Bonds!

[KJP]

On 12/10/2025 at 10:44 AM, changegonnacome said:

 

short end rates have come down and are likely to come down in the future but long end rates have and will remain stubbornly high 

 

A good recipe for bank profits.  @MMM20's HIFS thesis in a nutshell.

[benchmark]

1 hour ago, wabuffo said:

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

Is there a good introduction (books or blogs) on the monetary policy and mechanisms that Fed can employ? 

[hasilp89]

13 hours ago, wabuffo said:

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.  

Hmm wouldnt the point be to keep future interest costs low?
Are you ultimately saying the only buyer at 1% was the fed? 

[wabuffo]

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

[rogermunibond]

Trump interviewing Chris Waller on Weds.  Has Wall Street gotten their pick?  Still an underdog on Polymarket.

[TwoCitiesCapital]

https://www.federalreserve.gov/newsevents/speech/powell20260111a.htm

 

 

Trump threatening criminal action against Jerome Powell b/c rates aren't where he wants them

[UK]

4 hours ago, TwoCitiesCapital said:

https://www.federalreserve.gov/newsevents/speech/powell20260111a.htm

 

 

Trump threatening criminal action against Jerome Powell b/c rates aren't where he wants them

 

Going after sovereign countries is one thing:), but messing with FED independance...here I think he is out of the line and wrong! After such a year for USD already, this stuff really scares me.

[Spooky]

[Spooky]

Guys, does the Fed really matter as much as most people think anyway? The executive branch / administration already has control of the Treasury which is the 800 pound gorilla in the room.

[TwoCitiesCapital]

1 hour ago, Spooky said:

Guys, does the Fed really matter as much as most people think anyway? The executive branch / administration already has control of the Treasury which is the 800 pound gorilla in the room.

 

Both matter. The Treasury largely wouldn't be able to do what it does without the Fed and the banks being uneconomic buyers of its bonds. 

 

Have an even less independent Fed just furthers the shenanigans of issuance of paper to extract real value today and inflate away tomorrow. 

Edited January 12 by TwoCitiesCapital

[wabuffo]

Both matter. The Treasury largely wouldn't be able to do what it does without the Fed and the banks being uneconomic buyers of its bonds. 

 

Not true.  The Federal government operated with a US Treasury but without the Federal Reserve for many years.  Canada went through the Great Depression without a central bank and without any bank failures, either.

 

The only important function the Fed performs is to clear transfers between banks & the US Federal government via Fedwire.  That can, and has, been handled by private sector clearing houses established by the banks in the past.   

 

Bill

Edited January 12 by wabuffo

[gfp]

1 hour ago, Spooky said:

Guys, does the Fed really matter as much as most people think anyway? The executive branch / administration already has control of the Treasury which is the 800 pound gorilla in the room.

 

The Federal Reserve is way less important / powerful / useful / effective than most people think.  They are often more effective at accomplishing the opposite of their stated goal.

[TwoCitiesCapital]

8 minutes ago, wabuffo said:

Both matter. The Treasury largely wouldn't be able to do what it does without the Fed and the banks being uneconomic buyers of its bonds. 

 

Not true.  The Federal government operated with a US Treasury but without the Federal Reserve for many years. 

 

 

Not with trillions of deficits they didn't. The Fed literally prints bank reserves to buy treasuries when things go haywire which artificially keeps a lid on interest rates. 

 

8 minutes ago, wabuffo said:

 

The only important function the Fed performs is to clear transfers between banks & the US Federal government via Fedwire.  That can, and has, been handled by private sector clearing houses established by the banks in the past.   

 

I really don't believe this is the case when every investor in the world hangs on their every word and they're used to bail out the economy again, and again, and again. 

[wabuffo]

The Fed literally prints bank reserves to buy treasuries when things go haywire which artificially keeps a lid on interest rates. 

 

The US Treasury pre-funds its security issuance with its deficit spending.  That's why the two numbers basically equal each other (cumulative deficit since day 1 = total private sector holdings of US Treasury securities).

 

If the US Treasury did not issue securities but kept deficit spending, interest rates would fall to zero & eventually go into negative territory.

 

I feel like this is covered ground between us so no need to keep debating this point.

 

Bill

Edited January 12 by wabuffo

[TwoCitiesCapital]

Interest rates go to zero? 

 

As has been the experience of every government who printed money to spend when they couldnt sell bonds?  

 

Being the reserve currency delays the end result - it doesn't change it - because being a reserve currency isn't a permanent state of affairs as demonstrated by every reserve currency before us

 

If all Trump had to do to get lower on interest rates was to spend like a drunken sailor, well, he's already doing that and so did Biden as did Trump before him and interest rates rose over those periods of time. 

Edited January 12 by TwoCitiesCapital

[gfp]

8 minutes ago, TwoCitiesCapital said:

Interest rates go to zero? 

 

As has been the experience of every government who printed money to spend when they couldnt sell bonds?  

 

Being the reserve currency delays the end result - it doesn't change it - because being a reserve currency isn't a permanent state of affairs as demonstrated by every reserve currency before us

 

If you government "deficit" spend (create reserve deposits in recipients bank accounts) without draining any of those reserves, you will have an ever increasing excess of reserves.  Removing excess reserves is the Federal Reserve's tool for overnight interest rate targeting.

 

By selling treasury securities, the government is draining the excess reserves out of the overnight interbank market and into "bonds."

 

Warren Mosler would probably say the natural rate of interest, at least overnight, secured, between large banks, is zero.

Edited January 12 by gfp

[TwoCitiesCapital]

16 minutes ago, gfp said:

 

If you government "deficit" spend (create reserve deposits in recipients bank accounts) without draining any of those reserves, you will have an ever increasing excess of reserves.  Removing excess reserves is the Federal Reserve's tool for overnight interest rate targeting.

 

By selling treasury securities, the government is draining the excess reserves out of the overnight interbank market and into "bonds."

 

Warren Mosler would probably say the natural rate of interest, at least overnight, secured, between large banks, is zero.

He's talking about a scenario without a Federal Reserve. So there is no removal of the excess reserves. 

 

I've already pointed out the Fed is buying them. 

[Blake Hampton]

Old news:

 

WSJ: Fed to Resume Net Asset Purchases With $40 Billion in Securities This Month

 

So the Fed is doing "QE" again to "minimize repo-market strains," Trump is causing geopolitical chaos, and the size of outstanding Treasury basis trades are at an all time high:

 

Seems healthy to me.

[gfp]

8 minutes ago, Blake Hampton said:

Old news:

 

WSJ: Fed to Resume Net Asset Purchases With $40 Billion in Securities This Month

 

So the Fed is doing "QE" again to "minimize repo-market strains," Trump is causing geopolitical chaos, and the size of outstanding Treasury basis trades are at an all time high:

 

Seems healthy to me.

 

 

Welcome back Blake!  I see you haven't changed a bit on your vacation

[cubsfan]

Good to see you back Blake.

[gfp]

And before someone flames me for including Truflation - just forget about it

 

[TwoCitiesCapital]

And yet 10-year treasuries yield 4.3% and 30-year mortgages still have a 5-handle. Bonds are crazy good value right now even if you expect inflation to pick up a little this decade like I do. 

[UK]

9 hours ago, TwoCitiesCapital said:

And yet 10-year treasuries yield 4.3% and 30-year mortgages still have a 5-handle. Bonds are crazy good value right now even if you expect inflation to pick up a little this decade like I do. 

I know we had simillar discussion before and I do not know much about trading in bonds, but despite the owerall market, I think I would still rather borrow at 4.3 percent to invest in equities, than invest in 10 year bonds at this rate, for the next decade

 

Edited January 23 by UK

[TwoCitiesCapital]

17 minutes ago, UK said:

I know we had simillar discussion before and I do not know much about trading in bonds, but despite the owerall market, I think I would still rather borrow at 4.3 percent to invest in equities, than invest in 10 year bonds at this rate, for the next decade

 

 

You don't have to hold them to maturity

 

And borrowing at 4.3% works until markets go down 20% and you could've made 7-10% instead. 

 

Market returns are uncertain and bonds provide some level of certainty - having short term bonds is what allowed me to buy Fairfax this morning when it dumped -6%. 

Edited January 23 by TwoCitiesCapital

[UK]

27 minutes ago, TwoCitiesCapital said:

 

You don't have to hold them to maturity

 

And borrowing at 4.3% works until markets go down 20% and you could've made 7-10% instead. 

 

Market returns are uncertain and bonds provide some level of certainty - having short term bonds is what allowed me to buy Fairfax this morning when it dumped -6%. 

Yes, I understand:). And I agree with you re short term flexibiliy, but still, and I think this is personal, because of experience with inflation (but also WB kind of confirming/aproving this view), I would rather just hold cash vs anything longer than 1 year, if it is not yielding at least 8-10 per cent. But I admit this could not be optimal, because I already watched people more smarter and nimble than me on this board, proving this could be handled better:)

 

Edited January 23 by UK