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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?
by 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 agoI 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 agoThe 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.
- calebm 5y agoblack magic
- JumpCrisscross 5y ago> they're the only entity which counts currency as a liability If you expand currency to money this describes all financial institutions. Financial institution balance sheets are weird. The Fed's is almost simpler by comparison.
- dragonwriter 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. Don't all currency-issuing entities do that? I guess the Fed would be unique for US currency.
- JumpCrisscross 5y ago> Don't all currency-issuing entities do that? All central banks do. Coins aren't a liability of the U.S. Treasury's in the way Federal Reserve notes are for the Fed.
- snuxoll 5y agoWell, that's because the US Treasury only mints the coins - the Fed banks buy them. All US currency in circulation is ultimately issued by the US Federal Reserve, they just don't physically make all of it.
- imtringued 5y agoUh, you are getting something mixed up. When you go to a bank and deposit money, that money is your asset and the bank's liability because the bank promised to return it whenever you want to withdraw it. In layman terms you are lending money to the bank and the bank owes you a debt. The central bank does the same thing but the depositors are commercial banks in this scenario. >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. They wish bank reserves into existence taking an asset and creating a liability in equal proportion. By the way, commercial banks do the same thing and when they lend you money, you can actually buy things with it instead of only being able to use the fed money to lend to consumers and companies! Wow, commercial banks are amazing (sarcasm), they don't create the "useless" funny money (reserves) that the Fed creates that you can't even spend on groceries! I just realized that this rabbit hole is too long to explain over and over again. Here is a nice summary: https://youtu.be/ZFRVfXeIaek https://youtu.be/ZFRVfXeIaek
- marcosdumay 5y agoIt's very likely that QE pushed bonds up. Just not as much as stock. Adding money to the economy does not tend to push anything down.
- JumpCrisscross 5y ago> Adding money to the economy does not tend to push anything down Rates.
- dnadler 5y agoYields go down, prices go up.
- thesausageking 5y agoThe opposite. Interest rates will likely rise which makes the prices of currently held bonds go down. Inflation is so high too that bonds may continue to have negative real interest rates for a long time.
- adamsmith143 5y agoQuestion: How does the price of a bond going down lead to negative real interest rates?
- rank0 5y agoHe’s saying that inflation will perpetuate negative real rates despite increasing bond yields as bond prices decline.
- thesausageking 5y agoYes, thanks. That wasn't written well. Bonds today have negative real interest rates and likely will going forward even as nominal rates rise. The only way this doesn't happen is if inflation drops quickly which seems very, very unlikely.
- rubiquity 5y agoIt doesn't. Bond prices going down will help close the gap between bond rates and inflation. When the Fed floods the market with its existing treasuries via QT, new treasuries will need to be issued at higher rates to compete.
- jbay808 5y agoPushed bond yields down, by pushing bond prices up. If you believe in value investing, the same process has pushed stock yields down (where yield is measured in terms of earnings, ie the reciprocal of the P/E ratio). A step change down in interest rates can drive a rapid price appreciation in stocks as the value of future earnings gets pulled forward, at the cost of slower long-term appreciation after that run-up.