Fed’s QE Unwind Accelerates Sharply

Discussion in 'Economics' started by Banjo, May 5, 2018.

  1. Banjo


    elitenapper likes this.
  2. Hmm wonder how that could affext the market being as it they are the largest liquidity provider and speculator in the market
  3. The article is very good. It differentiates and acknowledges Treasury debt which "rolls off" (and is extinguished via maturity), and non-treasury which if not matured, can be re-packaged/re-sold.

    That said, you are seeing effects now. You hit a nail in recognizing THE largest debt liquidity provider is gone. Look at interest rates. Look at the dollar. These are always where/how debt is valued and normalized.

    Compare to the ECB, where negative interest rates abound, and QE continues, with zero debt being extinguished (Dragi said proceeds will be "reinvested", ie used for QE continuance). BTW, JCB and other CB's could be brought into this discussion as well.

    With the largest liquidity provider for US debt gone, IR must go up to incentivize purchasers. Unlike ECB, where no debt is extinguished thereby creating an ever-expanding ECB balance sheet, US treasury debt on the Feds sheet is a simple wash... extinguished, then replaced through "normal" new debt issuance, not the Feds balance sheet. Why do think many major industrialized countries lobbied Yellen to NOT raise interest rates? There was a point in time some smart people were asking if it was the Feds job to include localized situations in other countries in making its policy for home. Remember that?

    For now, all is well in the US markets. IR and the USD are coming off of lows, or historic lows. Get worried when dollar strength continues, and IR break through important levels (not necessarily 3%, 3.35% might be more apropos and certainly with fewer "believers"). The USD in particular, will set off a series of probable defaults (remember the Swissy, and Hungarian housing that issued debt in Swissy? Think much, much bigger and on a more global scale! Hell, even Greece is still in the news with the same ol stuff as before. At that point you better be ready, or you will miss the generational, historic, shift from West to East. Please note... that is not happening next week. it will take time, incrementally by month, culminating in (several, but not necessarily many) years. I am not a bull or bear. A better way to say that is I "try" to be neutral. I trade long and short. Generally speaking, it's still party-time in the US. Repatriation and tax cuts will bring home several pieces.

    Trade On!
    Last edited: May 5, 2018
  4. mbondy


    Since the Fed began normalizing last September, the unwind has already been affecting the market. Not having the assurance of central bank intervention to support the market means that a long-only strategy is not as promising as it was 8 years ago. I think btd traders are in for a rude awakening. tiddlywink did a good job explaining the situation less one caveat - when the Fed reaches its 50billion/month cap in the fourth quarter, there is speculation that they are going to be outright selling securities in the open market which would obviously have a market impact. Since only about 40billion securities mature per month, they would be offsetting this with open sales to meet their targets.

    I was bullish as the Fed declared its support of the market, now I am bearish as they have started to unwind a 4trillion dollar long position, something that many said would never happen.
  5. mbondy


    I think, for once, fiscal policy and monetary policy are actually working in tandem to try to somehow engineer a soft landing in an effort to avoid another depression. It's unusual in times of economic strength to see both an increase in stimulates and monetary tightening simultaneously... it just doesn't make sense otherwise.
  6. Rates on Treasuries are sure going up.

    Call me Capt. Obvious. :D
  7. May 4, 2018
    Argentina Raises Interest Rates to 40%


    Argentina has a history of defaults, corruption, and complete mismanagement.
    Someone stepped in (supported by populace and financier confidence) with the promise of change.

    Now, globally, the USD is at a minimum, bouncing off of a multi-year lows.

    The history of Argentina, a return to normalcy in a sense, will cause this to be overlooked.
    This is related to my previous post explaining my premise. Very few will make the connection.
  8. DeltaRisk


  9. Banjo


  10. ironchef


    #10     May 7, 2018