QT won’t impact markets much until RRP is drained (1T of excess liquidity)…at which the Fed will likely be ending its tightening cycle. If you took @suntrader’s view then you’d be max short long duration and expect massive steepening driven by a sell off in the long-end. That’s not going to happen (we’ll get the reverse). tl;dr it’s nice to have a simple talking point but it can be lethal when you don’t know what you’re talking about
I don't recall your recommending that book to me specifically, but I'll take your word for it. You've now shamed me into buying it. Twenty-two bucks gone! Arriving Sept 20. The last book I ordered on an ET recommendation was Sayler's book on bitcoin. I read much of it before throwing it into my "to be donated" box. I was pleasantly surprised to find the book well written, but disappointed to learn that Sayler's understanding of sovereign fiat money was very weak, too weak to allow him to understand why bitcoin won't and can not replace sovereign fiat money.
And agree Bitcoin won't replace the dollar. Something else will. All things, organic and inorganic, get replaced eventually. What that something is that takes the dollar's place I have no idea.
So purely coincidental $SPX rolling over same time as QT (that wasn't money printing yet all assets .... to the moon) rolling over. Bridge for sale. If a certain ex-Prez doesn't sell it first. Fitting that the peak was tax day April 15th. Hehe
That is such a fucked-up chart. That is all Fed and Inflation influence starting in 2022. Remarkable! Look at the BONES of 2022!
Fed’s Exit Puts World’s Biggest Bond Market on Shakier Ground Some traders worry that the $25 trillion U.S. Treasury market is becoming more fragile, and the Federal Reserve’s removal of support could make it worse. https://www.nytimes.com/2022/09/11/business/fed-treasury-market.html Market watchers are worried about a loss of liquidity as the Federal Reserve’s balance sheet shrinks.Credit...Al Drago for The New York Times By Joe Rennison Sept. 11, 2022, 5:00 a.m. ET Traders are worried about the world’s largest and most important government bond market, as the Federal Reserve quickens the pace at which it removes one of its primary pandemic supports. When the global economy crashed in March 2020 and markets went into free fall, the U.S. Treasury market — the $25 trillion bedrock of the global financial system — broke down. Sellers struggled to find buyers, and prices whipsawed higher and lower. The Fed stepped in, devoting trillions of dollars to steadying the market. The importance of the Treasury market is hard to overstate. It is the main source of funding for the U.S. government and underpins borrowing costs around the globe, for a huge variety of assets. If you have a mortgage, the interest rate you received was probably priced in relation to Treasuries. The same goes for credit cards, business loans and just about anything with an interest rate attached to it. The proper functioning of this market is paramount. The Fed’s balance sheet ballooned from a little over $4 trillion in early 2020 to a peak of nearly $9 trillion two years later. Stability also brought investment back to the stock market, enriching investors and helping stoke inflation. Now, the Fed is reversing course through quantitative tightening, or Q.T., pulling back its support for financial markets while it raises interest rates to quell inflation. Some investors worry that the quickening pace of the Fed’s pullback could become too much for markets to bear, undermining the safety and reliability of the Treasury market. “Eventually, all those bonds coming off the Fed’s balance sheet are going to disrupt the market,” said Scott Skyrm, a trader at Curvature Securities. Image Markets are functioning, but measures of price volatility are elevated and liquidity is deteriorating.Credit...Hiroko Masuike/The New York Times What market watchers are most worried about as the Fed’s balance sheet shrinks is something called liquidity — trader jargon for the ease of buying and selling a financial asset. When markets are liquid, money flows freely and easily, and investors can buy and sell a financial asset — in this case, Treasuries — at a stable price with little trouble. Illiquidity, on the other hand, is like a blocked water pipe; it’s hard to push anything through, and what does get past the blockage comes in spurts, with prices moving sharply higher or lower as trades fail to be fulfilled in a predictable way. Since June 2021, the Fed has been letting a small number of bonds mature without being replaced. Starting this month, the Fed will allow up to $60 billion of Treasuries and $35 billion of mortgage bonds to roll off its balance sheet as the debts come due, twice as much as the past three months. As the Fed backs away, it’s not clear who will fill the void. And even if new buyers for bonds can be found, the reduction in demand caused by the Fed’s exit is raising fears among traders of volatility that could make future market disturbances worse. Measures of price volatility are already elevated, and liquidity is the worst it has been since the pandemic-induced sell-off in early 2020, said Subadra Rajappa, an interest rate strategist at Société Générale. “The Fed doesn’t want to find itself in that situation again,” she said. Last week, some traders pointed to the ramping up of Q.T., combined with comments by Fed officials about rate increases, to explain large swings in Treasury prices. Previous attempts by the Fed to shrink its balance sheet did not go entirely smoothly. In September 2019, the Fed was about a year into the unwinding of the bond-buying program that stemmed from the 2008 financial crisis. Even though it was shrinking its balance sheet at roughly half the pace it is proposing now, a dearth of cash in the system roiled markets. The Fed had to step in and buy Treasuries to help the market function again. Today, the Fed’s shrinking balance sheet is not the only reason liquidity is deteriorating. The price that buyers or sellers are willing to trade for depends on how sure they are that the price won’t move significantly shortly after the trade is complete. With so much uncertainty — over the health of the economy, the course of the Russian-Ukrainian war or the path of inflation, to name just a few things — it’s harder to price trades, reducing liquidity. The sheer scale of U.S. government debt also plays an important role. The Treasury market has doubled over the past decade, to around $25 trillion, as the government’s financing needs have grown. All that debt needs to be bought by someone, and not just the Fed. If demand for Treasuries can’t keep pace with the supply, it could pull prices down. Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers already grappling with the Fed’s campaign to lower inflation by raising interest rates. “I am worried that we are piling Q.T. on top of these rate hikes and it will push us into recession,” said George Catrambone, the head of Americas trading and chief operating officer at DWS group. Image The Treasury Department. The Treasury bond market has doubled over the past decade, to around $25 trillion. Credit...Stefani Reynolds for The New York Times Others say lessons learned from past shocks make the risks less daunting. The Fed has introduced a permanent facility that could supply emergency cash to market participants in case of a liquidity crunch. A group of U.S. financial regulators is also looking at other ways to bolster the Treasury market. Importantly, the Fed is not actively selling its holdings; it’s just not reinvesting them as they come due. And investors won’t necessarily have to buy everything the Fed is letting run off its balance sheet. In fact, the Treasury has significantly reduced its borrowing over the past year as the financing needs of the government during the pandemic have declined. In turn, this has reduced the number of Treasuries that need to be bought by investors. Brian Sack, a managing director of the D. E. Shaw Group and a former New York Fed official, said he did not expect the Fed’s shrinking balance sheet to worsen conditions in the Treasury market. “There are not any compelling signs that they won’t be able to continue Q.T. for a while,” he said. Still, in a May report the Fed noted a worsening of liquidity and said that “the risk of a sudden significant deterioration appears higher than normal.” That is what’s unsettling traders as the Fed unwinds its pandemic support program with untested speed. “By itself you could argue it’s not a big deal,” said Priya Misra, an interest rate strategist at TD Securities. “But viewed in the context of a less liquid environment where stress events are having a bigger impact, that is why I am nervous about Q.T. ramping up.”
Leaving aside Rennison's incorrect statement: "...[the Treasury Market] is the main source of funding for the U.S. government...", most get this wrong anyway, there still seems something incongruent in Rennison's reasoning when he writes: "The sheer scale of U.S. government debt also plays an important role. The Treasury market has doubled over the past decade, to around $25 trillion, as the government’s financing needs have grown. All that debt needs to be bought by someone, and not just the Fed. If demand for Treasuries can’t keep pace with the supply, it could pull prices down. Prices move in the opposite direction to bond yields, a measure of borrowing costs. Higher Treasury yields would put more pressure on borrowers already grappling with the Fed’s campaign to lower inflation by raising interest rates." His concerns when isolated one from the other seem reasonable, but when considered together they make less sense. He's got himself hung up on the idea that the U.S. needs to sell bonds to finance its activities. It does not. (U.S. Treasury Bonds, contrary to what they seem to be for, serve entirely different purposes than the raising of money to spend!) He's pointed out that the Treasury market is huge and growing, but fails to recognize this is mainly due to growth in worldwide commerce. It isn't just the U.S. that makes use of U.S. Treasuries. Virtually every C.B. in the world uses them as a store of their dollar reserves. And since the Dollar is still the dominant reserve currency, as the world's economy grows, so will the Treasury Market. There is far more than U.S. deficits driving the Treasury market! It's actually the other way round. U.S. deficits are needed to supply the demand for Treasuries! -- that seems like nonsense, but it is not. Treasury issuance is tied directly to deficits, and that of course leads nearly everyone to belief Treasuries are funding our deficits. In fact they are not. We print a new dollar for every new dollar of deficit. We do not borrow money to cover deficits. Rennison is concerned that QT will lower the demand for Treasuries. QT bond operations, if they get so far as to entail Fed Bond selling, will be focused on the U.S. secondary market, because the effect of those operations must register in U.S., Private Sector, bank reserve accounts. The purpose of Q.T. is to make easy money a little more scarce by reducing U.S. Bank reserves, or alternatively by raising the interest rate the Fed currently pays on reserves (Currently the reserve requirement is still zero, I think, but the Fed has many tools). Foreign banks don't keep their local reserves in dollars, they keep them in their own currencies. However, they use U.S. Treasuries to store their U.S. dollar reserves. And they are quite happy to earn greater interest and see the buying power of their dollar reserves driven up. Rennison is concerned that the demand for Treasuries may not keep pace with the supply. He need not worry. Treasuries that pay a higher interest rate will be in demand. Trust me! He needn't be concerned that Fed bond buying will decrease and maybe eventually even transition to a little selling (it seems currently the Fed has mainly curtailed their rolling over of maturing bonds. Then the proceeds flow right back to the U.S. Treasury. Yippee.) I'm not concerned that there will be insufficient demand for Treasuries. That won't happen! I'm not concerned that interest rates will rise. That's overdue anyway. I'm concerned that rates will get to double digits, Volcker style, and drive us into a recession (which to listen to Larry Summers, ought to be our goal. Yikes! -- Summers is still hung up on the "Phillips Curve"; economics has moved on.) Help is on the way however. The economy wants to go full speed ahead. If the supply chain can respond in time, we may be able to convince Powell he can leave the punch bowl out, but just limit the number of servings. We may have, if not a "soft" landing, a landing no worse than a little bumpy glider-landing in a wheat field. This is an exceptionally strong economy we find ourselves in; we have unemployment approaching that during WWII- lowest on record!. Never mind the market, it is anticipating Powell will push for Summers' solution to inflation. The Market will wake up on its own should supply chain disruptions ease in time to cool inflation before Powell and Summers can complete their diabolical plan to ruin the economy to save it. (This reminds me of George W. having to kill Iraqis to bring Democracy to Iraq.)