Bill Gross is looking more and more like the most confused and frustrated guy in the investment business. Remember his ridiculous "tweet" back in late June when he said to the world, "Who will buy them now?" He was referring of course, to U.S. Treasuries and fretting publicly (or hoping, since he is purportedly short the US bond market) that there won't be anyone around to buy bonds now that the Fed is ending its Quantitative Easing program. When he tweeted that, yields on 10yr Treasuries were 3.16%. Today the yield is 2.89% and guess what? No Fed.
Gross still doesn't understand that government spending CREATES the funds that are used to buy Treasuries and, therefore, there is NEVER a lack of funds (or buyers) for these securities. If Gross ever "gets it" it would be nice if he explained it to another misinformed clown, Rick Santelli of CNBC, who rants about this constantly. After nearly 20 years on the air covering the bond markets and screaming about "supply" and "lack of buyers" before every single auction, you'd think he'd catch on by now.
The sad part is that both these guys have influence on policy. We are all affected in some way by their ignorance.
Ignorance or just the character script in some grand play?
ReplyDeleteFed is still supporting the bond market, not to mention just mainting the size of its balance sheet with all those treasuries on it helps to keep rates lower than they otherwise would be absent all the QE.
ReplyDeleteKeep in mind the U.S benefits from being the world reserve currency as problems in the Eurozone may send traders into the U.S bond market as a flight to saftey. We may not enjoy that luxur forever though.
Check it out:
http://www.bloomberg.com/news/2011-06-27/fed-seen-buying-25-billion-a-month-in-treasuries-after-qe2-comes-to-end.html
Mike,
ReplyDeleteLook what is happening to News Corps tabloid properties over in the UK: This is what can happen when the focus remains solely on the sensational.
If due to this tabloid debacle over in the UK, there is a new corporate focus back onto hard news and objective/skeptical reporting, company wide, YOU HAVE A GREAT ANGLE FOR NEIL wrt reporting on the economy... for instance this Gross situation IS A SCANDAL.... that someone in his position comes out "tweeting" like he is a junior member of the Debt Doomsday Club. This has been hard for me to understand from Gross.
Not even Jimmy Rogers has been so reckless in his statements around the end of QE2 and Treasury issuance...
Resp,
Can someone please explain to me what people think is happening when they say the Fed is "supporting the bond market" and "purchasing govt debt?"
ReplyDeleteRegarding the latter- that's illegal, right? The bonds are issued to primary dealers and the private section, only after which can they be sold to the Fed. Are these people implying that if the Fed wasn't there to buy them after, people wouldn't be buying the bonds because they couldn't flip them to the Fed?
I still don't understand that logic. Why wouldn't you be willing to buy the bonds if the Fed weren't there; in fact, isn't the Fed always there, performing OMOs on a daily basis? Is it because people think they can make a profit by selling to the Fed at a higher price? I still don't quite understand that though... if the market thinks the Fed will continue to bid interest rates down, won't that be reflected in the primary auction rates already?
At any rate, like Mike says, tsy bonds seem to be free money since the govt supplies the funds to buy them. So why would anyone not buy them? Someone might say "inflation," but if the market expected inflation, would they not demand higher rates in the auctions, or is that somehow controlled by the Fed too through Primary Dealers?
wh,
ReplyDeletethe Fed is NOT bidding up bonds, to the contrary.
Today, the Treasury did their first post-QE2 3-year note auction that went off AT THE LOWEST INTEREST RATE OF ANY 3-YEAR AUCTION SINCE THE BEGINNING OF THE QE2.
I'm gathering the data from the treasury site for a blog soon.
the Fed has been dropping it's bids in order to "get a good price for the taxpayers" or some such nonsense and as the biggest buyer, has been leading bond prices DOWN and hence rates UP... stand by for the data..
Resp,
wh,
ReplyDeleteIt's like this: when the Fed buys, bond prices go down, and when they stop buying, bond prices go up... this is what the data says.
Resp,
Matt,
ReplyDeleteToday, the Treasury did their first post-QE2 3-year note auction that went off AT THE LOWEST INTEREST RATE OF ANY 3-YEAR AUCTION SINCE THE BEGINNING OF THE QE2.
THANK YOU!!!!
And, yes, this is what happens when you focus on the sensational. i.e. News Corp.
Bill looks even more ignorant after Reuters exposed that the Chinese love treasuries so much, they not only buy them directly, but also use guaranteed bidders to buy on their behalf, obfuscating the real amount of treasuries they have in hand.
ReplyDeletehttp://www.youtube.com/watch?v=rm2M6vhDREc