Fed can't keep the rates low

[Munger_Disciple]

I found the paper on QE published by UK Parliament to be quite informative: 

https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4202.htm

Edited July 20, 2021 by Munger_Disciple

[TwoCitiesCapital]

4 hours ago, Libs said:

The SCHW puts doubled and the TLT calls were an 8-bagger.

Talk about being right for all the wrong reasons.....

 

Nice! Just closed out my TLT calls myself, but I opted for the $138 strike that were a bit ITM at purchase so didn't do anywhere near 8x. 

[wabuffo]

Home stretch run this week.   TGA must come down - did come down last week (and even redeemed more Treasury securities than new issues).

 

Checks long-term US Treasury yields.....good, good....all going according to plan!

https://www.cnbc.com/bonds/

 

wabuffo

[muscleman]

Hi wabuffo

    Do you think this new repo would impact your prediction about the interest rate rise in August? It is really hard to understand what this is.

    https://www.wsj.com/articles/fed-launches-standing-repo-facility-to-boost-market-liquidity-11627496260

 

 

 

[wabuffo]

Do you think this new repo would impact your prediction about the interest rate rise in August?

 

The current facility is an ad-hoc "temporary" facility for reverse repo.  This announcement just makes it a standing (ie not ad-hoc), permanent reverse repo facility.  In terms of day-to-day, nothing's going to change - even the limit is the same.

 

The reverse repo is helping the Fed prevent short-term rates from going negative - especially at Money Market Funds that have access to the Fed's reverse repo facility.  But I don't think it changes anything in terms of the TGA balance decline.

 

It is really hard to understand what this is.

 

Think of reverse repo being like the overflow drain at the top the tub.   Last March, the Fed (and the US Treasury) put a stopper in the main drain of the tub and then started to fill the tub with "water" as a response to the pandemic.  (liquidity, get it? LOL!)  They decided we (the private sector) needed more "water".  In fact, gallons of it (litres for you Europeans ).

 

But they keep filling and filling.  That's where the reverse repo facility comes into play.  It is the overflow drain. 

 

A couple of months ago, the "water" level in our tub got to the point where the participants went to the overflow drain to keep the tub from overflowing with "water".  As the Fed and the US Treasury continue to pour more "water" into the tub, every day more and more "water" goes out the overflow drain (via the reverse repo facility).

 

Negative rates are basically our tub overflowing with "water" and spilling all over the bathroom.

 

wabuffo

Edited July 29, 2021 by wabuffo

[muscleman]

Thank you so much wabuffo!

I previously totally could not understand what you were saying but now it starts to make sense. Would you please also explain about your TGA and its rate impact analysis in the above way if that is possible? I really appreciate your help!

 

[Guest]

Yes, Bill is the man. I also really appreciate his insights. Very unique and sound thinking. That's a rare trait. 

[muscleman]

I am buying TLT puts. I wonder if this is the best way to play this incoming rate spike? It all starts to make sense now, especially after Fed is considering to taper.

IEF seems to move in a slower fashion.

If I own TLT puts and they distribute interest to TLT holders, does that impact me in any way?

[TwoCitiesCapital]

7 minutes ago, muscleman said:

I am buying TLT puts. I wonder if this is the best way to play this incoming rate spike? It all starts to make sense now, especially after Fed is considering to taper.

IEF seems to move in a slower fashion.

If I own TLT puts and they distribute interest to TLT holders, does that impact me in any way?

 

Yes. Any regular dividends reduce the price and make it more likely to hit in your strike. But theoretically the markets are aware and price the puts accordingly. 

 

I used TLT call spreads to play the drop in rates. I have considered using PFIX to play a potential rise in rates. I don't know how the leverage compared to TLT puts, but I'd imagine it's somewhat comparable. 

[hasilp89]

https://www.ft.com/content/25ec12b5-aa66-4bbb-92a4-8e6ecec469b7?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content

 

 

this is pretty much what @wabuffo has been saying all along right?

 

@muscleman & @TwoCitiesCapital wouldn't this continue to force rates down until the debt ceiling is addressed  

 

 

[TwoCitiesCapital]

1 minute ago, hasilp89 said:

https://www.ft.com/content/25ec12b5-aa66-4bbb-92a4-8e6ecec469b7?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content

 

 

this is pretty much what @wabuffo has been saying all along right?

 

@muscleman & @TwoCitiesCapital wouldn't this continue to force rates down until the debt ceiling is addressed  

 

 

 

It's behind a paywall so I can't read what the article is saying. As far as agreeing or disagreeing with Wabuffo - I'm afraid I can't say one which way or another. I've read most of his posts, but I just don't quite understand enough to agree or disagree with them. 

 

My rates trades are driven by two factors: 

1) I still believe in the "lower for longer" trade in rates. None of the disinflationary/deflationary factors have fundamentally changed in the U.S. and as long as stimulus is temporary - so too will the inflation be. 

 

2) I expect rates to move +/- 0.50% in any given 6-month period. This is historically true (though less so in the era of exceptionally low rates). The move from 9/30/2020 - 3/31/2021 was over 2x that amount and 9/30/2020 wasn't even the low in rates...they'd already come up quite a ways. Was simply too far, too fast IMO. 

 

Now that we've moved 0.50% back to the downside, within my realm of reasonability, I've closed my TLT positions. If we keep moving lower, I'll move my intermediate bonds funds to money market and will look to add PFIX or TLT put spreads to play a 0.50% rise in rates over the next 6-months. 

 

 

[wabuffo]

I think the FT article is mixing up what I consider to be two separate issues:

 

1) the debt ceiling snap-back on August 1st

2) excess reserves in the system - leading to overflows into O/N RRP.

 

In the absence of an agreement in Congress toggles back in the on-position after being in the off-position since August 1, 2019.   It would bring two requirements for the US Treasury would be my understanding:

  - it would be limited to whatever debt it has already issued as of July 31st, 2021

  - it must be back to the level of TGA balance it was on August 1st, 2019.

If I read those two rules literally - it would be limited to total gross debt of $28.5t (as of yesterday's daily statement) and around $180b balance in its TGA account.   I don't know how much wiggle room, Tsy Sec'y Yellen would be allowed vs those two requirements. 

 

The O/N RRP is strictly a function of all the excess reserves in the system.  It's back to my bathtub overflow drain metaphor.  The TGA drawdown might've accelerated that a bit - but the need for the O/N RRP would be there with or without the debt ceiling drama.

 

Of course, I could be wrong about it all.

 

wabuffo

 

[ERICOPOLY]

The low rates have created a form of lasting stimulus that won't go away even when rates go back up.  Over the past couple of weeks 30 yr fixed mortgage rates have hit like 2.25%.  A household with a $500,000 mortgage at 3.6% can refinance and immediately improve their cash flow by a few hundred dollars a month, while at the same time increasing their monthly principle payment.

 

So they're not only spending more, but while doing so they're also paying down their mortgage at a faster rate.

Edited July 29, 2021 by ERICOPOLY

[hasilp89]

23 minutes ago, wabuffo said:

The TGA drawdown might've accelerated that a bit - but the need for the O/N RRP would be there with or without the debt ceiling drama.

thank you. helpful to think of it as two separate issues.

[muscleman]

56 minutes ago, TwoCitiesCapital said:

 

It's behind a paywall so I can't read what the article is saying. As far as agreeing or disagreeing with Wabuffo - I'm afraid I can't say one which way or another. I've read most of his posts, but I just don't quite understand enough to agree or disagree with them. 

 

My rates trades are driven by two factors: 

1) I still believe in the "lower for longer" trade in rates. None of the disinflationary/deflationary factors have fundamentally changed in the U.S. and as long as stimulus is temporary - so too will the inflation be. 

 

2) I expect rates to move +/- 0.50% in any given 6-month period. This is historically true (though less so in the era of exceptionally low rates). The move from 9/30/2020 - 3/31/2021 was over 2x that amount and 9/30/2020 wasn't even the low in rates...they'd already come up quite a ways. Was simply too far, too fast IMO. 

 

Now that we've moved 0.50% back to the downside, within my realm of reasonability, I've closed my TLT positions. If we keep moving lower, I'll move my intermediate bonds funds to money market and will look to add PFIX or TLT put spreads to play a 0.50% rise in rates over the next 6-months. 

 

 

 

There is another article not behind a pay wall

https://californianewstimes.com/debt-ceiling-replay-to-ignite-fresh-demand-for-fed-facility/460266/

 

[TwoCitiesCapital]

42 minutes ago, ERICOPOLY said:

The low rates have created a form of lasting stimulus that won't go away even when rates go back up.  Over the past couple of weeks 30 yr fixed mortgage rates have hit like 2.25%.  A household with a $500,000 mortgage at 3.6% can refinance and immediately improve their cash flow by a few hundred dollars a month, while at the same time increasing their monthly principle payment.

 

So they're not only spending more, but while doing so they're also paying down their mortgage at a faster rate.

 

This is true. I did this exact thing myself and am saving over $500/month from it. 

 

But even many of my coworkers in finance don't think this way. The two colleagues on my team hadn't even considered refinancing until I mentioned how much I had saved doing so myself. My guess is that a minority of homeowners will take advantage of this. It will still be lasting stimulus - but largely insubstantial in the grand scheme of removal of ongoing stimulus measured in trillions. 

 

Also, from a GDP perspective, you're just moving buckets. Whether that money goes to a mortgage servicer or bank to be spent on dividends, buybacks, wages, bonuses, etc that then get spent in the economy OR goes to the consumer - it's mostly zero sum. The consumer will have a higher multiplier, so it'll be a small positive impact, but it's not as if that money wasn't going to be earned/spent elsewhere otherwise. 

Edited July 29, 2021 by TwoCitiesCapital

[muscleman]

On 7/25/2021 at 7:22 PM, wabuffo said:

Home stretch run this week.   TGA must come down - did come down last week (and even redeemed more Treasury securities than new issues).

 

Checks long-term US Treasury yields.....good, good....all going according to plan!

https://www.cnbc.com/bonds/

 

wabuffo

 

I re-read your "explain this to 5 year old" post on page 10 over and over and I think I finally start to understand your rational here.

i checked the balance here.

https://fsapps.fiscal.treasury.gov/dts/issues

As of July 27th it says "Federal Reserve Account" closing balance today is projected to be 564 Bn. Is this number supposed to run down to 150 bn by July 31st? That seems like a long way to go isn't it?

[wabuffo]

As of July 27th it says "Federal Reserve Account" closing balance today is projected to be 564 Bn. Is this number supposed to run down to 150 bn by July 31st? That seems like a long way to go isn't it?

 

I think so.   But the Treasury estimated it would only get to $450b by the end of this month in a recent forecast.  Perhaps Yellen has some leeway by claiming that daily receipts and expenditures are hard to predict.   Who knows?   Like all of us, I am a bit of a tourist here in Fedland!

 

wabuffo

Edited July 29, 2021 by wabuffo

[gfp]

Yeah - the linked report from Zoltan looked like he was using $450 Billion as his target as well.  I've been assuming they only had to draw it down to $450 Billion or so.

[ERICOPOLY]

1 hour ago, TwoCitiesCapital said:

The consumer will have a higher multiplier, so it'll be a small positive impact, but it's not as if that money wasn't going to be earned/spent elsewhere otherwise. 

 

My loan is in process for a cash-out refi courtesy of the real estate appreciation in my area.  That's a megaton payload weapon compared to the stimmi check I got last year.

 

Edited July 29, 2021 by ERICOPOLY

[muscleman]

35 minutes ago, wabuffo said:

As of July 27th it says "Federal Reserve Account" closing balance today is projected to be 564 Bn. Is this number supposed to run down to 150 bn by July 31st? That seems like a long way to go isn't it?

 

I think so.   But the Treasury estimated it would only get to $450b by the end of this month in a recent forecast.  Perhaps Yellen has some leeway by claiming that daily receipts and expenditures are hard to predict.   Who knows?   Like all of us, I am a bit of a tourist here in Fedland!

 

wabuffo

 

Got it. Does this mean treasury will keep running this balance down to $150 bn next month? In that case, rate spike is likely postponed after August 1st?

[wabuffo]

Does this mean treasury will keep running this balance down to $150 bn next month? In that case, rate spike is likely postponed after August 1st?

 

No, I don't think so.  I think the governor on the US Treasury general account becomes (a) the debt limit and (b) zero balance.   IMHO, they will spend and tax and then try to settle the difference by issuing bonds to keep their balance level or as high as they can without issuing so much new, net debt that they bump up against the debt ceiling.

 

wabuffo

[muscleman]

13 minutes ago, wabuffo said:

Does this mean treasury will keep running this balance down to $150 bn next month? In that case, rate spike is likely postponed after August 1st?

 

No, I don't think so.  I think the governor on the US Treasury general account becomes (a) the debt limit and (b) zero balance.   IMHO, they will spend and tax and then try to settle the difference by issuing bonds to keep their balance level or as high as they can without issuing so much new, net debt that they bump up against the debt ceiling.

 

wabuffo

 

I am a little confused. Can you please clarify? When you said "No, I don't think so.", do you mean that you don't think the TGA balance will continue to run down to $150 bn, or do you mean that you don't think rate spikes will postpone after August 1st?

[wabuffo]

No - I don't think the TGA balance will continue to run down.   I think the TGA balance will become subordinate to managing to the debt limit, spending, receipts.

 

As to interest rates - I think the trend will be higher but I wouldn't use the word "spike".  There's a lot of liquidity in the system that new Treasury issuance will have to sop up.  The rate at which that happens will depend on the debt ceiling amount and how much future spending Congress passes through the rest of year.   If debt ceiling is raised really high and the Democrats pass both of their "infrastructure plan" - rates could rise at a quicker pace than if the debt ceiling is only raised a limited amount and nothing passes in Congress - then rates would rise rather slowly or go sideways until the Fed stops its QE.

 

There are so many variables in the macro economy that its tough to make calls with certainty.  But the TGA drawdown was a one-time special cause that one could see was having a disparate impact on rates. 

 

wabuffo

[Guest]

Alright, Bill, so (I know you might be wrong) but where do you guess the 10 year will be this time next year?