Chart below showing the 10-yr UST rate over the 6 months of US govt Treasury operations under the so-called "debt ceiling!" and to present.
You can see at Point A, which is the recent high in the yield, the date is March 14th which is the last day Treasury could net issue UST securities before the "debt ceiling!" was hit the next day March 15th.
Then at Point B, which is the recent bottom in the yield, the date is September 8th, which is the recent day the "debt ceiling!" was again suspended until December 8th when Trump made his deal with Chuck and Nancy and f-ed Mitch and Paul.
These are top and bottom ticks to the day... checkmate .... sorry....
Rote textbook MMT 101: "US Treasury issuance is an interest rate maintenance operation..." or "US Treasury issuance is a reserve drain so interest rates don't collapse..."
You can see that during the 6 months at the ceiling, as US Treasury had no ability to drain new reserve assets being created via the Treasury 'extraordinary measures', the 10 year rate was collapsing and, if given a bit more time, would have eventually converged with the current policy rate supported via the IOR at 1.25%.
So what we want to see now currently is a continuation in this uptrend in the rates out the curve until at least the date of December 8th at which time the current "debt ceiling!" suspension is scheduled to end.
If they don't raise the debt ceiling by or at that time and instead go on another 6 months of reserve creation via the 'extraordinary measures' into 2018 we would want to see the bonds again rally and the rates out the curve start to again collapse towards the policy rate with Treasury having no ability to drain newly created reserve assets until the "ceiling!" would eventually be raised or again suspended.
(FD: Currently short 2 March '18 10-yr UST Futures until at least December 8th... not a recommendation.)
Rote textbook MMT 101: "US Treasury issuance is an interest rate maintenance operation..."
ReplyDeleteOr "US Treasury issuance is a reserve drain so interest rates don't collapse..."
According to MMT economists, when the Fed is not paying IOR and doesn't choose to set the FFR to zero, issuance of tsys drains reserves created by deficit spending. This operation is used to facilitate the Fed hitting its target rate in the bank overnight lending market. The Fed then fine tunes the rate using OMO, which also involves repo using tsys. Tsy issuance plays a key role in setting the overnight rate under normal operations.
This doesn't directly affect the yield curve, which is set in the market unless the Fed chooses to intervene in setting yields. The yield curve is based on expectations, so it rises and falls relative to the base rate iaw changing expectations. Changes in the base rate affect the yield curve but do not determine it.
If reserves were allowed to build up in the banking system without end, ie no UST issuance, and no support rate was imposed (ie 0% policy rate), all govt bond rates would converge to zero...
ReplyDeletethis is (again MMT rote) "the natural rate of interest is zero" in action...
"This doesn't directly affect the yield curve, which is set in the market"
You might as well believe in the "bond vigilantes!"....
Tom,
ReplyDeleteThe fiscal agents do not have discretion whether or not to receive the deposit of a govt check hello ... as opposed to other types of assets they might or might not acquire or establish...
I had a friend who had a dealership for 10 years and in 2009 his 2 banks just up and refused to floorplan him ... for no reason... he just had to shut the whole thing down...
they dont have a choice they have to accept deposits period that is part of the agency agreement with Treasury...
MMT describes operations and also offers policy recommendations. The use of tsys in setting the overnight rate is an operational description. ZIRP is a policy recommendation.
ReplyDeleteWhy do changes in the the yield curve track the FFR but not precisely? Market reaction based on expectations of future Fed policy based on inflation expectations and market conditions. The result is discounts and premiums depending on expectations.
The bond vigilante theory is that the bond market determines yields independently of Fed policy. It doesn't.
I had a friend who had a dealership for 10 years and in 2009 his 2 banks just up and refused to floorplan him ... for no reason... he just had to shut the whole thing down...
ReplyDeleteIf they had really wanted to make the loan, they could have increased capital.
When Warren owned a bank, he said that increasing capital was no big deal.
" increasing capital was no big deal."
ReplyDeleteBy $150B in a few weeks ?????
Please...
Tom,
ReplyDeletedo you think that the reason you cant receive the AM band on a FM radio and vice versa is because the one radio has "AM" written on it and the other one has "FM" written on it?
So you are saying that with as much as we chastise these morons going all around the place saying "loanable funds!" and "banks lend out the reserves!" that this in actuality has NO import on outcomes?
ReplyDeleteThen why are you complaining about it? It obviously doesnt matter...
So you are saying that they're morons doesnt matter and instead they hatched this clever multi-year plan to bankrupt all the banks and businesses and lose bazillions and somehow come out ahead in the end like a "vampire squid!" or wtf?
" Market reaction based on expectations of future Fed policy based on inflation expectations and market conditions."
ReplyDeletethose conditions were all there and didnt change during the 6 months of the ceiling and yet the yield was in free fall... now they suspended the ceiling and its headed back up... only change is that the Treasury can issue again....
How come neither BIS, the Fed, and the banks haven't realized this?
ReplyDeleteOne way bank easily lighten their balance sheets is selling mortgages to Fannie and Freddie, for example. Receivables can always be factors at a discount. The GSEs end up with most of the paper and a large portion of bank assets are loans.
Banks are not powerless in managing their balance sheets when reserves increase. If it were a big issue, then the Fed would create special purpose vehicles.
These people may be morons in some respects but not when it comes to making a buck. Then they know all the angles.
If the Treasury is decreasing issuance and appetite for safe assets doesn't decrease correspondingly, then demand will exceed supply, bond prices will rise and yields will fall.
ReplyDeleteSame when the Fed is taking safe assets off the table through POMO. Bond prices rise and yields fall. The Fed was using tsys purchases to flatten the yield curve.
As the Fed unwinds its balance sheet by selling tsys, then (cet. par.) bond prices can be expected to fall with increase in supply, yields rise, long term commercial interest rates increase, and the yield curve steepen.
Treasuries do respond to changing conditions, but it not a completely free market determined by the private sector either.
If the Fed chose ZIRP and stayed out of the bond market than free market conditions would still not prevail since supply would vary with the size of the deficit and the choice whether to roll over the existing debt or pay it down.
"How come neither BIS, the Fed, and the banks haven't realized this? "
ReplyDeleteYou can't realize this if you are going all around the place saying "banks lend out the reserves!" and "loanable funds!" all the time...
They are exclusive positions...
They would say "Hey! we have to get the reserves up so banks have more to lend out!"
here is Milton Friedman:
"What more can it do to increase the quantity of money?”
The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. "
https://www.pragcap.com/milton-friedman-misunderstood-quantitative-easing/
They are all idiots...
"How come neither BIS, the Fed, and the banks haven't realized this? "
ReplyDeletetheir training leaves them unskilled to do the required analysis....
Friedman: "expand their liabilities by loans and open market purchases"
ReplyDeletereserves, loans, and purchases are all assets at a bank... so he doesnt even know wtf is even going on... and he is looked at as one of the BETTER ones... they are all "Friedman this and Friedman that... blah blah...Freidman.... blah..."
"How come neither BIS, the Fed, and the banks haven';t realized this?";
ReplyDeleteYou can't realize this if you are going all around the place saying "banks lend out the reserves!", "loanable funds"; all the time...
They are exclusive positions...
I have read papers and posted link here showing that they know exactly what is going on. The banks want the system changed so that hard assets like rb are not counted in the ratios, and the regulators are saying, no way, we want to increase your capital as a matter of prudence.
They are still fighting over this.
"The degree is often titled Master of Finance or Master in Finance (abbreviated M.Fin., MiF), or Master of Science in Finance (abbreviated MSF in North America and MSc in Finance in the UK and Europe)"
ReplyDeleteTry to find me one dated 2008 or earlier ....