8 ms·

Except for a brief reprieve during SVB's failure, the Fed continues to let the treasury and agency bonds it previously purchased mature, without recycling the p

by cs702 3y ago

Except for a brief reprieve during SVB's failure, the Fed continues to let the treasury and agency bonds it previously purchased mature, without recycling the proceeds it receives to purchase replacement bonds (i.e., the Fed is destroying the money): https://fred.stlouisfed.org/graph/fredgraph.png?g=15IkH https://fred.stlouisfed.org/graph/fredgraph.png?g=15IkH Every day, the US Treasury must issue new bonds to replace those bonds it repays. Given that the Fed is not stepping in to buy more treasury bonds in the open market, the private sector -- individuals, 401(k) plans, pension plans, endowments, mutual funds, etc. -- must find additional liquidity somewhere to buy the new bonds. The US Treasury will issue those bonds at the market-clearing price. A similar logic applies to agency bonds. Every day. Of course bank deposits are dwindling!

DirectorKrennic 3y ago
> The Fed is not stepping in to buy more treasury bonds, so the private sector -- individuals, 401(k) plans, pension plans, endowments, mutual funds, etc. -- must find additional liquidity somewhere to step in to buy the new bonds The private sector doesn't "have" to do anything.
- Kye 3y ago
  All but individuals and possibly possibly 401(k)s do, in fact, have to do something. They have targets to meet. They don't just sit on the money.
- cs702 3y ago
  If the private sector doesn't step in to buy newly issued treasuries, you would have a failed US treasury auction!!!
  - s1artibartfast 3y ago
    However, that isnt the motivation of the private sector. The private sector buys them because they want to returns.
    - cs702 3y ago
      Of course. The private sector sets the price at each auction! The US Treasury HAS TO sell the bonds. It has no choice.
      - s1artibartfast 3y ago
        Correct, The US Treasury has to sell enough bonds to fill the budget deficit.
- eppp 3y ago
  That clearly isn't true if it wishes to continue to exist.
- srj 3y ago
  That's true but the treasury will price their interest rates to get buyers. If it goes high enough buyers will emerge unless there is nobody with faith in the government paying it back.
candiddevmike 3y ago
If the fed doesn't buy more bonds, what does it do with the money to "destroy it"? Light it on fire in the parking lot?
- BurningFrog 3y ago
  The Fed can create and destroy any amount of US dollars with a simple database transaction.
  - DirectorKrennic 3y ago
    sudo rm -rf M1 M2
  - bubbleRefuge 3y ago
    yeah. so should the treasury. the fact that is must fund itself with bonds is an operational relic.
- cs702 3y ago
  Money is just debits and credits, not paper bills. A $1 dollar bill is a legal document that gives the holder a credit of $1 with the US Treasury.
- srj 3y ago
  Any loan getting repaid technically "destroys" the money unless new replacement lending is made. It's because the money was created when it was lent out, i.e. banks are allowed to lend money they don't have up to a point (called the reserve ratio). When it's repaid the interest is kept by the bank but the principal goes back to their balance sheet as money they can lend. For central banks this is taken to the next level as I'm not sure they do anything with interest.
  - dfxm12 3y ago
    This is important. I think this is not well understood and these misunderstandings lead to misplaced anger about things like "government spending" and "student loan forgiveness" or government fiscal responsibility in general.
BurningFrog 3y ago
Let's see if I understand this. My finance jargon skill is low. The Fed buys US treasury bonds for $XB, the treasury pays them the money plus interest, and the Fed then does nothing with the money? That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation.
- fuoqi 3y ago
  Until recently the Treasury was draining TGA, which was equivalent to doing QE. In other words, it was spending money which it got earlier from Fed by selling it treasuries. Now Fed does not buy treasuries anymore, so the Treasury has to refill TGA by attracting liquidity from the open market. It's equivalent to QT, which will be added to tightening performed by the Fed. Yes, it will lower money supply, but not without serious risks for the economy.
  - cs702 3y ago
    Minor nitpicking: The Fed cannot buy bonds directly from the US Treasury. It can only buy them from third parties in the open market. Otherwise, you're right.
    - fuoqi 3y ago
      You are right, but I think that everyone understands that today it's nothing more than a formality which feeds those intermediate banks at the expense of taxpayers.
- varispeed 3y ago
  > That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation. Not the best idea if the problem with inflation is on the supply side - energy costs and so on, corporations have to find a way to cover these and the easiest way is to raise prices. Reduction of money supply will make fall in demand and those corporations will find it difficult to cover day to day - either they'll have to increase prices even more or go bankrupt. If they really wanted to fight inflation, they should have looked at easing supply side problems.
rr808 3y ago
I think you're talking about reverse of QE. This will reduce bank's reserves at the fed, but doesn't affect money supply or retail deposits. When a private investor buys a bond the cash goes to the seller, it doesn't disappear.
- cs702 3y ago
  The cash that the US Treasury pays to the Fed as its bonds mature does disappear. Ditto for agency bonds that are repaid to the Fed.
safog 3y ago
I don't think it's that simple. Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries. Now they're holding a bunch of treasuries that won't mature for a while. If they simply sold them they'd have to book a bunch of losses (because as rates rose the price of treasurys falls). They don't do that and instead hope holding them to maturity will be fine to service their existing commitments (i.e., pay interest on deposits). The problem is that they bought treasurys that yield close to nothing and they have to make a profit on those and pay out an interest to customers, so they take their cut from the 2% and pay the customers a 0.03% interest on deposits or whatever. The customer sees that their savings account is yielding 0% and they could just go park their money in a money market account that yields ~5% (thanks to overnight rates being that high) and moves their money from their bank to a brokerage account. Bank deposits fall resulting in a standard bank run. Sure well run banks maybe have their risk profile in a better place (didn't actually go out and buy a bunch of 30yr treasurys like SVB did and instead got more short duration stuff) but they can't just pivot to instantly increasing the interest rates to match the money market account and so will continue to bleed deposits.
- danesparza 3y ago
  In any case there are no mentions of bonds in this report. It's irresponsible for the FDIC to not even mention this in this report. A huge part of the banking problem is not being addressed in this report.
- dragontamer 3y ago
  > Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries. You're ignoring Fed Repos. Aka: overnight deposits at the Federal Reserve. Which counts as cash and today is returning 5% APY. Today, a bank will very strongly consider Fed Repos, because 5% is a much better rate than the rates from 2 years ago (aka: 0% to 0.25%) --------- This also means that a 10Y bond you bought at like 2% or whatever is making less than Fed Repo overnight deposits today. So banks who are on 5Y, 10Y, or 30Y treasuries are in practice feeling like they've lost a lot of money. (And in SIVB or FRC's case, collapsed in part because of this mismatch, combined with depositor flight).
bubbleRefuge 3y ago
When the treasury department spends, deposits are created at Fed bank member accounts. Ultimately these deposits end up buying treasury securities or getting paid IOR (Interest on Reserves) in Fed reserve accounts. So the same money that is spent by Treasury "re-cycles" into new treasuries ad infinitum or till we hit the debt ceiling.
engineer_22 3y ago
It's interesting how many different opinions there are about how this works. You say one thing, and in the replys there are several different views of how this works. Do the decision makers have a similar diversity of opinion on how this works?

by cs702 3y ago

DirectorKrennic 3y ago

> The Fed is not stepping in to buy more treasury bonds, so the private sector -- individuals, 401(k) plans, pension plans, endowments, mutual funds, etc. -- must find additional liquidity somewhere to step in to buy the new bonds The private sector doesn't "have" to do anything.

Kye 3y ago
All but individuals and possibly possibly 401(k)s do, in fact, have to do something. They have targets to meet. They don't just sit on the money.
cs702 3y ago
If the private sector doesn't step in to buy newly issued treasuries, you would have a failed US treasury auction!!!
- s1artibartfast 3y ago
  However, that isnt the motivation of the private sector. The private sector buys them because they want to returns.
  - cs702 3y ago
    Of course. The private sector sets the price at each auction! The US Treasury HAS TO sell the bonds. It has no choice.
    - s1artibartfast 3y ago
      Correct, The US Treasury has to sell enough bonds to fill the budget deficit.
eppp 3y ago
That clearly isn't true if it wishes to continue to exist.
srj 3y ago
That's true but the treasury will price their interest rates to get buyers. If it goes high enough buyers will emerge unless there is nobody with faith in the government paying it back.

candiddevmike 3y ago

If the fed doesn't buy more bonds, what does it do with the money to "destroy it"? Light it on fire in the parking lot?

BurningFrog 3y ago
The Fed can create and destroy any amount of US dollars with a simple database transaction.
- DirectorKrennic 3y ago
  sudo rm -rf M1 M2
- bubbleRefuge 3y ago
  yeah. so should the treasury. the fact that is must fund itself with bonds is an operational relic.
cs702 3y ago
Money is just debits and credits, not paper bills. A $1 dollar bill is a legal document that gives the holder a credit of $1 with the US Treasury.
srj 3y ago
Any loan getting repaid technically "destroys" the money unless new replacement lending is made. It's because the money was created when it was lent out, i.e. banks are allowed to lend money they don't have up to a point (called the reserve ratio). When it's repaid the interest is kept by the bank but the principal goes back to their balance sheet as money they can lend. For central banks this is taken to the next level as I'm not sure they do anything with interest.
- dfxm12 3y ago
  This is important. I think this is not well understood and these misunderstandings lead to misplaced anger about things like "government spending" and "student loan forgiveness" or government fiscal responsibility in general.

BurningFrog 3y ago

Let's see if I understand this. My finance jargon skill is low. The Fed buys US treasury bonds for $XB, the treasury pays them the money plus interest, and the Fed then does nothing with the money? That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation.

fuoqi 3y ago
Until recently the Treasury was draining TGA, which was equivalent to doing QE. In other words, it was spending money which it got earlier from Fed by selling it treasuries. Now Fed does not buy treasuries anymore, so the Treasury has to refill TGA by attracting liquidity from the open market. It's equivalent to QT, which will be added to tightening performed by the Fed. Yes, it will lower money supply, but not without serious risks for the economy.
- cs702 3y ago
  Minor nitpicking: The Fed cannot buy bonds directly from the US Treasury. It can only buy them from third parties in the open market. Otherwise, you're right.
  - fuoqi 3y ago
    You are right, but I think that everyone understands that today it's nothing more than a formality which feeds those intermediate banks at the expense of taxpayers.
varispeed 3y ago
> That sounds like a way to lower the money supply, which is exactly what I'd expect of a central bank trying to fight inflation. Not the best idea if the problem with inflation is on the supply side - energy costs and so on, corporations have to find a way to cover these and the easiest way is to raise prices. Reduction of money supply will make fall in demand and those corporations will find it difficult to cover day to day - either they'll have to increase prices even more or go bankrupt. If they really wanted to fight inflation, they should have looked at easing supply side problems.

rr808 3y ago

I think you're talking about reverse of QE. This will reduce bank's reserves at the fed, but doesn't affect money supply or retail deposits. When a private investor buys a bond the cash goes to the seller, it doesn't disappear.

cs702 3y ago
The cash that the US Treasury pays to the Fed as its bonds mature does disappear. Ditto for agency bonds that are repaid to the Fed.

safog 3y ago

I don't think it's that simple. Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries. Now they're holding a bunch of treasuries that won't mature for a while. If they simply sold them they'd have to book a bunch of losses (because as rates rose the price of treasurys falls). They don't do that and instead hope holding them to maturity will be fine to service their existing commitments (i.e., pay interest on deposits). The problem is that they bought treasurys that yield close to nothing and they have to make a profit on those and pay out an interest to customers, so they take their cut from the 2% and pay the customers a 0.03% interest on deposits or whatever. The customer sees that their savings account is yielding 0% and they could just go park their money in a money market account that yields ~5% (thanks to overnight rates being that high) and moves their money from their bank to a brokerage account. Bank deposits fall resulting in a standard bank run. Sure well run banks maybe have their risk profile in a better place (didn't actually go out and buy a bunch of 30yr treasurys like SVB did and instead got more short duration stuff) but they can't just pivot to instantly increasing the interest rates to match the money market account and so will continue to bleed deposits.

danesparza 3y ago
In any case there are no mentions of bonds in this report. It's irresponsible for the FDIC to not even mention this in this report. A huge part of the banking problem is not being addressed in this report.
dragontamer 3y ago
> Banks bought up a bunch of US treasuries at close to nothing interest rates during the last two years. This is where a bank typically parks their cash reserves because the audit requirements require them to hold a certain amount of cash and cash basically == treasuries. You're ignoring Fed Repos. Aka: overnight deposits at the Federal Reserve. Which counts as cash and today is returning 5% APY. Today, a bank will very strongly consider Fed Repos, because 5% is a much better rate than the rates from 2 years ago (aka: 0% to 0.25%) --------- This also means that a 10Y bond you bought at like 2% or whatever is making less than Fed Repo overnight deposits today. So banks who are on 5Y, 10Y, or 30Y treasuries are in practice feeling like they've lost a lot of money. (And in SIVB or FRC's case, collapsed in part because of this mismatch, combined with depositor flight).

bubbleRefuge 3y ago

When the treasury department spends, deposits are created at Fed bank member accounts. Ultimately these deposits end up buying treasury securities or getting paid IOR (Interest on Reserves) in Fed reserve accounts. So the same money that is spent by Treasury "re-cycles" into new treasuries ad infinitum or till we hit the debt ceiling.

engineer_22 3y ago

It's interesting how many different opinions there are about how this works. You say one thing, and in the replys there are several different views of how this works. Do the decision makers have a similar diversity of opinion on how this works?