Monday, August 2, 2021

Why I Am A 5-Year/5-Year Bug — Brian Romanchuk

I entered into a private conversation about techniques that academics use to isolate the alleged effect of fiscal deficits, quantitative easing, (etc.) on bond yields. I tend to be somewhat skeptical about such attempts, but there has been some work done that looked more reasonable. (I probably should highlight that research, but I would have to get back to it at a later time.) My argument is that if you want to any research in that area, you want to go after the 5-year rate, 5 years forward (or a qualitatively similar forward). If you can explain that rate, I would be interested.

This article is halfway between a rant and a serious discussion of the application of quantitative techniques. It is extremely difficult for it to not be a rant, since my argument is that the literature and the accepted methodology took a wrong turn a very long time ago. I will even have a bit of a rant about mainstream economists, which is probably the only bit that a lot of my readers are interested in....
Bond Economics
Why I Am A 5-Year/5-Year Bug
Brian Romanchuk

2 comments:

Matt Franko said...

“ If regulators are forcing you to buy 30-years, you are by definition price insensitive. What happens when there is not sufficient float to absorb these buyers? You get the U.K. gilt curve of the 1990s, that is what you get.”

We got the opposite over the last year…there was issuance in excess of the deficit and the TGA probably has averaged $1T over this time…

Now under debt ceiling those conditions may reverse … iow we get issuance that doesn’t equal the deficit and TGA will drop back towards zero where it has historically been maintained…

If the ROW typically maintains a near zero balance in its Treasury account then US should converge towards what we see in UK and EZ… ie 10-yr at 0.5% or maybe below that…

Matt Franko said...

https://www.marketwatch.com/investing/bond/tmbmkde-30y?countrycode=bx

Germany 30-yr now negative…