0.375% YIELD? NO PROBLEM….
27 September 2010 by Cullen Roche
19 Comments
Just a 0.375% yield on the 2 year note? No problem. Treasury continues to see record demand at bond auctions despite record low yields. The non-existence of inflation concerns and government default has buyers banging down the doors at Treasury. Today’s bid to cover ratio of 3.78 is the highest in several years. This data must be incredibly confusing for inflationistas and defaultistas who have been betting on higher yields and tanking demand for bonds for several years now.
not confusing at all. PD’s took over 50% of the auction down. what does it matter. the POMO operations simply take them right off the PD balance sheets. same crap goes on with european sovereigns. they try to make like there are legitimate bidders and headlines go crazy in the MSM about the great auctions. ECB simply comes in just like the fraud reserve and soaks the crap up.
Ah yes, it’s all one big govt conspiracy where the PDs are working with the Fed to “monetize” all the debt.
Please. The indirects almost tendered the whole auction by themselves. Demand is huge for this paper. There is no threat of default.
That’s right:
1) new banks capital rules (Bale 2-3) to reinforce their capital with sovereign AAA-Grade. At these levels of interest rates, they invest only in USD, the currency risk is higher that the price for insurance against that.
2) looses on debt portfolios, and the obligation to respect capital rules.
These are the two mains trends who maintain the demand for bonds.
But… one important thing to note is the shorter duration of the debt portfolios of the banks, which make them far more sensitive to an rate increase. This is a bigger problem, because whenever the FED will stop to support the bond market and keep the rates low, the holder will register huge looses on their holdings. This is an additional reason (unsaid) to extend the extended period of low rates.
are you in denial. is it not a fact that PD’s took down 50% of this auction. have you seen the equity reaction on fed POMO days.do you believe it’s just front running of POMO? as far as conspiracy goes, why is the fed fighting tooth and nail about opening its balance sheet. why is the fed against mark to market accounting. why are we lied to about the reason for maiden lane. why is the fed backstopping 100′s of billion in C off balance sheet garbage and hosts of other banks. why are fnm and fre still in existence.
What could I possibly be in denial about? I understand how these operations work. The PDs exist in large part to create a market for the Fed’s trading desk. That’s part of the agreement in being a PD. I don’t know why anyone would be shocked that they take down a lot of the auction.
Your comment implies that the Fed is acting unusually, but if you look back through history you can see that the PDs have always been huge participants in the auctions. For instance, just look at a random auction here in 2008 before the Fed started “monetizing” everything (at least according to the hyperinflationists. The PDs took down 75% of this auction:
http://www.treasurydirect.gov/instit/annceresult/press/preanre/2008/R_20080528_2.pdf
Big deal. That’s partly why they are PDs. To make a market.
I am not arguing that the Fed hasn’t done anything wrong in the last few years, but to argue that they are doing something that borders on illegal, manipulative or under the table simply misrepresents the facts.
i’m not arguing anything illegal. if i was a primary dealer back in 2008 i would have taken down as much of an auction i could have. (hindsight not really) i had tons of treasuries back then and was buying every auction. now with yields at zero yes i question it. why would you post on the website like you have. we’ll never know who the indirects are that come out of the islands or UK. the fact is china has not been a buyer and has been a seller. you just solidified my point. the PD’s are there to make a market and the fact is the fed will POMO it right of the balance sheets just like the ECB
I don’t really see your point. The govt spends the money into existence and the largest banks in this country end up with the deposits which the Fed soaks up. There is nothing nefarious going on here at all. At the end of the day, these auctions really just represent the massive size of the deficit.
If you have a beef it should be with how the money is spent and not how the Fed goes about keeping the overnight rate where it is.
i really don’t follow. if the indirects stop buying and primary dealers soak up most of the auctions the fed has become buyer of last resort. sounds like economic apocalypse to me. i am a student of japan. i am assuming the large savings in that country soaked up the auctions for decades. the savings in japan are no more. end game in japan seems imminent.
Why would it be a problem if the PDs were the ONLY buyers? These are the largest banks in the USA. They carry most of the deposits so there’s nothing weird about them being the largest players in the tsy market.
Besides, foreign demand is up. China can do whatever they want with their dollars. Eventually, however, they flow back to the USA and tsys are the obvious beneficiary.
I see nothing even remotely alarming in these auctions. The Fed is keeping the overnight rate where they want and buyers are getting an interest bearing asset in return.
I am a modern monetary theorist in case you are not aware. I do not believe the bond auctions fund our spending. In fact, I would go so far as to argue that these auctions prove as much.
Based on MMT what does the rate tell us? It seems arbitray. You said the Treasury just has to remind Fed an auction is happening…why in that case is there any rate at all? Or put another way why does the rate ever fluctuate since there is never a chance of it not being funded since its just accounting. Can’t Treausry just say 1F 30 year bond forever? The common answer is who would buy the debt at that rate but the MMT answer is no one is buying it per se.
I hate that it is called MM THEORY. The way these auctions work is not theory at all. It is how the Fed and Treasury really operate. Take this from the NY Fed:
“Staff on the Desk start each workday by gathering information about the market’s activities from a number of sources. The Fed’s traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers’ task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks’ plans for meeting them and with fed funds brokers about activities in that market.
Reserve forecasters at the New York Fed and at the Board of Governors in Washington, D.C., compile data on bank reserves for the previous day and make projections of factors that could affect reserves for future days. The staff also receives information from the Treasury about its balance at the Federal Reserve and assists the Treasury in managing this balance and Treasury accounts at commercial banks.
Following the discussion with the Treasury, forecasts of reserves are completed. Then, after reviewing all of the information gathered from the various sources, Desk staff develop a plan of action for the day.”
http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
I’ve explained this in more detail here: http://pragcap.com/when-will-the-bond-auctions-begin-to-fail
It’s 100% erroneous to imply that these auctions could fail or won’t be oversubscribed. They are designed to succeed because they are merely targeting reserves. All it represents is the high level of deficit spending and the resulting high level of reserves in the system.
None of this is theory. It is reality.
And don’t take it from me. Take it from the NY Fed and the description above. These inflationistas just don’t know how the system works. It’s as simple as that. To imply that bond auctions will start failing, that there is solvency at the govt level and that the treasury market will unravel due to market forces is pure and simple nonsense and shows that anyone arguing these points has no idea what they are talking about.
What could I possibly be in denial about? I understand how these operations work. The PDs exist in large part to create a market for the Fed’s trading desk. That’s part of the agreement in being a PD. I don’t know why anyone would be shocked that they take down a lot of the auction.
Your comment implies that the Fed is acting unusually, but if you look back through history you can see that the PDs have always been huge participants in the auctions. For instance, just look at a random auction here in 2008 before the Fed started “monetizing” everything (at least according to the hyperinflationists. The PDs took down 75% of this auction:
http://www.treasurydirect.gov/instit/annceresult/press/preanre/2008/R_20080528_2.pdf
Big deal. That’s partly why they are PDs. To make a market.
I am not arguing that the Fed hasn’t done anything wrong in the last few years, but to argue that they are doing something that borders on illegal, manipulative or under the table simply misrepresents the facts.
Awesome post, TPC. Keep hitting those inflationistas and deflationistas over the head with this.
Lately, I’ve been wrangling with several people on this subject. Granted, it does take some time and contemplation to understand, but I’m surprised at the outright hostile reaction I receive. I had might as well try to convert them to Islam.
sorry pal not an inflationist whatsoever and a deflationist by heart but when i hear that PD’s can fund all fed auctions then i say something has gone awry.(sounds like TEPPER claiming stocks can only go up) if it comes to than god bless this country.
Harold,
The bond market funds nothing. Just look at the operations here. The Fed is simply soaking up the reserves. Review my comment above. They literally call the PDs to see how much reserves they need/have. Then they issue the bonds. It’s a monetary tool and not a fiscal financing tool. The bond mkt funds nothing in the USA.
TPC,
Why is it that you know how the monetary system really works, yet most other people don’t? I assume that you attended the same classes and were taught by the same professors as many deficit terrorists, so how is it that you know the system and they don’t?
Were you taught/learnt on the job?
1) I am not the only one who understands this stuff. LOTS of people do.
2) This is VERY complex stuff.
3) They don’t teach this in schools.
4) When you study the actual operations something doesn’t add up. Trade a market long enough and you see it from a different perspective.
I am not some pompous ass who is running around claiming to understand something that someone else doesn’t. For instance, the above quote is on the NY Fed’s website. Anyone can find it. Anyone can learn about the relationship between tsy, the Fed and the PDs and how they run these auctions. And when you see how the actual operations work you begin to realize that our textbooks are not correct. The money multiplier does not work like we were taught. The govt does not issue bonds to fund its spending. And on and on. I am just another guy with a great deal of curiosity who happens to trade bonds and has realized that the system we were taught in school is not the system we live in.
Hi TPC,
Thanks for publishing this site. I have gained a lot from this and from your views on MMT. It was very thought provoking and it took me more than 3 months to comprehend as it is very counter intuitive. I can’t say I am up to speed with MMT even though I have read your posts and Mossler. I was in the inflationista camp but struggled with the empirical evidence on Japan. In any case I have some questions on the implications of MMT:
1/ Given that the Chinese are choosing to save in US$, doesn’t that represent a real future claim on US real goods and services if and when they choose to spend it. The trade surplus over the past decades simply reflects that they have put off demanding the US to send real goods and services in exchange for theirs. If that was the case, when they start to spend it, won’t it cause inflation, especially if the economy was back to operating a full capacity. Extending that further, if they wait 1 generation to spend their savings, won’t it be to the detriment to the next generation (this generation enjoyed the trade surplus whereas the next is paying for it by having to send real goods and svcs overseas)
2/ If China decides not to save in US$ in future and says moves it into Euros or RMB or whatever, won’t that cause the US$ to depreciate, increasing the price of imports, decreasing the terms of trade, which will represent a real reduction in living standards for the US