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It’s Not QE, Ok?! Powell Pre-Announces QE-Lite, Hopes You’re Smart Enough To Understand It

"The time is now upon us".

"The time is now upon us".
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6 comments on “It’s Not QE, Ok?! Powell Pre-Announces QE-Lite, Hopes You’re Smart Enough To Understand It

  1. Lance Manly

    So if it looks like a duck, swims like a duck, and quacks like a duck, why is then not a duck

    “Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect the stance of monetary policy, to which I now turn.”

    Why shouldn’t it

  2. vicissitude

    The invisible elephant in the room is also the trump budget, aka Fed deficit aka out-of-control multi-trillion insane spending, recently attached to a massive taxcut, which helped a few thousand millionaires and billionaires bur essentially steals money from the future.

    One concept not discussed by anyone is that lower fiscal deficits “pull down” the Treasury yield, but instead, we have an insane president that wants to have a lower dollar, lower yields and a multi-trillion, increasing amont of debt that will once again, Destroy America.

    In that light, here’s something grabbed fro space this morning:

    “Nevertheless, the mid-September repo upheaval is a clear sign there might actually be limits on just how much debt the U.S. can take before triggering more frequent disruptions. Deficits aren’t exactly new, but they do add up. Since the crisis, the market for Treasury debt has roughly tripled in size.

    And the fiscal balance has only gotten worse under President Donald Trump. The deficit surpassed $1 trillion in the first 11 months of the fiscal year, which just ended last month. And the Congressional Budget Office forecasts the shortfall this fiscal year will exceed $1 trillion. That all means the Treasury will need to keep increasing its debt auctions to fund the budget shortfalls.

    “The Fed has shrunk its balance sheet in a meaningful way, resulting in reduced reserves in the system,” he said. The cash squeeze has “been further exacerbated by increased issuance, resulting in high levels of Treasury collateral settling into the market.”

    Dealers aren’t getting as much help from foreign investors to soak up all that additional supply. Big creditors like China and Japan have slowed their buying of Treasuries in recent years. Overall, the share of foreign official holdings has shrunk to just over 25% this year, from a high of about 40% in 2008.

    That waning appetite been reflected in the amount of bids investors submit versus the actual amount sold, known as the bid-to-cover ratio.

    According to an analysis by John Canavan, Oxford Economics’ lead analyst, the ratio for 3-, 10- and 30-year debt sold each month has fallen to 2.39. That’s down from 2.89 times in January 2018, just before the Treasury began boosting its sales, and far lower than a high of 3.48 times in December 2011.

    So-called auction tails, which occur when yields on debt issued at auction exceed prevailing levels in the market at the time of sale, have become more common as well. In layman’s terms, it’s a sign investors need to be paid more to take on new debt. That’s been true especially for longer-maturity debt, like the 10-year note and the 30-year bond.

    “The debt has become more difficult to digest as the rise in Treasury issuance is outpacing the rise in demand, and overall there’s been a decline in recent years in foreign demand,” Canavan said.

    There’s little to suggest the U.S. will suddenly decide to embrace fiscal restraint, either under Trump or a Democratic administration.

    When it comes to financing America’s deficit though, it’s not the Fed that Julius Baer’s Markus Allenspach is worried about.

    “There’s going to be saturation by investors at some point,” said Allenspach, head of fixed-income research and a member of the firm’s investment committee. “Yes, there is a global search for yield, but we believe we may be past the peak of this hunt for safe assets.””


    • Lance Manly

      So basically we are just playing Japan and having the excess bonds being bought by the CB. Worked out great for them.

  3. vicissitude

    FYI, yet another take on BoneHeadMania:

    Front-end pressures have been intensifying since the middle of last year,” Shahid Ladha, BNP’s head of G10 rates strategy, said in a market comment released late last week. “With small changes in demand for funding having large impacts on funding rates, we have reached the lowest comfortable level of reserves (LCLoR) at around $1.4 trillion. Structural collateral/liquidity imbalances result from the complex interaction of fiscal, monetary and macroprudential policy.”

    Ladha sees several actions the Fed will be taking in the near-term.

    “To maintain an ample reserves system and move clear of scarcity, we estimate the Fed needs to add nearly $400 billion of liquidity over the next year. The Fed is likely to shift balance sheet policy to formally target liabilities (from managing assets),” Ladha said.

    “Since June 2018’s [interest rate on excess reserves] adjustment, the Fed’s response function to the growing collateral/liquidity imbalance has been reactive not proactive — necessary but not sufficient,” he wrote. “The N.Y. Fed successfully intervened with temporary open market repo operations.”

    Ladha said that a bolder response was needed to keep control of front-end rates, maintain smooth U.S. Treasury auctions, limit contagion into other assets and reduce any undesired side effects into the banking system.


  4. Billy Oxygen

    I like reading H style especially in articles like this. We also have some really good comment content to boot. Only online script I have!

  5. vicissitude

    Re: lowest comfortable level of reserves

    Observations on Implementing Monetary Policy in an Ample-Reserves Regime
    April 17, 2019
    Lorie K. Logan, Senior Vice President

    ” … Third, the banking system’s demand for reserves could be higher than the sum of each bank’s individual demand if reserves are not distributed efficiently. This scenario could occur if there are financial market frictions to redistributing reserves that result in some banks persistently holding a surplus of reserves above their LCLoR. For example, banks now suggest that they face higher balance sheet costs to lend in federal funds, making it possible that this market would not be as efficient at redistributing reserves late in the day as it was prior to the crisis.18

    These balance sheet costs can manifest themselves in less federal funds activity later in the day at rates near IOER. Prior to the crisis the federal funds market was liquid until late in the day. Banks could experience unanticipated late day outflows and still be confident in their ability to borrow from other banks holding excess reserves. Today, there is little late day activity in the federal funds market. As reserves decline and there is greater need to redistribute reserves, it is unclear if this activity will return as the opportunity cost of holding reserves is now lower. In the post-crisis era of super abundant reserves, bank lenders have largely left the federal funds market and today almost all lending is done by the Federal Home Loan Banks. In Desk outreach and the SFOS responses, many banks have indicated that rates would need to be well above IOER before the economics would be attractive enough to offset balance sheet costs that lending in the federal funds market incurs.


    Also see: (May 18, 2017) Fed officials originally said they planned to phase out their so-called reverse repo tool, initially introduced in 2013 to help the central bank maintain control over its benchmark federal-funds rate. The Fed said it would phase out the facility when it was no longer needed, but didn’t specify a time frame.


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