Today is the last day for the Fed's open market operations known as "QE2", so Gross apparently took this opportunity to re-emphasize his current position that no one will buy Treasury bonds once the Fed stops.
Here's a link to his "tweet" and I quote: "Who will buy them now?" (Ed.: Unbelievable!)
I think bonds are actually going to rally once the Fed exits this marketplace, as they have been acting as a deep-pocketed scale-down buyer, in a market where there has been much speculative selling.
12 comments:
The best news in the world would be that no one wants to buy tsys. Then we could get rid of the subsidy for the risk-free parking place, which is operationally unnecessary now that the Fed is paying a support rate on excess reserves anyway. So long, bond vigilantes, don't let the door hit you on the way out.
Tom,
I was looking at the ITA flow reports and it looks like it shows a large build up in foreign owned bank deposits in first quarter from the trade imbalance(that probably continued into the second quarter here but that report is not out yet).
Since the Treasury market is a Dealer market, the Fed gets to step in front of the line to buy treasuries (and have been buying ALL net new issuance, $110B/mo) and more or less shuts out what probably would have been other buyers who have no where else to go but bank accounts.
By this time there is probably 100s of billions (BEA reported increase of over $300B just for Q1) of bank deposits previously shut out of the Treasury market by QE2, some of which will probably start to flow into Treasuries once the Fed steps out of the way to get current deposit holders a bit more interest than they are getting at the bank...
we'll see, there may be a bit more spec selling before a bottom is put in and also the Fed will still be in there mucking it up a bit as they have stated that they will continue to roll over redeemed securities back into treasuries to maintain the size of their balance sheet but no where near their recent rate of buying under QE2...
Resp,
If the Fed doesn't like what is happening (rising yields) then it will bring on QE3, setting price instead of quantity to manage the yield curve. If that happens, together with paying a support rate, the game is up for the bond vigilantes, and it will be abundantly obvious that the interest on the "national debt" is a corporate subsidy, as MMT'ers have been saying.
Maybe my novice understanding of the monetary system and bonds markets will show but I do not see how large bond holders have a choice.
Whether funds where many small investors are pooling their money for a safe return, or nations/large entities selling goods and services to the US and receiving dollars in return, the bond holders are large parties WITH dollars and they WANT a safe place to put them. If they refused to hold treasuries and continue to want a safe place to put the money, where are they going to put those dollars? And if the current bond holders decided to put it somewhere else, it is still in the net private/foreign sector, no? For example, if they sell bonds, they get dollars back. If they then trade the US currency for another country’s currency, or shifted it to riskier assets, then the seller of that other currency or investment vehicle has the dollars, so the net private/foreign sector still has the same amount of dollars – they just changed hands to/from different entities. So for the entire private/foreign sector, the choice seems to be either sit on currency earning no interest and still having the same currency risk or place it in treasuries bonds – in other words, no choice.
Matt,
Great point and evidence on the pent-up demand for treasuries.
Crake,
Another issue is the debt ceiling. Which more or less prevents net new issuance since it was hit a bit over a month ago now.. lots of cross currents....
the Fed has been buying in the 5-6 year maturity range, the yields there are around 2% which may be more than those foreign holders can get in a bank account with no risk of bank failure... so maybe these non-govt/foreign entities will step up in these maturities as new buyers...this should be interesting... Resp,
Hey, I wonder if what you reported (no treasuries for others to buy but Fed), is what had the Chinese mad about QE. Warren Mosler wrote a few weeks ago that the Chinese were very upset with QE (the Chinese made public comments along those lines) and were buying Euro based bonds in protest to send a warning shot across the Fed’s bow. But instead of that act being a warning shot, were the Chinese forced to go that route because the Euro bonds were the next safest place to park their dollars and they had no choice with the Fed taking up all the new issues of treasuries? Therefore, the protest by Chinese were because they could not buy treasuries pure and simple. In other words, the Chinese’s desire to buy treasuries is so strong, they had hissy fits when there were no treasuries to buy. And so many pundits think the Chinese will quit buying them – ha ha. Also, if the Chinese are/were upset they could not buy treasuries, how will they react to the debt ceiling if it cuts off new supplies. And yet if the Chinese vocally protest, the mainstream will interrupt it wrong again incorrectly thinking the protest signifies China not wanting treasuries.
Why do the masses always get things completely backwards???????
Crake: Excellent point.
Crake,
Looking at what T-bills yield (1 yr at 0.18% today), its a wonder China doesn't just leave their money with the Fed to collect their 0.25% IOR.
If they want a higher return, Vanguard has plenty of index funds they can dump cash into.
Would deposits, like the Chinese trade accounts deposits, receive Fed rates? (What are the rules on what entities get those rates?) And if they did and chose to do that, and if the Fed did not want that to happen, the Fed could cut that rate to 0% right, or even negative (I think it did that during a period during the Great Depression charging banks to keep their deposits.)
Matt Franko wrote:
"Remember last year when he said that Treasuries were going to collapse once the Fed stopped their QE 2 program? And his now infamous tweet, “Who’s going to buy them now?” which exposed his utter lack of understanding of how rates are set."
Well, how are rates set? Why didn't rates rise when the Fed stopped QE2?
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