6 ms·

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.
        5y ago
- 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.

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.
      - 5y ago
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.