Bonds!

[Hektor]

On 5/30/2025 at 10:48 AM, gfp said:

 

There is nothing special about 5% but it is the number I use for my trade.  I think there is a wall of demand that comes in when treasury securities are offering over 5%.  Interest rates are going down across the globe and the days of 5% t-bills are long gone.  You cannot get 5% on government paper in very many places.

 

@gfp, I came across the following article, which states that given the large deficit, issuing large number of treasuries is inevitable, and this will lead to higher yields. My understanding of the thesis for ZROZ et al is that treasury yields would be lower in the future. How do you feel about this large issuance of treasuries leading to higher yields and it's impact of ZROZ etc.

 

https://www.wsj.com/finance/federal-government-debt-deficit-charts-3289eff8

 

 

[gfp]

6 minutes ago, Hektor said:

@gfp, I came across the following article, which states that given the large deficit, issuing large number of treasuries is inevitable, and this will lead to higher yields. My understanding of the thesis for ZROZ et al is that treasury yields would be lower in the future. How do you feel about this large issuance of treasuries leading to higher yields and it's impact of ZROZ etc.

 

https://www.wsj.com/finance/federal-government-debt-deficit-charts-3289eff8

 

 

 

Listen, I don't think anybody should "follow" me into any trades I am making.  Everyone needs to come to their own conclusion.  The article you linked, like the 10 identical articles that have been in every publication recently is the consensus view mixed with a very remedial explanation of government "borrowing."

[Hektor]

6 minutes ago, gfp said:

 

Listen, I don't think anybody should "follow" me into any trades I am making.  Everyone needs to come to their own conclusion.  The article you linked, like the 10 identical articles that have been in every publication recently is the consensus view mixed with a very remedial explanation of government "borrowing."

I am not coatailing you or anyone into anything :). I was curious about the long dated debt. I felt this one was projecting higher rates (than lower) and thus contrary to my understanding of the ZROZ thesis.  

[gfp]

17 minutes ago, Hektor said:

I am not coatailing you or anyone into anything :). I was curious about the long dated debt. I felt this one was projecting higher rates (than lower) and thus contrary to my understanding of the ZROZ thesis.  

 

Yes - find me someone who is not projecting higher rates.

 

The government doesn't need to "borrow" through the treasury market at all.  They certainly don't need to borrow at 20 or 30 years if they don't feel like it.  If demand is for a small amount of long dated paper they can issue less.

 

My thesis has been that there is actually a lot of demand for 20 year government paper yielding over 5% and, so far, every time it has been available it has found a wave of buyers pushing the yield back below 5%.

 

Consensus is very loud right now.  Everyone is in agreement that the bond vigilantes are coming to push up yields on bonds.  Maybe everyone is right, you never know

[Hektor]

Thanks @gfp

 

1 hour ago, gfp said:

My thesis has been that there is actually a lot of demand for 20 year government paper yielding over 5% and, so far, every time it has been available it has found a wave of buyers pushing the yield back below 5%.

I have noticed this as well (from the recent time when I started tracking the ZROZ). The yield does not stay above 5 for much time. 

 

1 hour ago, gfp said:

The government doesn't need to "borrow" through the treasury market at all.

How else can they roll over the ones that are maturing. (You can send me some place to read up and I will be happy to do my homework )

 

 

[Dalal.Holdings]

 

 

The USD devaluation continues. Enjoy your 4.9% yield

[Santayana]

Not sure how meaningful a 1 month chart is when it comes to currencies.  Looking over the long term it just looks like mean reversion.a  I've been hearing that debt will cause a collapse of the dollar for most of my adult life, maybe this time they really mean it?

[Dalal.Holdings]

1 minute ago, Santayana said:

Not sure how meaningful a 1 month chart is when it comes to currencies.  Looking over the long term it just looks like mean reversion.a  I've been hearing that debt will cause a collapse of the dollar for most of my adult life, maybe this time they really mean it?

 

It might not mean much to the avg bloke, but if you're buying 20, 30 year bonds with fixed USD payouts, it might mean a lot

[thepupil]

7 minutes ago, Dalal.Holdings said:

 

It might not mean much to the avg bloke, but if you're buying 20, 30 year bonds with fixed USD payouts, it might mean a lot

 

YTD TLT is down about 9.5% in EUR terms (1 yr is 8.6%, 3 yr is 8.2%/yr, 5 yr is -9.8%/yr). YTD TLT is flat in USD terms so the loss is mostly USD depreciation whereas prior years were driven by the duration sell-off. 

 

I think owning 2-15% or so in LT USD bonds, particularly when short of a LT USD mortgage is a completely reasonable thing to do. The USD depreciating / yields blowing out jsut decreases your future defeasance cost and you get decent coupons now / deflation / disaster hedging elements. 

 

3% - 15% of one's portfolio losing 10% in EUR terms is not a particularly terrible thing to have occurred, but no denying the USD is selling off / may continue to do so (it still seems pretty overvalued to me). 

Edited June 12, 2025 by thepupil

[thepupil]

YTD SPY is also down -7.3% in EUR terms...so it really doesn't have much to do w/ TLT.

[Eldad]

Got some 3 month US bills for over 4.4 this morning Woo hoo. 

[gfp]

I noticed the financial newspapers took a break from all writing the same article about treasury supply being unsustainable to write a few articles about “shortages of Tbills”. 
 

stay classy folks!

[backtothebeach]

On 5/22/2025 at 3:44 PM, wabuffo said:

7% of GDP is 7% of GDP and is largely unprecedented in peacetime with full employment

 

Its now running at 5.4% of GDP  (US GDP = $30.5T).  A booming economy is bring it down because of rising tax receipts.

 

But who's counting, yah?

 

 

@wabuffo, thanks for your expertise. So the "Real deficit/surplus" is the reported one, adjusted by the "By other means" number. Would tariff income be part of the "By other means"?

 

What is the formula for your crosscheck in the final column?

 

The latest number is May 2025; the trailing 12-month deficit increased by about $59B.

 

I downloaded the data from https://www.fiscal.treasury.gov/reports-statements/mts/current.html to replicate your table. Love being able to go the data source and not listen to talking heads with whatever agenda they have.

 

 

[wabuffo]

Would tariff income be part of the "By other means"?

 

No - tariff income comes in as receipts going into the TGA.   Think of "By Other Means" as the reconciliation between cash (inflows/outflows to/from TGA) and "GAAP" (non-TGA adjustments made to the Monthly Treasury Report that don't flow thru the TGA).

 

For example, in Sept 2022, the Biden Administration tried to do a large blanket forgiveness of student loans.  That created a Monthly deficit of $429B - but that included a $373B adjustment to TGA in By Other Means.   The forgiveness didn't affect any inflows/outflows in the TGA that month, but was, instead, a "writedown" of Federal govt assets (ie student loan balances).   So the adjustment was more of a GAAP-y driven accounting adjustment than a true cash flow.

 

Of course, that didn't fly and a year later - in August 2023, the Monthly Treasury report showed a monthly surplus of $89B of which $377B was in By Other Means as a "write-up of Federal govt assets" (ie, student loans).  In other words, that previous writedown was reversed creating an accounting surplus but not a cash flow surplus for that month.

 

For me, what counts is the deficit/surplus as measured by the cash accounting version which is the Deficit as Reported in the MTS less the By Other Means Column.  This is basically the change in the balance of the TGA for the month (ex debt transactions).   

 

That's what the X-Check column does.  It calculates the "real deficit" (Deficit as Reported - By Other Means) and adds the Public Borrow as a check that this X-Check calculation foots with the Change in the TGA balance for the month (which is called Change in Operating Cash in the MTS).  Of course, its not really "cash" its a change in reserve balances in the TGA.

 

Hope that helps,

Bill

Edited July 5, 2025 by wabuffo

[backtothebeach]

Helps a lot. Thank you!

[gfp]

2 hours ago, wabuffo said:

Would tariff income be part of the "By other means"?

 

No - tariff income comes in as receipts going into the TGA.   Think of "By Other Means" as the reconciliation between cash (inflows/outflows to/from TGA) and "GAAP" (non-TGA adjustments made to the Monthly Treasury Report that don't flow thru the TGA).

 

For example, in Sept 2022, the Biden Administration tried to do a large blanket forgiveness of student loans.  That created a Monthly deficit of $429B - but that included a $373B adjustment to TGA in By Other Means.   The forgiveness didn't affect any inflows/outflows in the TGA that month, but was, instead, a "writedown" of Federal govt assets (ie student loan balances).   So the adjustment was more of a GAAP-y driven accounting adjustment than a true cash flow.

 

Of course, that didn't fly and a year later - in August 2023, the Monthly Treasury report showed a monthly surplus of $89B of which $377B was in By Other Means as a "write-up of Federal govt assets" (ie, student loans).  In other words, that previous writedown was reversed creating an accounting surplus but not a cash flow surplus for that month.

 

For me, what counts is the deficit/surplus as measured by the cash accounting version which is the Deficit as Reported in the MTS less the By Other Means Column.  This is basically the change in the balance of the TGA for the month (ex debt transactions).   

 

That's what the X-Check column does.  It calculates the "real deficit" (Deficit as Reported - By Other Means) and adds the Public Borrow as a check that this X-Check calculation foots with the Change in the TGA balance for the month (which is called Change in Operating Cash in the MTS).  Of course, its not really "cash" its a change in reserve balances in the TGA.

 

Hope that helps,

Bill

 

 

Thanks Bill, another great post.  I have a question for you.

 

In normal times (as in not during some debt ceiling-related distortion), since the Treasury department usually maintains some significant positive balance in the Treasury General Account, is it true in principle that the deficit spending (government reserve balances becoming private sector reserve balances) pre-funds the private sector "cash" that is used to purchase the treasury securities that "fund" those deficits?

 

My contention is that as soon as some of the TGA reserve balance is deficit-spent into the private sector, it becomes the IOU of the government and then some of that newly created government IOU (private sector reserve balance) is swapped for a treasury security.

 

Private sector owned bank reserves pay a high rate of interest currently (4.4%), so "borrowing" actually saves significant money, under present conditions, if the treasury elects to "borrow" for 2-5 years.

[Spekulatius]

On 6/4/2025 at 11:38 AM, TwoCitiesCapital said:

This is why it's important to be diversified. Sometimes bonds hedge.

It’s like everything else. Sometimes it works, sometimes it doesn’t. Bond suck if interest rates are record low and they almost yield nothing . Who would have thought?

 

Japanese treasury bond yield are a case in point- the 30 years went from 0.6% to almost 3% now:

 

[wabuffo]

My contention is that as soon as some of the TGA reserve balance is deficit-spent into the private sector, it becomes the IOU of the government and then some of that newly created government IOU (private sector reserve balance) is swapped for a treasury security.

 

You have it exactly right.   The Treasury spending moves reserves from the TGA to the banking sector (in terms of Federal Reserve liabilities).  This addition of reserves to the banking sector "lights up" corresponding bank deposits (so bank asset = reserve, bank liability = deposit).   But for the private sector recipient of that deposit (say, a Social Security monthly direct deposit), it is an unencumbered financial asset.  i.e. - MONEY.

 

But the US Treasury spending can't be allowed to just pile up reserves in the banking sector, so Treasury security issuance removes those reserves (and corresponding deposits) with a T-bill/note/bond dollar-for-dollar.   Here's the accounting debits-and-credits view of 1) The US Treasury spending $10m, and then 2) The US Treasury with the follow-on security issuance (bond).

 

 

That's why I always say Treasury security issuance is always "pre-funded".  There's no "crowding out" of private sector wealth or savings -- especially now that the operating regime is a floating exchange mechanism (rather than fixed-exchange).  Deficit spending adds to that wealth or savings and then transforms the composition of that wealth/savings.   In fact, the cumulative deficit spending over time = the net Treasury security balance outstanding in private sector hands.  

 

Private sector owned bank reserves pay a high rate of interest currently (4.4%), so "borrowing" actually saves significant money, under present conditions, if the treasury elects to "borrow" for 2-5 years.

 

I tend to consolidate the Treasury and the central bank one one side (govt sector) and the banks/businesses/individuals on the other side (private sector).   Your point is ok - but the reality is that the Fed's QE "unsaved" money because it took long-term fixed rate issuance by the US Treasury at 2% or lower during the pandemic and converted it to short-term variable rate borrowing by the Fed now at 4%.   That's why there's a lot of nonsense around the terms "Quantitative Easing" and "Fiscal Dominance".  

 

Bill

Edited July 5, 2025 by wabuffo

[TwoCitiesCapital]

57 minutes ago, Spekulatius said:

It’s like everything else. Sometimes it works, sometimes it doesn’t. Bond suck if interest rates are record low and they almost yield nothing . Who would have thought?

 

Japanese treasury bond yield are a case in point- the 30 years went from 0.6% to almost 3% now:

 

 

Of course! Which is why I said sometimes. Intermediate US bonds sucked in 2022, but short term bonds were only down 3-4% while equities were down double digits. Gold was flat.

 

Intermediate bonds did fine this year in the April drawdown. Gold did even better. 

 

You have 3-5 of these exposures that aren't positively correlated and there's typically something you can do without being forced to sell at a loss. But as with anything, price you pay matters.

 

And paying such a high price to get 0% yield means your forward return is likely terrible regardless of the environment. 

Edited July 5, 2025 by TwoCitiesCapital

[Spekulatius]

18 minutes ago, TwoCitiesCapital said:

 

Of course! Which is why I said sometimes. Intermediate US bonds sucked in 2022, but short term bonds were only down 3-4% while equities were down double digits. Gold was flat.

 

Intermediate bonds did fine this year in the April drawdown. Gold did even better. 

 

You have 3-5 of these exposures that aren't positively correlated and there's typically something you can do without being forced to sell at a loss. But as with anything, price you pay matters.

 

And paying such a high price to get 0% yield means your forward return is likely terrible regardless of the environment. 

Agreed. my point is that sometimes adding a new asset class does not reduce risk.p, if the asset class you are adding is overvalued in the history context,

 

If you had no tech exposure in 2000 and felt undiversified, then adding tech exposure back then increased your risk. You always have to use common sense.

 

I think Gold right now feels a bit overbought too, but that is a bit harder to handicap,

[gfp]

Didn't surprise Bill !

 

 

[Spekulatius]

According to trading economics the consensus deficit for June was -$11B. May was higher than consensus . I think the positive June was due to changes in payment timing. If so, expect a large deficit in July 2025 - May for example was higher than consensus. And yes, tariffs play a role here as well, as they were higher than expected.

 

 

[wabuffo]

According to trading economics the consensus deficit for June was -$11B. May was higher than consensus . I think the positive June was due to changes in payment timing.

 

No.

 

The $27B surplus was AFTER timing adjustments and other non-cash adjustments were made.  The actual "cash" surplus based on the change in the TGA (x-debt issuance) was $102.3B !!!   Those adjustments are in "By Other Means".  

 

Another way to get to the actual, unadjusted surplus number is take the increase in operating cash (TGA balance) of $105.5B and subtract the "borrowing from the public" of $3.2B

 

Bottom line - receipts are up and staying up in 2025.  Mostly due to continued payroll taxes flowing into the US Treasury + strong quarterly individual estimated taxes and corporate taxes paid in June.  Yeah - duties helped but they weren't as big a factor and are drawing too much of the headlines, IMHO in terms of reasons for the unusually large June surplus.

 

[rogermunibond]

@wabuffo  that's great for explaining this.

 

Have you posted somewhere onlline a comprehensive take on the Treasury workings from the viewpoint of MMT?

 

Or is there someone you can recommend who's posted on this?

[wabuffo]

Or is there someone you can recommend who's posted on this?

 

Google Warren Mosler or L. Randall Wray and track down their writing or books.   As long as you ignore their policy prescriptions and just focus on their description of the monetary plumbing, you're good.

 

Also good, though not an MMT-er per se, is anything by Zoltan Pozsar.  He's gone to an expensive subscription model, but his stuff when he published Global Money Notes as part of Credit Suisse are excellent deep dives into the US monetary plumbing as well.  They are excruciatingly detailed but I learned a lot after reading them 3 or 4 times each.  I think there are a few dozen issues and are floating around the internet.

 

Bill