3 ms·

All treasuries or specific maturities will have to offer double digit rates? And what do you expect to be the distribution of the buyers at the time long rates

by ptero 1y ago

All treasuries or specific maturities will have to offer double digit rates? And what do you expect to be the distribution of the buyers at the time long rates cross above 10%? Honestly curious. I personally think that after Biden's COVID response the only way forward goes through eventual financial repression. We can kick that ball down the road for a bit more, but not forever. That said, I would love to hear counter-arguments.

IAmGraydon 1y ago
What is the Biden Covid response you're referring to? The trillions of dollars that were printed during Covid were mostly done under Trump's term, and the delayed inflation during Biden's term were mostly due to this. Here's the Fed balance sheet for reference: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL As for treasuries, you have to realize that the primary risk for bond holders is inflationary risk. In fact, high inflation environments make this "risk free" investment very risky indeed. Tariffs will drive inflation. There is little doubt about that as retailers have directly stated that they will raise prices. This force alone will be enough to cause bond yields to rocket. Add on top of that the fact that Trump loves to absolve himself of debt and leave the lenders holding the bag and has even spoken about doing this with some government debt, and you have a recipe for treasuries being seen as utterly toxic. The government will have a very hard time raising money across all maturities, and will have to really sweeten the deal to entice lenders in the future.
- nickysielicki 1y ago
  look no further than the SLR changes that Bessent is hinting for next month -- they are already desperate for demand.
  - IAmGraydon 1y ago
    That's a little scary in this environment. Changing the Supplementary Leverage Ratio to make treasuries more enticing to banks could create a situation where the banks hold even more of their deposits in treasuries. If treasury yields then move up due to the aforementioned tariffs and doubts about the US honoring its debts, it would make those bonds held by the banks nearly worthless on the secondary market. At that point, all it takes is people pulling money out of savings en masse (which happens in an economic downturn) to create a collapse of the banking system. Banks would have to liquidate bonds at a massive discount on the secondary to honor withdrawals, which would further push up yields, at which point there would likely be contagion and panic, bank runs, and implosion. This exact dynamic is what caused the 2023 banking crisis and the collapse of SVB. https://en.wikipedia.org/wiki/2023_United_States_banking_crisis https://en.wikipedia.org/wiki/2023_United_States_banking_cri... This administration keeps making the absolute worst possible choices, so none of this surprises me.
    - nickysielicki 1y ago
      Did you use an LLM to write this?
      - IAmGraydon 1y ago
        No, not at all. It's pretty crazy that people are paranoid everything is from LLMs. The truth is I went to Catholic school where they drilled grammar and sentence structure and it stuck with me. Now I get accused of being an AI. Cute. Also, FWIW, I honestly don't think my reply seemed that LLM-like. There's no em-dashes. There's no bullet points. Despite my best intentions, there are probably also grammatical mistakes. Perhaps I should stop using proper capitalization like you to remove all doubt!
        nickysielicki 1y ago
        It felt like an LLM only because it summarized so much subtext. Sorry! I also went to Catholic school.
    - ptero 1y ago
      First, my apologies for answering your "because Trump" with "because Biden". It was a knee-jerk reaction to politicization of an argument that IMO has nothing to do with politics. If I had to pick "because something" I would say "because Iraq war / G.W. Bush" which started this fiscal debt spiral. That said, I do not immediately agree with either of your points here. On changing the SLR, to the best of my knowledge it gives the bank an option, not places a requirement on them. On the SVB collapse: that was a bank run, plain and simple. That particular one was caused by jumpy clients (startups) that reacted to the mark-to-market correction due to the raised rates. The bank's chief risk officer probably screwed up pretty badly, but bank runs can happen to ANY bank, large or small. If enough Citibank, BoA or Chase clients decided to move money out those large banks would be in the same boat (i.e., unable to fulfil those request, or insolvent). The reason most banks are mostly safe from bank runs most of the time is that small clients believe they will be bailed out by the FDIC (which does not have enough money to bail everyone) and large companies believe they will be bailed out directly by the gov't, printing money as needed to save systemically important banks. But smaller banks do get insolvent regularly, with over 500 since my "because Bush" point of 2001. Nothing special. The only way out I think is via financial repression, holding rates below inflation, partially inflating gov't debts and partially wiping out savers (and pensions that do not adjust for inflation and a ton of other things) and maybe partially growing the economy out of it. This is a long process, IMO likely to play out over the next 10 years or more and will be painful for those caught in front of this wreck. But it has nothing to do with <insert your evil president or party>" now. My 2c.

by ptero 1y ago

IAmGraydon 1y ago

What is the Biden Covid response you're referring to? The trillions of dollars that were printed during Covid were mostly done under Trump's term, and the delayed inflation during Biden's term were mostly due to this. Here's the Fed balance sheet for reference: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL As for treasuries, you have to realize that the primary risk for bond holders is inflationary risk. In fact, high inflation environments make this "risk free" investment very risky indeed. Tariffs will drive inflation. There is little doubt about that as retailers have directly stated that they will raise prices. This force alone will be enough to cause bond yields to rocket. Add on top of that the fact that Trump loves to absolve himself of debt and leave the lenders holding the bag and has even spoken about doing this with some government debt, and you have a recipe for treasuries being seen as utterly toxic. The government will have a very hard time raising money across all maturities, and will have to really sweeten the deal to entice lenders in the future.

nickysielicki 1y ago
look no further than the SLR changes that Bessent is hinting for next month -- they are already desperate for demand.
- IAmGraydon 1y ago
  That's a little scary in this environment. Changing the Supplementary Leverage Ratio to make treasuries more enticing to banks could create a situation where the banks hold even more of their deposits in treasuries. If treasury yields then move up due to the aforementioned tariffs and doubts about the US honoring its debts, it would make those bonds held by the banks nearly worthless on the secondary market. At that point, all it takes is people pulling money out of savings en masse (which happens in an economic downturn) to create a collapse of the banking system. Banks would have to liquidate bonds at a massive discount on the secondary to honor withdrawals, which would further push up yields, at which point there would likely be contagion and panic, bank runs, and implosion. This exact dynamic is what caused the 2023 banking crisis and the collapse of SVB. https://en.wikipedia.org/wiki/2023_United_States_banking_crisis https://en.wikipedia.org/wiki/2023_United_States_banking_cri... This administration keeps making the absolute worst possible choices, so none of this surprises me.
  - nickysielicki 1y ago
    Did you use an LLM to write this?
    - IAmGraydon 1y ago
      No, not at all. It's pretty crazy that people are paranoid everything is from LLMs. The truth is I went to Catholic school where they drilled grammar and sentence structure and it stuck with me. Now I get accused of being an AI. Cute. Also, FWIW, I honestly don't think my reply seemed that LLM-like. There's no em-dashes. There's no bullet points. Despite my best intentions, there are probably also grammatical mistakes. Perhaps I should stop using proper capitalization like you to remove all doubt!
      - nickysielicki 1y ago
        It felt like an LLM only because it summarized so much subtext. Sorry! I also went to Catholic school.
  - ptero 1y ago
    First, my apologies for answering your "because Trump" with "because Biden". It was a knee-jerk reaction to politicization of an argument that IMO has nothing to do with politics. If I had to pick "because something" I would say "because Iraq war / G.W. Bush" which started this fiscal debt spiral. That said, I do not immediately agree with either of your points here. On changing the SLR, to the best of my knowledge it gives the bank an option, not places a requirement on them. On the SVB collapse: that was a bank run, plain and simple. That particular one was caused by jumpy clients (startups) that reacted to the mark-to-market correction due to the raised rates. The bank's chief risk officer probably screwed up pretty badly, but bank runs can happen to ANY bank, large or small. If enough Citibank, BoA or Chase clients decided to move money out those large banks would be in the same boat (i.e., unable to fulfil those request, or insolvent). The reason most banks are mostly safe from bank runs most of the time is that small clients believe they will be bailed out by the FDIC (which does not have enough money to bail everyone) and large companies believe they will be bailed out directly by the gov't, printing money as needed to save systemically important banks. But smaller banks do get insolvent regularly, with over 500 since my "because Bush" point of 2001. Nothing special. The only way out I think is via financial repression, holding rates below inflation, partially inflating gov't debts and partially wiping out savers (and pensions that do not adjust for inflation and a ton of other things) and maybe partially growing the economy out of it. This is a long process, IMO likely to play out over the next 10 years or more and will be painful for those caught in front of this wreck. But it has nothing to do with <insert your evil president or party>" now. My 2c.