Bonds!

[UK]

8 minutes ago, dealraker said:

 

What is the chance, the probability, that debt default threats/concerns hit our treasury market sales and pricing in such a manner that all living hell breaks loose?    And what happens if that comes?

 

I guess probability of all living hell in treasury market is still very low, but as soon as something happens (not necessarily something as serious as all living hell) I would expect abrupt end of QT and maybe start of QE4?

[Red Lion]

On 10/31/2023 at 6:38 AM, UK said:

 

I guess probability of all living hell in treasury market is still very low, but as soon as something happens (not necessarily something as serious as all living hell) I would expect abrupt end of QT and maybe start of QE4?

I’ve always felt like the end game is yet more QE, but trying to position myself where I’ll survive either way. I just don’t see how we get out of this debt problem without inflating our way out, and it seems like QE is going to be needed to thread that needle. Or money printing, but QE seems much preferable. 
 

Everyone seems worried about reserve status, but are other major currencies any better? Is this all just a game of chicken where the fed just has to be higher for longer (than the ecb? China? Japan?) and then go back to QE and zirp after all the other banks do the same? 

[dealraker]

2 minutes ago, RedLion said:

I’ve always felt like the end game is yet more QE, but trying to position myself where I’ll survive either way. I just don’t see how we get out of this debt problem without inflating our way out, and it seems like QE is going to be needed to thread that needle. Or money printing, but QE seems much preferable. 
 

Everyone seems worried about reserve status, but are other major currencies any better? Is this all just a game of chicken where the fed just has to be higher for longer (than the ecb? China? Japan?) and then go back to QE and zirp after all the other banks do the same? 

Same here, with RedLion on the inflate out.  Playing "predict" is fun, but few succeed and I'm worse than most.  But I do like to play.

[gfp]

I don't think QE does much of anything and I think the Fed is starting to realize that themselves.  Hopefully they won't bother with it anymore going forward.  

 

"Money Printing" is deficit spending.  That is what we are currently doing that people claim is causing the big unsustainable debt problem.

 

Just remember when you hear folks handwringing over "who is going to buy our debt??!!!" that the government spends the new USD money into the economy first.

 

edit to add:

What we saw happen with quantitative easing is just the exchange of securities for a shit-ton of excess bank reserves.  We operated without all those excess bank reserves just fine for 100 years and lending by large commercial banks is in no way constrained by the level of bank reserves in the system.  So all those excess reserves just got parked at the Fed or reverse repo and basically accomplished nothing except the signaling effect of "QE!  QE!."  (and according to the Fed's own research paper maybe a few basis points of difference in long term yields for a short period of time)  And now that the short term reserves are earning over 5% and the long dated paper on the Fed's balance sheet from QE is earning way less, the Fed is running a huge loss, paying net interest into the economy - which is another form of stimulus at the moment.  Net interest paid by the Fed on their upside down balance sheet should be added to deficit spending to get the total (highly regressive to rich people) stimulus figures...

 

Nobody can explain it better than Mosler -

https://www.youtube.com/watch?v=CO6GS13rEuE

 

Edited November 1, 2023 by gfp

[gfp]

Aaaannnd the 30 year yield is back in the 4's!  Will the 2 year yield also lose the 5-handle?  I will say it again: There is a lot of demand for US treasury securities with a 5 handle across the entire yield curve.

[UK]

45 minutes ago, gfp said:

I don't think QE does much of anything and I think the Fed is starting to realize that themselves.  Hopefully they won't bother with it anymore going forward.  

 

"Money Printing" is deficit spending.  That is what we are currently doing that people claim is causing the big unsustainable debt problem.

 

Just remember when you hear folks handwringing over "who is going to buy our debt??!!!" that the government spends the new USD money into the economy first.

 

I think deficit is important, especially for the general economy. But in terms of functioning treasury market, it's hell/panics, as was the last time in 2020, QE perhaps is also or even more important? Also I am not sure QE is not working in setting rates in the longer term in Japan and they would be anywhere close were they are today in term of debt and rates without yield control via massive QE? Also, when bond market started to break in UK last year, because of too big/unsustainable budget, the central bank was forced to postpone QT and even made some QE very quicky. However, what I am more sure about, is I do not understand all these things at all:))

 

Edited November 1, 2023 by UK

[TwoCitiesCapital]

51 minutes ago, RedLion said:

I’ve always felt like the end game is yet more QE, but trying to position myself where I’ll survive either way. I just don’t see how we get out of this debt problem without inflating our way out, and it seems like QE is going to be needed to thread that needle. Or money printing, but QE seems much preferable. 
 

Everyone seems worried about reserve status, but are other major currencies any better? Is this all just a game of chicken where the fed just has to be higher for longer (than the ecb? China? Japan?) and then go back to QE and zirp after all the other banks do the same? 

 

Other countries aren't in a better condition so the USD will remain the reserve currency for now.

 

However, gold has been taking the marginal demand from USD as a reserve asset for the last few years. Any cross-border deals to trade oil for yuan, gold, rubles, rupees, etc only leads to further degradation of USD denominated reserves and Treasury demand even if USD remains the reserve currency. 

 

There may not be an alternative for the USD as a reserve asset, but there are certainly alternatives to marginal demand for USD which is occurring. This will only serve to make the USD less attractive which will lower the bar for any future alternative to surpass. 

[gfp]

I mean look at this chart of reserves.  We barely needed any (relatively speaking) and then this:

 

https://fred.stlouisfed.org/series/TOTRESNS

[Spekulatius]

We have had this discussion before but QE is not "money printing". It's just an asset exchange of a longer duration treasury for reserves (or essentially a shorter duration asset).

 

It seems to have accomplished very little other than damage the banking system. Only deficits are money printing and we do plenty of this. Deficits are inflationary. The treasury drives the bus much more so than the Fed.

[gfp]

2 minutes ago, Spekulatius said:

We have had this discussion before but QE is not "money printing". It's just an asset exchange of a longer duration treasury for reserves (or essentially a shorter duration asset).

 

It seems to have accomplished very little other than damage the banking system. Only deficits are money printing and we do plenty of this. Deficits are inflationary. The treasury drives the bus much more so than the Fed.

 

I agree with all of that except that it IS "money printing" when the Fed runs a loss on their balance sheet like they are currently.  Just like it is a form of tax when they were building up their balance sheet with QE and had a positive carry and were remitting the "profits" to the treasury each quarter (lowering the deficit).

 

So ironically, QE acted as a tax because the Fed took interest income out of the hands of the private sector, made a profit on the carry, and remitted that profit to the treasury.

[TwoCitiesCapital]

For all the fanfare surrounding the blowout Q3 GDP, Q4 is expected at 1.2% at the moment

 

Largely due to a much reduced contribution from personal consumption and negative drag of inventories. Perhaps Q3 was just front-loaded demand for a dismal Q4. 

Edited November 2, 2023 by TwoCitiesCapital

[tede02]

19 hours ago, Spekulatius said:

We have had this discussion before but QE is not "money printing". It's just an asset exchange of a longer duration treasury for reserves (or essentially a shorter duration asset).

 

It seems to have accomplished very little other than damage the banking system. Only deficits are money printing and we do plenty of this. Deficits are inflationary. The treasury drives the bus much more so than the Fed.

 

This seems like semantics. If the Fed is expanding its balance sheet to buy the debt that the treasury is issuing to finance the deficit, is that not money printing?

 

Edited November 2, 2023 by tede02

[gfp]

2 minutes ago, tede02 said:

 

This seems like semantics. If the Fed is expanding its balance sheet to buy the debt that the treasury is issuing to finance the deficit, is that not money printing?

 

 

At the time they were ramping up their balance sheet doing quantitative easing, it was actually functionally the opposite of money printing.  The net effect was like a tax - the opposite of stimulus.  QE exchanges one form of government liability (which is "money") for another.  The Fed buys treasury securities and the seller of treasury securities gets reserves.  Both are government liabilities, both are "money," but at the time, the treasury security paid more interest than the reserve account at the Fed.  So the Fed removes that interest income from the private sector and replaces it with reserves which at the time earned basically zero.  That is why during QE the Fed was reporting large profits on their balance sheet that they would remit to the Treasury (which reduces the deficit like a tax).

 

Today, however, the long dated treasuries on the Fed's balance sheet earn less than cash and the Fed is running a loss on their balance sheet.  This is stimulus - the Fed is paying net interest into the private sector.  Much closer to money printing today than when they were building up the balance sheet doing QE.

[Cigarbutt]

24 minutes ago, gfp said:

...The Fed buys treasury securities and the seller of treasury securities gets reserves...

In a world where semantics can be so important, i would submit that the above statement is a factual misrepresentation or at least a partial representation of facts. 

Since GFC, QE was effectively carried out with non-bank private participants (about 95% of open-market operations). These transactions do end up with a commercial bank balance sheet entry of a new reserve account held at the Fed. But, because of the non-bank participation. there are new balance sheet entries at the commercial bank level, a new asset of the bank ie money as an asset and a new liability ie deposit of the non-bank participant as a liability. This feature explains a lot the rise of the uninsured deposits that occurred especially after Covid.

All that to say that 'we' ended up with private participants becoming owners of zero-earning deposits looking to chase yields in related and other investing asset classes, contributing to lowering yields elsewhere and contributing to asset inflation (and also although hard to quantify to main street inflation through the wealth effect).

Just something to consider if sustainability becomes an issue or if tightening becomes part of the picture?

[wabuffo]

All that to say that 'we' ended up with private participants becoming owners of zero-earning deposits looking to chase yields in related and other investing asset classes, contributing to lowering yields elsewhere and contributing to asset inflation (and also although hard to quantify to main street inflation through the wealth effect).

 

This discussion brings a tear to my eye as I watch COBF participants become savvy monetary plumbers....

 

I would add that 2021 also brought the US Treasury into the equation because of the debt ceiling toggling back on on August 1st of that year.  It had to get back to its TGA balance extant at the time of the suspension of the debt ceiling in 2019, which was $100b or so.   The issue was that the US Treasury's TGA balance stood at ~$1.7t in Feb 2021.

 

For the rest of 2021, the US Treasury spent down its TGA balance while keeping net new issuance of Treasury securities to an absolute minimum (ie creating deposits/reserves and basically not withdrawing them with securities for the rest of 2021 as the debt ceiling battle stretched into Dec with a minor bump up in Oct).   Add in the Fed continuing with its monstrous QE balance sheet expansion, and interest rates were threatening to go negative by Apr-May of that year.

 

Which is why the Fed out of necessity had to open the spigots on its reverse repo operation and let it grow to over $2t.

 

Bill

[TwoCitiesCapital]

On 11/1/2023 at 9:04 AM, gfp said:

Aaaannnd the 30 year yield is back in the 4's!  Will the 2 year yield also lose the 5-handle?  I will say it again: There is a lot of demand for US treasury securities with a 5 handle across the entire yield curve.

 

10-year below 4.7% after the October hysteria if it surpassing 5% to the upside.

[gfp]

The seasonal fake-out has concluded!  Long live the September effect

 

 

[NnnnotSoSmart]

More Oaktree commentary on state of credit markets:

 

Full Return World with Howard Marks and Armen Panossian

 

https://www.oaktreecapital.com/insights/insight-podcast/market-commentary/full-return-world-with-howard-marks-and-armen-panossian

Edited November 3, 2023 by NnnnotSoSmart

[Gregmal]

I got a few more pupilbonds today just for shits. Meta 5.75 2063s

 

Imagine at some point they’ll be a free carry spread vs margin rates at IB

[thepupil]

58 minutes ago, Gregmal said:

I got a few more pupilbonds today just for shits. Meta 5.75 2063s

 

Imagine at some point they’ll be a free carry spread vs margin rates at IB

 

interesting, I peaked at 45% ish long bonds and sold down to about 40% today, been a ripper of a rally in spreads and rates.... just lightening up a bit. 

 

6.2%--->6.6%--->6.2% in span of like 2 weeks for Bloomberg 10+ Corporates (VCLT Benchmark)

 

[UK]

https://www.wsj.com/finance/the-big-problem-with-government-debt-isnt-what-you-think-b876c198?mod=hp_minor_pos21

[ValueMaven]

First Citizens has two interesting series A and C preferreds which are yielding about 7%, and trading about -20% below their par value of $25.  Fairly interesting and safe option imho.  

[mattee2264]

There is a bit of circular reasoning going on.

 

Fed backing off a bit because it sees long bonds doing the rest of the tightening. Long bonds yields promptly slide sparking a rally. 

[gfp]

3 hours ago, UK said:

https://www.wsj.com/finance/the-big-problem-with-government-debt-isnt-what-you-think-b876c198?mod=hp_minor_pos21

 

I'm curious what people think the author is saying in this article.

[UK]

6 minutes ago, gfp said:

 

I'm curious what people think the author is saying in this article.

 

'Nevertheless, the takeaway applies everywhere: The private sector may not be able to provide as much bond-market liquidity as officials’ fiscal plans imply.'

 

and 

 

'Eventually, central banks would buy bonds again. But backstops kick in only after severe market disruptions.'