much 'funding' of demand as it wants to as it has an unlimited buying power.
  - nickles 5y ago
    > all interest rates are endogenous: determined by fed policy or future expectations of fed policy based on macro variables The Fed frames its policy response in terms of the somewhat nebulous natural rate, which implies that there is some exogenous component to rate policy. Additionally, rates have consistently trended downwards for 500 years, well before the invention of central banks [0], supporting the notion that rates are driven by exogenous factors. [0] https://econreview.berkeley.edu/the-long-decline-of-global-interest-rates/ https://econreview.berkeley.edu/the-long-decline-of-global-i...
JumpCrisscross 5y ago
> the slope of the yield curve is determined by the expectations of future fed rate policy Entangled with is a better way to think about it. The Fed strongly influences the rate curve. But the rate curve also influences the Fed. And trading rates isn't just about predicting what the Fed will do (though that's a big piece of it).

01100011 5y ago

It will be interesting to see how long the fed can do this without having to reverse course due to a struggling economy. Things are tricky right now, as the economy has been dependent on a loose fed for quite a while. We're heading towards a demographic crisis as boomers retire and need more service workers. I think this is inflationary, perhaps stagflationary. I've heard worries that the government will run into budgetary issues if bond rates climb too high. On the other hand, any profits the fed makes on lending flow back to the Treasury, so maybe that's not an issue. Does anyone know the deal with that?

JumpCrisscross 5y ago
> a demographic crisis as boomers retire and need more service workers America is blessed as far as this crisis goes. Virtually everyone else will hit it first. That creates a policy testbed. It also means others must violently re-gear for the necessary automation (or reduction in lifestyle expectations for the bulging generation). > heard worries that the government will run into budgetary issues if bond rates climb too high To the extent the future U.S. budget is constrained, it's by inflation. (More pointedly: the politics of inflation.) If the Congress wants to spend, it can spend. Rates be damned.
- pphysch 5y ago
  > America is blessed as far as this crisis goes. Virtually everyone else will hit it first. This doesn't pass the smell test. Human productivity hasn't been a function of food calories and muscle mass (i.e. healthy 15-35yos) for at least a century. While America might have a marginally younger population than China or Germany, it is not even close to competitive in terms of actual productivity. Among the younger generations there is a lot of confusion and feeling lost. Anecdotally, almost everyone from my high school graduating class -- young people! -- are floating aimlessly through university, dead-end service jobs, or unemployment. They are not "productive" in any real sense of the word. Unless there is a revolution in public policy and culture within this decade, America will face a genuine economic crisis long before Germany or China. Many parts of America (Rust Belt) have been feeling it for over a decade. Looking solely at the two-dimensional demographic chart is a fatal error in the 21st century.

thematrixturtle 5y ago

Until now we're been in quantitative easing (QE), which has driven up stock prices and pushed bonds down. Does transitioning into QT imply the reverse?

JumpCrisscross 5y ago
> Until now we're been in quantitative easing (QE), which has driven up stock prices and pushed bonds down. Does transitioning into QT imply the reverse? Yes.
- dsauerbrun 5y ago
  I dont think this is right.... QE means the fed is buying up bonds like crazy which should push bond prices up. I'm not very knowledgeable here so please correct me if I'm wrong please.
  - JumpCrisscross 5y ago
    > QE means the fed is buying up bonds like crazy which should push bond prices up Correct. When bonds go up rates go down. This is mathematical fact. (If a bond at 100 pays a $1 coupon, i.e. 1%, it pays ~0.91% when that bond trades at 110.) When rates go down, asset prices go up. This isn't mathematical fact, but it's close to economic fact. (If rates are 5%, a bond yields the same as the earnings on a stock at P/E 20. That limits P/E ratios which caps stock prices.) QE means buying bonds so rates go down. QT is the inverse. Selling bonds so rates go up.
  - JackFr 5y ago
    The Fed's balance sheet is an amazing thing from an accountings standpoint -- they're the only entity which counts currency as a liability. But the real amazing part is that when the Fed buys something (and the only thing they ever buy is bonds) they just wish the money into existence. They take your bond and write a number in your account. And when they sell something back, the bond goes to the buyer and the money disappears.

misja111 5y ago

Tl;Dr; Fed will continue with Quantitative Tightening -> market interest rates will go up

incomingpain 5y ago

During covid, the bond market inverted. To avoid collapse of the bond market the fed was the only one who could step in and print money to buy assets. It's the right thing to do. Nobody is saying they were wrong to do this. Nixon made this possible to do and was inevitable to happen. Though Nixon placed it on manufacturing in the USA. Since his time, manufacturing was shipped out of the borders. https://tradingeconomics.com/united-states/central-bank-balance-sheet https://tradingeconomics.com/united-states/central-bank-bala... The problem is that they had to do this during the financial crisis and they were clearly unable to exit these 'assets' literally casting shadow on them being labelled assets to begin with. You can even see in 2013-2014 they had to buy more. They had over 10 years to exit these 'assets' and failed to do so. Even in 2019 there was a temporary dip and then rebuy right before covid. They say they will be doing $1T/year but that isn't anywhere near where they must go. You can extrapolate where they must go by tracking the line pre-2008. At $1T a year, it will take minimum 7 years to exit. You'll notice that this 7 years is too long. It's 100% certain that another event will occur before they are complete in which they must buy more. Even ignoring that future prediction, it's 7 years of pain. So what's about to happen for sure? The bond market will be taking some hits bigtime. We're talking about major negative real yields. The money will come out of retirement funds. Not exactly a prediction given bonds have taken a -2% hit already. Here's the real prediciton: https://tradingeconomics.com/united-states/money-supply-m2 https://tradingeconomics.com/united-states/money-supply-m2 M2 says there's 40% inflation coming. At 7.9% that's in the area of 3 years. BUT that 40% doesn't just stay 40%. How does it increase? It actually requires the Fed to exit that ~$7trillion right this month to keep it at 40%. If they don't and they clearly are not planning to do so. We can look at M1 and see where it might go. https://tradingeconomics.com/united-states/money-supply-m1 https://tradingeconomics.com/united-states/money-supply-m1 So there's about 400% to deliver. In their current plan of 1 trillion/year. The USA is saying they are locking in ~200% over the next 3 years. They are saying inflation is going MUCH higher. Mid term election won't have any major impact on this. 2024 on the otherhand? The real inflation numbers will be out then. Practically handing the election to the republicans. Meanwhile those of us who aren't in the USA. What are we about to do? We're going to look at new reserve currencies that are more stable. Hence why biden is talking about the new world order. USA will no longer be top dog.

5y ago

dash2 5y ago

Asking a stupid question here, so nobody knows how little I understand macroeconomics. Inflation is 8% or more. Interest rates are about 0.25%. How can we possibly tame inflation by (e.g.) raising them to 3% or 4%? At that level, it still makes sense to borrow all you can, buy the basket of goods or gold or anything that holds its value in dollar terms, sell it later on, and pay the loan back. Put another way: the Taylor rule says that the optimal rate is r = p + 0.5y + 0.5(p - 2) + 2 where p is inflation and y is the output gap. So for p = 8% we get r = 13% + 0.5y. Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low. Why does the Taylor rule not apply?

misja111 5y ago
The general consensus is still that the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine and the uptick of the economy after Corona: they have pushed the energy prices up a lot, which in turn drive other prices up etc. So central banks don't feel the urgency to raise interest levels above 8% and consequently the market interest rate doesn't get too high either.
- jbay808 5y ago
  > the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine 8% was from data as of February. By the way, shelter inflation is steadily climbing at 0.3% per month. That's going to be a fearsome trend to reverse.
JumpCrisscross 5y ago
> Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low Markets are profoundly convinced the output gap is/was huge. This is true in financial markets, which aren't dumping everything yielding less than 8%. It's true in the real economy, where inventories are being spun down [1]. It's true according to CBO [2] for the time period in which that eight percent registered. (Inflation was 7.9% February 2021 to '22. The CBO output gap was, in Q1 2021, roughly where it was in Q1 2003. After 9/11 and the dot-com crash.) Side note: this is probably the smartest question on this page. [1] https://fred.stlouisfed.org/series/ISRATIO https://fred.stlouisfed.org/series/ISRATIO [2] https://fred.stlouisfed.org/graph/?g=f1cZ https://fred.stlouisfed.org/graph/?g=f1cZ

paulpauper 5y ago

Interest rates are gonna remain rock bottom forever , and be raised very very slowly even as inflation and GDP rips higher. this is incredibly bullish for stocks cuz it means all fixed income is yielding negative in real terms, so the only way to not lose money to inflation is to own stocks or real estate. Crazy.

throwaway1777 5y ago
Interest rates for real estate have already doubled from 2020. In my opinion with prices still rising we either aren’t pricing this in enough yet, or else inflation is still beating the rising rates.

RockyMcNuts 5y ago

Fed is more likely to target the shape of the yield curve and adjust policy accordingly, so it would be a little backwards to say that based on their forecast pace of selling longer-dated paper and supply, the yield curve will do X. really, the question is whether a soft landing can be achieved, bringing inflation down without a recession or crisis. When CPI inflation is 8% before the Russian shock even hits those numbers, that is quite hard to achieve. in soccer, when you have to make a saving tackle in the penalty area, you've already made a mistake.

pphysch 5y ago

> By the end of QT Non-Fed investors should hold $2t more Treasuries as Fed holdings decline by $2t. Who, exactly, is going to foot the bill? China? Hell no. They did partly in 2008, and they got Obama-Hillary "China pivot" and Trump's trade war as a reward, and who knows what else. Japan? Maybe a little more (they are currently #1 US debt holder at $1.3T). Europe? Amid a sanctions-driven economic crisis? Big Tech? I don't see a way out.

nostromo 5y ago
The only way out is to cut spending. The Fed is sending a signal to congress.
snuxoll 5y ago
> Who, exactly, is going to foot the bill? Remember that the vast majority of US government debt is held by....the American public. The Fed was buying treasuries that normal investors would have to regulate rates, it's not like suddenly there's 0 demand domestically for US bonds. If the Fed wants to take a haircut and start offloading their balance sheet at a discount I'll happily throw a treasury ladder together in my retirement account, stock market gains are about to get incredibly volatile and I'll take a guaranteed yield over what I predict to be a major correction in the making.
- pphysch 5y ago
  According to some napkin math, the average American household would need to buy ~$20k in bonds over the QT period. This is on the order of the average amount of savings/investments per household.
gniv 5y ago
Domestic investors and banks, I suspect. Me personally I'm thinking of buying 2-year notes once they reach 3%.

throw8383833jj 5y ago

the market for treasuries is now dominated by the fed, right? if demand for treasuries dries up, they'll just keep buying more until they achieve the interest rate they want. I mean we're basically just 1 step away from full blown yield curve control. how can the media keep pretending that market forces have anything to do with it anymore?