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Fed warns of low market liquidity in $24T Treasury market in report

63 points by ianai 4y ago

ianai 4y ago
Full title: Fed warns of ‘low’ market liquidity in $24 trillion Treasury market, in latest financial stability report It’s stuff like this that I’ve been waiting to see before starting to particularly worry. Though lowered liquidity would seem to be a sign of lowered inflation. Idk
- Spooky23 4y ago
  Why would you buy treasury bonds today when the yield will almost certainly be higher in a few months? The market isn’t dumb. People are unloading and going cash.
  - icedistilled 4y ago
    or you could just buy the 4 week, 17 week or 26 week treasury bills while waiting for the 10 year or 20 year ones to increase yield.
cl0ckt0wer 4y ago
Does this mean that the demand for new treasuries is drying up? That would suggest that they would need to raise interest rates further to attract more money? They're going to try to rebuy the older low interest bonds but that brings "significant operational complexity". Why would they give the money back that they just got by selling bonds? Here's the report directly. "Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee | U.S. Department of the Treasury" https://home.treasury.gov/news/press-releases/jy1073 https://home.treasury.gov/news/press-releases/jy1073
- readthenotes1 4y ago
  "Why would they give the money back that they just got by selling bonds?" I was confused at first about who would be doing the buying but your link makes it clear that the Treasury is thinking about buying back the higher priced bonds while at the same time they are selling the lower price bonds. I'm still confused...
- pgayed 4y ago
  The vast majority of bond market is not new issues. (I don't know the exact “age distribution” of bonds but that would be interesting.) If old bonds have pitiful rates compared to new issues, the pool of buyers for the old is thin and bond prices suffer. This is especially bad for those in retirement who sell bonds to fund living expenses.
anigbrowl 4y ago
I wonder if this is partly the outcome of banks declining to offer any sort of meaningful ROR on savings accounts? Bank of America (for example) is offering 0.01%, although this rises to a whopping 0.04% for super-preferred customers. Yet they want $8/month to service the account unless there's a minimum balance of $500. Meanwhile, their mortgage rates start at 6.37%. https://www.bankofamerica.com/deposits/savings/savings-accounts/ https://www.bankofamerica.com/deposits/savings/savings-accou... https://www.bankofamerica.com/mortgage/fixed-rate-mortgage-loans/ https://www.bankofamerica.com/mortgage/fixed-rate-mortgage-l...
- mindslight 4y ago
  That's just what the large incumbent brick-and-mortar banks have done for a decade - because anybody still using them as a primary bank clearly doesn't know better. Meanwhile, the major online banks have been sending emails announcing interest rate increases like every single week.
  - rlucas 4y ago
    There is a large set of infrequently encountered (for most) but often highly important and/or time-sensitive things that having a traditional bank you can walk into makes much easier. Consider: medallion signature guarantee, initiating an arbitrarily large sized wire to an arbitrary recipient, cashing a physical check where the payee and indorsement doesn't match automatic remote-deposit scrutiny, cashing a particularly large cashier's check, getting cash above an ATM withdrawal limit (even from another bank or in another country, in some cases), working around a stated policy, etc. Online-only, mobile-only, and neo-banks basically say "eh" to these corner-case services. But a branch manager, even if they may not personally recognize you, will have surprising leeway and willingness to solve problems if they look at the CRM and see you're a longtime customer in good standing with some modicum of deposit / activity over time. Not so for a rando. It's been very worth my while to forego a couple % in interest income for the annual "need an institution to help me fix this today" tax. (But yeah, keep the corpus in something that will pay you.)
    - 4y ago
ragnot 4y ago
I've heard that this is actually a buyer liquidity problem and not a general liquidity problem...i.e. too many sellers and not enough buyers. Makes since the world is trying to offload their foreign reserves to combat the surging dollar and defend their own currencies. Immediate effects will be how the US Gov handles the fact that their interest rate payments are gonna shoot up when they have to roll over the debt.
- naveen99 4y ago
  There are plenty of buyers (I just bought some myself). The problem is people who levered up on them (banks, foreign governments, pension funds) don’t want to sell at a loss, because they will go bankrupt.
  - credit_guy 4y ago
    Banks either use Fair Value accounting or Accrual accounting for a given position. If it’s fair value, then the bond is already marked down on the balance sheet. Selling it or not does not result in a profit or a loss, at least not a significant one. If it’s in accrual, it’s held at par so there is no loss on the balance sheet, but they also can’t sell. They need to hold to maturity, that’s the rule.
    - naveen99 4y ago
      Yeah, so an inability to sell because they are levered up and using accrual accounting isn’t really a lack of liquidity in the market. It’s a seller liquidity problem, not a buyer liquidity problem. which is a weird type of liquidity problem.
      - jbscpa 4y ago
        “ which is a weird type of liquidity problem” Ah yes. The very definition of “financial accident”
deleted 4y ago
[deleted]
im-a-baby 4y ago
The full report has a lot of interesting information in it: https://www.federalreserve.gov/publications/files/financial-stability-report-20221104.pdf https://www.federalreserve.gov/publications/files/financial-... Scroll to any point in the document and you will see an interesting facet of the economy.
huitzitziltzin 4y ago
Difficult to overstate how significant this could be for the US. Watch the recent experience of the UK for examples. Or the experience of any of a number of developing markets. Democrat or Republican any administration’s first priority is keeping the bond market happy. Has not been an issue for a long time but if it becomes one… damn. You don’t have to like it. You can think it’s incompatible with your view of democracy or gives too much power to banks or finance or whatever (fyi it has nothing to do with that!) but it is going to be a giant, giant problem if demand for treasuries is significantly negatively impacted.
- colechristensen 4y ago
  The fed rate will go up until there’s a market for treasuries, the US isn’t the UK or an emerging market. The dollar is just a bit too strong at the moment and we’re trying to gracefully fall off a cliff.

63 points by ianai 4y ago

Full title: Fed warns of ‘low’ market liquidity in $24 trillion Treasury market, in latest financial stability report It’s stuff like this that I’ve been waiting to see before starting to particularly worry. Though lowered liquidity would seem to be a sign of lowered inflation. Idk

Spooky23 4y ago
Why would you buy treasury bonds today when the yield will almost certainly be higher in a few months? The market isn’t dumb. People are unloading and going cash.
- icedistilled 4y ago
  or you could just buy the 4 week, 17 week or 26 week treasury bills while waiting for the 10 year or 20 year ones to increase yield.

cl0ckt0wer 4y ago

Does this mean that the demand for new treasuries is drying up? That would suggest that they would need to raise interest rates further to attract more money? They're going to try to rebuy the older low interest bonds but that brings "significant operational complexity". Why would they give the money back that they just got by selling bonds? Here's the report directly. "Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee | U.S. Department of the Treasury" https://home.treasury.gov/news/press-releases/jy1073 https://home.treasury.gov/news/press-releases/jy1073

readthenotes1 4y ago
"Why would they give the money back that they just got by selling bonds?" I was confused at first about who would be doing the buying but your link makes it clear that the Treasury is thinking about buying back the higher priced bonds while at the same time they are selling the lower price bonds. I'm still confused...
pgayed 4y ago
The vast majority of bond market is not new issues. (I don't know the exact “age distribution” of bonds but that would be interesting.) If old bonds have pitiful rates compared to new issues, the pool of buyers for the old is thin and bond prices suffer. This is especially bad for those in retirement who sell bonds to fund living expenses.

anigbrowl 4y ago

I wonder if this is partly the outcome of banks declining to offer any sort of meaningful ROR on savings accounts? Bank of America (for example) is offering 0.01%, although this rises to a whopping 0.04% for super-preferred customers. Yet they want $8/month to service the account unless there's a minimum balance of $500. Meanwhile, their mortgage rates start at 6.37%. https://www.bankofamerica.com/deposits/savings/savings-accounts/ https://www.bankofamerica.com/deposits/savings/savings-accou... https://www.bankofamerica.com/mortgage/fixed-rate-mortgage-loans/ https://www.bankofamerica.com/mortgage/fixed-rate-mortgage-l...

mindslight 4y ago
That's just what the large incumbent brick-and-mortar banks have done for a decade - because anybody still using them as a primary bank clearly doesn't know better. Meanwhile, the major online banks have been sending emails announcing interest rate increases like every single week.
- rlucas 4y ago
  There is a large set of infrequently encountered (for most) but often highly important and/or time-sensitive things that having a traditional bank you can walk into makes much easier. Consider: medallion signature guarantee, initiating an arbitrarily large sized wire to an arbitrary recipient, cashing a physical check where the payee and indorsement doesn't match automatic remote-deposit scrutiny, cashing a particularly large cashier's check, getting cash above an ATM withdrawal limit (even from another bank or in another country, in some cases), working around a stated policy, etc. Online-only, mobile-only, and neo-banks basically say "eh" to these corner-case services. But a branch manager, even if they may not personally recognize you, will have surprising leeway and willingness to solve problems if they look at the CRM and see you're a longtime customer in good standing with some modicum of deposit / activity over time. Not so for a rando. It's been very worth my while to forego a couple % in interest income for the annual "need an institution to help me fix this today" tax. (But yeah, keep the corpus in something that will pay you.)
  - 4y ago

ragnot 4y ago

I've heard that this is actually a buyer liquidity problem and not a general liquidity problem...i.e. too many sellers and not enough buyers. Makes since the world is trying to offload their foreign reserves to combat the surging dollar and defend their own currencies. Immediate effects will be how the US Gov handles the fact that their interest rate payments are gonna shoot up when they have to roll over the debt.

naveen99 4y ago
There are plenty of buyers (I just bought some myself). The problem is people who levered up on them (banks, foreign governments, pension funds) don’t want to sell at a loss, because they will go bankrupt.
- credit_guy 4y ago
  Banks either use Fair Value accounting or Accrual accounting for a given position. If it’s fair value, then the bond is already marked down on the balance sheet. Selling it or not does not result in a profit or a loss, at least not a significant one. If it’s in accrual, it’s held at par so there is no loss on the balance sheet, but they also can’t sell. They need to hold to maturity, that’s the rule.
  - naveen99 4y ago
    Yeah, so an inability to sell because they are levered up and using accrual accounting isn’t really a lack of liquidity in the market. It’s a seller liquidity problem, not a buyer liquidity problem. which is a weird type of liquidity problem.
    - jbscpa 4y ago
      “ which is a weird type of liquidity problem” Ah yes. The very definition of “financial accident”

deleted 4y ago

[deleted]

im-a-baby 4y ago

The full report has a lot of interesting information in it: https://www.federalreserve.gov/publications/files/financial-stability-report-20221104.pdf https://www.federalreserve.gov/publications/files/financial-... Scroll to any point in the document and you will see an interesting facet of the economy.

huitzitziltzin 4y ago

Difficult to overstate how significant this could be for the US. Watch the recent experience of the UK for examples. Or the experience of any of a number of developing markets. Democrat or Republican any administration’s first priority is keeping the bond market happy. Has not been an issue for a long time but if it becomes one… damn. You don’t have to like it. You can think it’s incompatible with your view of democracy or gives too much power to banks or finance or whatever (fyi it has nothing to do with that!) but it is going to be a giant, giant problem if demand for treasuries is significantly negatively impacted.

colechristensen 4y ago
The fed rate will go up until there’s a market for treasuries, the US isn’t the UK or an emerging market. The dollar is just a bit too strong at the moment and we’re trying to gracefully fall off a cliff.