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Certainly if the FED has purchased 61% of the already issued Treasury bills on the open market, those purchases shored up the market price.
What else does that QE behavior do?
QE is essentially just printing money.
Well it converts Banksters' T-bills into cash, doesn't it?
Basically, yes
Now why would the Banksters want to get out of US T-bills?
It's about changing the rates of short and long term bills in order to manipulate the amount of money in rotation and therefore, its worth. This enhances import/export ratios by essentially declaring war on international trade partner currencies.
Aren't those T-bills just as good as the cash they represent?
something like that.
WEll doesn't that depend on the market's valuation of T-bills?
The fed controls the worth of treasury notes by expand and contraction methods as per above. The market is all about the confidence in international CBs. Which is why China has backed off buying our monetized debt and began diversifying away from dollars starting a few years back. Japan and the UK are the current buyers. An dthey are the other two most in debt nations in the world.
So we need some more information, don't we?
More information would be nice, but that transparency would destroy the feds game of manipulation. So its about looking back to predict it forward.
When the FED puchased those T-bills was the market price DISCOUNTED to provide a lower yield?
Serious question, folks, I really don't know the answer to that question and the WSJ editorial doesn't tell us, either.
Lawrence Goodman: Demand for U.S. Debt Is Not Limitless - WSJ.com
The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.
Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate.
This isn't a problem as long as we can continue to strong-arm nations into using the USD for trade. Money for all that war is limitless, because we can continue to print it and fund the wars.
It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.
Just trust him.
Certainly if the FED has purchased 61% of the already issued Treasury bills on the open market, those purchases shored up the market price.
What else does that QE behavior do?
QE is essentially just printing money.
Well it converts Banksters' T-bills into cash, doesn't it?
Basically, yes
Now why would the Banksters want to get out of US T-bills?
It's about changing the rates of short and long term bills in order to manipulate the amount of money in rotation and therefore, its worth. This enhances import/export ratios by essentially declaring war on international trade partner currencies.
Aren't those T-bills just as good as the cash they represent?
something like that.
WEll doesn't that depend on the market's valuation of T-bills?
The fed controls the worth of treasury notes by expand and contraction methods as per above. The market is all about the confidence in international CBs. Which is why China has backed off buying our monetized debt and began diversifying away from dollars starting a few years back. Japan and the UK are the current buyers. An dthey are the other two most in debt nations in the world.
So we need some more information, don't we?
More information would be nice, but that transparency would destroy the feds game of manipulation. So its about looking back to predict it forward.
When the FED puchased those T-bills was the market price DISCOUNTED to provide a lower yield?
Serious question, folks, I really don't know the answer to that question and the WSJ editorial doesn't tell us, either.
The fed usually pays the treasury any profit it makes, yet that was cast off by the treasury to essentially IUOs in 2010. This was done because, gasp....the federal reserve was essentially insolvent and needed to cook the books in order to appear in good health. Go figure.
Lawrence Goodman: Demand for U.S. Debt Is Not Limitless - WSJ.com
The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.
Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate.
This isn't a problem as long as we can continue to strong-arm nations into using the USD for trade. Money for all that war is limitless, because we can continue to print it and fund the wars.
It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.
Just trust him.
If GE sells all its bonds to other investors, and I say in advance that I am going to buy 60% of the bonds in the secondary market within a few days after the issuance and I do so, I am effectively funding GE because I wind up owning the bonds anyways and the market would have behaved very differently had I not been there
Well that's the key part. Would the market behave differently otherwise. I don't know all the ins and outs of trading, so maybe you can shed some light on this for me. The sale of bonds from the Treasury department, and the purchase and sale of bonds in OMOs are all done through competitive auction. There are presumably transaction costs. Why would a dealer buy from the Treasury only to sell to the Fed? My question is, where is the profit coming from for the dealer?
For normal OMOs under normal times, it's that the Fed unexpectedly lowers its acceptable yield on buying the bonds, raising their price. That makes selling the bond to the Fed different from if they'd just not bought the bond and kept the cash in the first place. It's now more profitable to go back to cash, yes?
But here there's not really any unexpected increase in the bond price. If the Fed announces its intentions before hand, the price of the bonds at Treasury auction will increase until any expected arbitrage profit disappears right? These are competitive auctions after all. So this "I'll buy them now so I can sell them to the Fed later" system doesn't seem like it should be profitable. It feels like they should only be buying the bonds at auction if they wanted them anyway as part of their portfolio.
But yeah, I'm not especially knowledgeable when it comes to finance, so maybe there's something I'm completely missing.
A colleague of mine had Austin Goolsbee at his place a few months ago. After "10 glasses of wine," Goolsbee told him that the plan was to inflate away the debt.
FWIW.
of course that would take Bernanke's agreement, something Goolsbee may have forgotten after 10 drinks.
If GE sells all its bonds to other investors, and I say in advance that I am going to buy 60% of the bonds in the secondary market within a few days after the issuance and I do so, I am effectively funding GE because I wind up owning the bonds anyways and the market would have behaved very differently had I not been there
Well that's the key part. Would the market behave differently otherwise. I don't know all the ins and outs of trading, so maybe you can shed some light on this for me. The sale of bonds from the Treasury department, and the purchase and sale of bonds in OMOs are all done through competitive auction. There are presumably transaction costs. Why would a dealer buy from the Treasury only to sell to the Fed? My question is, where is the profit coming from for the dealer?
For normal OMOs under normal times, it's that the Fed unexpectedly lowers its acceptable yield on buying the bonds, raising their price. That makes selling the bond to the Fed different from if they'd just not bought the bond and kept the cash in the first place. It's now more profitable to go back to cash, yes?
But here there's not really any unexpected increase in the bond price. If the Fed announces its intentions before hand, the price of the bonds at Treasury auction will increase until any expected arbitrage profit disappears right? These are competitive auctions after all. So this "I'll buy them now so I can sell them to the Fed later" system doesn't seem like it should be profitable. It feels like they should only be buying the bonds at auction if they wanted them anyway as part of their portfolio.
But yeah, I'm not especially knowledgeable when it comes to finance, so maybe there's something I'm completely missing.
You answered your question - yes, the market would have behaved differently had the Fed not been standing behind the market.
The market will behave differently if it knows that the Fed will buy 20% of the bonds outstanding compared to 60% of the bonds outstanding, or that the market believes the Fed will buy as many bonds as it wants. The Fed is thus fixing the price, which is what the Fed does. So to the market, it has an assured buyer, which alters the market. You are correct that the market will arbitrage risk-free profits away, but it does not arb away all the risk since there is still interest rate and default risk.
Those are the normal risks buyers of Treasuries take. The Treasury will announce which bonds it will buy ahead of time, so there is also the risk that your inventory may not be exactly what the Fed was buying, which puts a bit of risk premia into the market.
But the point I was making was that when the Fed essentially becomes the market, there really isn't any difference than the Fed just buying directly from the Treasury. There is risk premia built into the Treasury market, but it is slight, or at least it has been until this point.
Transaction costs to the government for government securities are virtually nil.
Well that's the key part. Would the market behave differently otherwise. I don't know all the ins and outs of trading, so maybe you can shed some light on this for me. The sale of bonds from the Treasury department, and the purchase and sale of bonds in OMOs are all done through competitive auction. There are presumably transaction costs. Why would a dealer buy from the Treasury only to sell to the Fed? My question is, where is the profit coming from for the dealer?
For normal OMOs under normal times, it's that the Fed unexpectedly lowers its acceptable yield on buying the bonds, raising their price. That makes selling the bond to the Fed different from if they'd just not bought the bond and kept the cash in the first place. It's now more profitable to go back to cash, yes?
But here there's not really any unexpected increase in the bond price. If the Fed announces its intentions before hand, the price of the bonds at Treasury auction will increase until any expected arbitrage profit disappears right? These are competitive auctions after all. So this "I'll buy them now so I can sell them to the Fed later" system doesn't seem like it should be profitable. It feels like they should only be buying the bonds at auction if they wanted them anyway as part of their portfolio.
But yeah, I'm not especially knowledgeable when it comes to finance, so maybe there's something I'm completely missing.
You answered your question - yes, the market would have behaved differently had the Fed not been standing behind the market.
I don't think I did.
What? Treasury notes have effectively zero default risk. Maybe you would make the argument that long treasury debt has non-zero default risk (which i think would still be pretty tenuous), but the Fed can't really control the price of long bonds anyway. What it can control, short maturity treasury debt, has effectively no default risk. And there's almost no interest rate risk either since the Fed adopted the ZIRP. For all intents and purposes (from a bank's point of view), short treasuries and reserves are perfect substitutes. So where is the profit coming from in being this middle man between the Treasury and the Fed?
Yeah, so it looks to me like you're taking on that risk but for no expected returns. I don't get why the price the notes take at treasury auction and the price they get from the Fed aren't the same.
But the point I was making was that when the Fed essentially becomes the market, there really isn't any difference than the Fed just buying directly from the Treasury. There is risk premia built into the Treasury market, but it is slight, or at least it has been until this point.
I somewhat agree to an extent. For starters I think QE is useless (god knows why the market loves it), and if the Fed were level targeting they would only have had to increase the base by maybe $200 billion.
Transaction costs to the government for government securities are virtually nil.
I mean transaction costs for the dealers.
The Fed influences the long bond rate indirectly through the term structure of the curve by fixing the short end as well as directly through programs such as operation Twist.
The default risk to Treasuries is not zero. It might be just slightly above zero but it isn't zero.
Transaction costs for the dealers is virtually nil.
It's easy to understand why the market loves QE. It supplies liquidity, the market thinks it's inflationary
I think the point he's trying to make (and I could be wrong about this), is that perhaps there is a different motivation for being the middle man than simply profit.Well that's the key part. Would the market behave differently otherwise. I don't know all the ins and outs of trading, so maybe you can shed some light on this for me. The sale of bonds from the Treasury department, and the purchase and sale of bonds in OMOs are all done through competitive auction. There are presumably transaction costs. Why would a dealer buy from the Treasury only to sell to the Fed? My question is, where is the profit coming from for the dealer?
For normal OMOs under normal times, it's that the Fed unexpectedly lowers its acceptable yield on buying the bonds, raising their price. That makes selling the bond to the Fed different from if they'd just not bought the bond and kept the cash in the first place. It's now more profitable to go back to cash, yes?
But here there's not really any unexpected increase in the bond price. If the Fed announces its intentions before hand, the price of the bonds at Treasury auction will increase until any expected arbitrage profit disappears right? These are competitive auctions after all. So this "I'll buy them now so I can sell them to the Fed later" system doesn't seem like it should be profitable. It feels like they should only be buying the bonds at auction if they wanted them anyway as part of their portfolio.
But yeah, I'm not especially knowledgeable when it comes to finance, so maybe there's something I'm completely missing.
You answered your question - yes, the market would have behaved differently had the Fed not been standing behind the market.
I don't think I did.
What? Treasury notes have effectively zero default risk. Maybe you would make the argument that long treasury debt has non-zero default risk (which i think would still be pretty tenuous), but the Fed can't really control the price of long bonds anyway. What it can control, short maturity treasury debt, has effectively no default risk. And there's almost no interest rate risk either since the Fed adopted the ZIRP. For all intents and purposes (from a bank's point of view), short treasuries and reserves are perfect substitutes. So where is the profit coming from in being this middle man between the Treasury and the Fed?
I think the point he's trying to make (and I could be wrong about this), is that perhaps there is a different motivation for being the middle man than simply profit.You answered your question - yes, the market would have behaved differently had the Fed not been standing behind the market.
I don't think I did.
What? Treasury notes have effectively zero default risk. Maybe you would make the argument that long treasury debt has non-zero default risk (which i think would still be pretty tenuous), but the Fed can't really control the price of long bonds anyway. What it can control, short maturity treasury debt, has effectively no default risk. And there's almost no interest rate risk either since the Fed adopted the ZIRP. For all intents and purposes (from a bank's point of view), short treasuries and reserves are perfect substitutes. So where is the profit coming from in being this middle man between the Treasury and the Fed?
What if...and I know this might sound outlandish to a text book thinker...the motivation of the secondary banks was to play a crucial part in propping up the Treasury market for the government? It's a de-facto way for the Fed to fund the Treasury in times when the rest of the market is timid.
Certainly it can't be that far out of the realm of possibility that the Goldmans and JP Morgans of the world would play that part for the Fed?
Even a nominal LOSS would be a small price to pay for playing that crucial part in keeping the US Treasury funded.
I think the point he's trying to make (and I could be wrong about this), is that perhaps there is a different motivation for being the middle man than simply profit.I don't think I did.
What? Treasury notes have effectively zero default risk. Maybe you would make the argument that long treasury debt has non-zero default risk (which i think would still be pretty tenuous), but the Fed can't really control the price of long bonds anyway. What it can control, short maturity treasury debt, has effectively no default risk. And there's almost no interest rate risk either since the Fed adopted the ZIRP. For all intents and purposes (from a bank's point of view), short treasuries and reserves are perfect substitutes. So where is the profit coming from in being this middle man between the Treasury and the Fed?
What if...and I know this might sound outlandish to a text book thinker...the motivation of the secondary banks was to play a crucial part in propping up the Treasury market for the government? It's a de-facto way for the Fed to fund the Treasury in times when the rest of the market is timid.
Certainly it can't be that far out of the realm of possibility that the Goldmans and JP Morgans of the world would play that part for the Fed?
Even a nominal LOSS would be a small price to pay for playing that crucial part in keeping the US Treasury funded.
Well to a "text book thinker" (which I resent by the way) that sounds very out there. Not that the Treasury needs the Fed to fund them. Everybody is flooding to hold Treasuries anyway.
Money for all that war is limitless, because we can continue to print it and fund the wars.
The Fed isn't giving the government money. The Fed bought T-bills in the secondary market; bills already issued. The Fed isn't allowed to, and doesn't, fund government spending. They swapped out T-bills for reserves at a bank. Those reserves aren't permanent. It's exactly the same as normal. Investors lend to the government, the government can only continue to spend so long as private investors are willing to lend to them.
It's all good, because Bernanke is a prodigy...a genius...he'll figure out how to exit from all of this money creation before inflation becomes a problem.
That was figured out before they even implemented QE. They have IOR to control the Fed Funds Rate, and can combine that with reserve-draining facilities.
That can't happen. The Fed needs to shroud itself in secrecy in order to maintain confidence. If their books revealed their true state of health and it looked grim, it would shock the entire financial world and could lead to a massive calamity.
Of course, there is a chance, a goood chance, that will happen anyway.