wabuffo

So it seems obvious that short term rates will drop in the next couple of years. I don't think short-term rates matter much (within a reasonable range). US households and non-financial businesses, in aggregate, are currently positively geared to rates. IOW - they benefit more from rising short-term rates through increased income vs lowering rates (since most household liabilities are fixed in the short-term). I'm wondering if they can pull this off for long term rates as well. QT has stopped. Are they going to go back to QE in a major way to drive down rates? Not an expert on macro, so am curious to know what sort of power the Fed has via QE. I doubt it. The Fed isn't going to expand its balance sheet. And the US Treasury is less concerned with managing duration and more concerned with supplying the right quantities of bills, notes, and bonds that the private sector needs. The yields at the long end will be a function of what the market expects for inflation and economic growth. Call inflation at 2.5% and real growth at 2% & you can probably expect a 10-year at 4.5%? I dunno - that's just my SWAG. And how would this pair in a high inflation scenario? I guess I'm in the minority that thinks inflation is not going to be a problem. Wages, rents, and energy costs are flat to declining right now. These would be the major inputs to any re-inflation scenario so its hard to see what drives inflation higher from here, IMHO. We can also assume the deficits will remain large and maybe get larger in a slowdown. We all need to learn to love deficits - for the owner of the reserve currency, the rest of the world needs to run trade surpluses with the US in order to obtain US dollars and US dollar assets. So one needs a large deficit to US GDP than most people have thought possible to accomodate both domestic + foreign demand for US Treasuries. And the US is finally running a decent sized deficit that meets that demand. Bill

Hmm wouldnt the point be to keep future interest costs low? Are you ultimately saying the only buyer at 1% was the fed? I'm saying the reason they are at 1% is that the Fed is buying in size & limiting the quantity available to the private sector. If the US Treasury tries to issue more - then rates won't stay at 1%. In addition, the mere act of the Fed buying a large portion of the long bond auction at 1% means the govt will not lock in 1% rates over the duration of those bonds bought by the central bank. They will be converted to higher rates the govt must pay (through the central bank) when the Fed ultimately raises short-term rates. (Hence - the conversion of low, long-term fixed rates to high, short-term variable rates). Bill

Is there anything weird going on with the Fidelity, Schwab, Vanguards having such large Treasury MM funds? I haven't looked closely - but my sense is that there are two factors: - a growth in cash assets due to the pandemic and post-pandemic deficit spending that eventually needs to sit somewhere other than bank deposits (ie - a safe counter-party). - a one-time move back to MMF from o/n RRP - roughly $2.3T from its peak to now close to zero. During 2023 at the peak of the Fed's balance sheet size, you would look at some MMFs and over 50% of their assets were invested in o/n RRP. Now its close to zero. While that doesn't affect MMF asset size, it did change the composition dramatically back to govt T-bills. Its as I always say, the deficit spending self-funds the follow-up Treasury issuance. Someone gets a social security check deposit, spends it at Amazon, Amazon buys T-Bills. Rinse and repeat. Bill

"Contained in today’s Fed release, the Federal Reserve announced approximately 40 billion per month of reserve‑management purchases of short‑term Treasury securities, starting in mid‑December, with the stated goal of maintaining an ample supply of reserves and supporting smooth money‑market functioning." All things being equal, the Fed's MBS portfolio continues to liquidate (as underlying mortgages pay their monthly principal and interest). Since the Fed wants to keep total reserves from shrinking any further (currently below its self-imposed target of $3T), the Fed must buy an equal amount each month of Treasury securities to offset this decline in MBS. The Fed prefers buying T-Bills than more MBS in trying to keep its balance sheet flat. If the Fed doesn't do this, and lets it balance sheet shrink further, it risks losing control of its target interest rate due to banks bidding up the cost of borrowing reserves from other banks due to a systemwide shortage of reserves. This is what happened in Sept 2019 (the "Repo Madness Incident"). Bill

hate to ask the obvious question, but why didn't they do it then? big whiff? Isn't it pointless if the Fed is buying a large quantity of long bonds by doing QE? In effect, from a consolidated-sovereign POV, the central bank is converting govt obligations from long-term fixed rate (10-year bond) to short-term variable rate (reserves) debt. Bill

Wasn't most of Ted's outperformance from his intimate knowledge of WR Grace assets in their bankruptcy? Also - big investment in DDS, IIRC. Also DaVita and DirecTV. Ran very concentrated, too. Bill

I thought this part was interesting. 34% over 5 years is 6% per year compounded. That pales in comparison to the public record of Ted Weschler at Peninsula before he joined BRK. While focusing on financials and only being down 5.7% in 2008 is impressive, 2009 would've likely have been a barnburner return as all financials rallied hard. I mean you could've thrown darts at financials in Feb 2009, and you would've been up 80% or more. That means his fund was likely showing a negative return over its first 4 years.

signs you may be spending too much time on X Bill! True dat (unfortunately, lol). Bill

I assume they are just referencing issuance being almost entirely at the short end and not increasing supply of longer term bond issuance? The US Treasury gives the market what it wants and needs. Yellen issued T-Bills in large supply because the market was desperately short of safe (from a counter-party risk) places to hold cash and was relying excessively on the Fed via reverse repo as a second-best alternative. Huge pools of cash (think large corporations, asset managers, forex desks) need safety first, liquidity second, and yield third -- and safety is way ahead of the other two. Pandemic spending flooded the global economy with cash. But by early 2021, it was patently obvious that the Fed's balance sheet expansion (and the US Treasury's need to snap back to pre-pandemic TGA levels by August 2021 due to the debt limit toggling back on after it was suspended in 2019) was creating a massive shortage of safe assets. That was mostly a shortage of T-Bills and it was obvious that without action, the US was going to experience negative rates for the first time ever. That's why the Fed opened up the reverse repo operation in size. From a plumbing perspective, the bathtub was going to overflow so the overflow drain had to be opened. (The Fed is also a safe counter-party, banks aren't as the depositors at SVB learned the hard way). All Yellen did in 2023-2024 was relieve that massive shortage of bills that had accumulated. But few understand this. There was no manipulation here. If she didn't it would've likely have created a banking crisis (shortage of reserves). Bill Bill

The current Treasury secretary, when not cosplaying as a soya farmer, has mostly stuck with the practice of the previous Treasury secretary with regard to Treasury issuance, which the current Treasury secretary was highly critical of, thus somewhat suppressing the long end. Please explain - I don't see it this way (with either Treasury secretary). Bill

Thanks man! Bill

My theory is that there are no severe plumbing issues...yet. The Fed is doing the right thing by ending their balance sheet reduction because reserves have fallen below $3T. That's a rule-of-thumb number because no one truly knows what level of total system reserves are required. In addition, the level required can fluctuate, perhaps significantly, from one day to the next. My own guess is that the smaller banks are the first ones to feel a shortage of reserves. The large GSIB banks tend to be receivers of reserves while the non-GSIB banks are not. Looking at recent history, it seems like any time cash assets (99% of which are reserve balances) of the US small banking sector (ie, the non-top-20 US banks) fall below 6% of total assets it seems to be another red-line. In 2019, it led to the repo madness of Sept and in Q1, 2023 it led to the failure of SVB among others. But as we can see, the US small banking sector seems to be well above that danger zone right now. FWIW, Bill

It's ironic that recent talks and studies come up with a 65% rule of required excess reserves to clear Fedwire transactions as only a minuscule amount of excess reserves were necessary to clear transactions before the GFC? This is because of a major policy change by the Fed after the GFC. No more daylight overdrafts allowed + minimum liquidity requirements over and above the overdraft change. Here's Dimon explaining it during the Q3 2019 JPM earnings call after the Sept Repo Madness Incident. If one forces all 4000 US banks to hold reserves during volatile daily value transfers without ever going below zero, then yeah, the math will add up to a shite-ton of reserves. But it doesn't have to be that way. They could run the system with zero reserves if they wanted to. Bank of Canada does. Its just a policy decision. Again - its not because banks want to hold such large quantities of reserves. They could earn more elsewhere if they could redeploy that 14% of their asset base. Bill

This is mostly window-dressing at month-ends. It will fall off tomorrow and the rest of the week. Yep - there it is.

Cash was $358 Billion at quarter-end, so don't get caught up in the $382 Billion number. A lot of that cash is going to stay put or become "bonds" and never get "spent." I know that the 10-Q says that all but $30B is sequestered in order to meet immediate & unforeseen insurance business needs. But hasn't BRK historically held near 100% cash and cash equivalents to match insurance liabilities? LAEs +Unearned premiums this last Q add up to $184B. So I always think that Buffett/Abel have closer to $170B of excess cash (rather than $358B). Bill

Isn't this just semantics though? Bank profit = change in assets-change in liabilities Of course, but 14% of total US banking sector assets are tied up in reserve balances. What's worse is that for the GSIB banks these amounts count against their Supplementary Leverage Ratios limiting their asset growth in lending operations. You don't think Jamie Dimon can earn higher returns on JPM's loan book than what he earns from IORB in cash? Bill

What counts is when a new financial asset gets created in the private sector with no offsetting financial liability. That's new money. You're excessively focusing on deposits as exclusively money and labelling Treasury securities as somehow having less "moneyness". The Fed buying an asset with reserves does not create money. (swap one financial asset for another) A bank creating a loan does not create money. (creates offsetting financial assets and liabilities) Only the US Treasury net spending creates an unencumbered financial asset with no offsetting liability. That is the only new money. The charts you posted from 2010 to today also coincide with massive fiscal deficits (except for a short period of low deficits in 2015-16). That's where all the money came from. Here's an old table I created that explains the difference between the conventional view of money (basically M2) and the correct version that I point to. Bill

The hedge fund, for example, which sold the Treasury security ends up with money that can be spent. I think you're confusing a US Treasury as not being a monetary asset with a deposit being a monetary asset. There is no net-financial asset creation happening here. Its just a transformation of one asset to another. If your bank comes to you and transforms your $1000 in a time deposit (savings acct) to $1000 in a demand deposit (checking acct) - do you feel an increase in your balance sheet? This is the transaction you've just described if you substitute Treasury security for time deposit and cash for demand deposit. Bill

Seriously though, conditions are tightening up and a lot more MBS are being posted as collateral vs purely treasury securities. This is mostly window-dressing at month-ends. It will fall off tomorrow and the rest of the week. If things were tight, reverse repo wouldn't have also climbed to over $50B at month-end. Remember this is banks posting reserves (which are supposed to be in short-supply) to get an over-the-weekend interest rate from the Fed. In addition, for purely mechanical plumbing reasons, the US Treasury drew its general account balance over $1T. This is to meet scheduled debt redemptions and spending next week. It too should fall back to $800-$850B next week which will send reserves back to the banking sector. Too much hysteria being fueled by journalists and social media who don't actually follow the monetary plumbing. Bill

With the Federal Reserve buying the security, a bank balance sheet expansion occurs, cash is created as an asset and a (uninsured) demandable deposit is created. Yes - but a Treasury security has been lost. There is no private sector balance sheet expansion. And the cash is/are reserves stuck at the Fed. Banks ended up with a new profit center: interest paid on reserves more than interest paid on deposits In what currency does the Fed pay the interest on reserves? It pays in the only currency it has - more reserves! Which again are stuck at the Fed. Doesn't help with interest paid on deposits which are paid with USDs. For this reason, I think there's no resistance by banks to the Fed lowering reserves. Bill

If SHTF again, how do you feel about the Fed's position to mount a rescue (i.e. do a QE)? I can predict with 100% certainty that the Fed will always act to add reserves to the system if some bank falls short. People think that all the Fed does is set interest rates - but job 1 is making sure that every Fedwire transfer successfully completes. The Fed does this for two reasons: 1) it doesn't want a receiving bank to fall short and cause a cascading problem. 2) if a bank falls short of reserves it will start to bid up the price of reserves from other banks because it is desperate. That will cause the IORB to rise above the Fed's target. The Fed does not want to lose control of its short-term rate. This happened briefly in Sept 2019. ("Repo Madness"). So it will act to add reserves and bring the IORB back to target. Bill

How / why has the Fed set the lower bound of $3T for bank reserves? As gfp correctly stated - its based on Fedwire transaction volumes. Fedwire is the Federal Reserve's bank clearing/settlement system. Basically all value transfers between US (and US-domiciled banks of foreign bank companies) as well as between the US Treasury and the banks are done via Fedwire. The settlement currency to do this....is.....drumroll....reserves. IOW, each bank has a "checking account" at the Fed with reserve balances. If you pay gfp by check for $1000 and your bank is JPM and his bank is BAC, that $1000 creates a movement of $1000 in reserves from JPM to BAC. The total annual volume of value transfers is over $1 quadrillion dollars (cue Dr. Evil laugh). That's 40 times US GDP. https://www.frbservices.org/resources/financial-services/wires/volume-value-stats/annual-stats.html So - back to where the $3T level comes from... the Federal Reserve did a study and published the results in July of this year. The conclusion was that the lower threshold was at 65% of average daily Fedwire value transfers. That corresponds to a level of ~$3T. https://www.federalreserve.gov/econres/notes/feds-notes/what-can-public-fedwire-payments-data-tell-us-about-ample-reserves-20250718.html Of course, that's not a hard "floor". The level will necessarily fluctuate from day-to-day based on economic events. But it guides the Fed and allowed us armchair Fed watchers to predict that the end of QT was very near. Bill

Quantitative Easing is back! Can any bond wizards explain the implication? The Fed has stealthily set a lower bound for total system bank reserve balances at $3T. That level has been breached in recent weeks so the Fed has announced that it no longer wants its balance sheet to shrink. It's important to note that the Fed can't stop the liquidation of its MBS portfolio (nor does it want to). That portion reduces the Fed balance sheet by a variable amount ($10-$20B) through monthly P & I payments on the underlying mortgage pool. So to keep the balance sheet from shrinking, the Fed will have to offset the MBS reduction by being a net buyer of an equivalent amount of Treasury securities every month. It has said it will do this with T-Bills to reduce the avg duration of its Treasury securities portfolio. And sure enough, here come the howls of "QE" from the conspiracy theorists. Overall, it’s a nothing burger because the Fed is merely trying to keep its balance sheet flat. A final note - there are two other liabilities on the Fed’s balance sheet it does not directly control: 1) Curency in circulation - that tends to go higher perpetually at a very slow rate based on private sector demand for bank notes. So no impact. 2) The US Treasury’s general account - that seems to be at a level where the Treasury wants it to be ($800B - $1T) so it will fluctuate here and there around the level it is at now. Depending on what happens, the Fed may have to supplement reserves with additional T-Bill purchases if it rises significantly (at the expense of reserves) usually during a big tax receipt month. Hope that helps. Bill

These were two completely different events that sent both commodities up OPEC formed as a direct consequence of the Nixon devaluation of the USD due to severing the link to gold in 1971. OPEC members understood that they did not want to see the value of their oil devalued too so they used their new cartel powers to limit supply and re-establish the true value of their oil exports in real terms. The US then tried to impose price controls domestically, which, of course, created the gas lines (as price controls always lead to shortages). The laws of economics can't be repealed. These are not unconnected events. Don't believe me? https://www.federalreservehistory.org/essays/oil-shock-of-1973-74 Bill

Do you have any theories on why this is the case? After 1971, the world's, non-US oil exporting countries did not want to trade their oil for dollars that were diminishing in buying power. Bill