Zeus’s Catch-22 (Forget The Bonds. Take The Cannoli)
The Fed faces a "Catch-22," BofA's Michael Hartnett said, in the latest edition of the bank's popular "Flow Show" series.
The current conjuncture of mass vaccination (synonymous with imminent reopening), heavy issuance and the prospect of "an inflationary boom," as Hartnett put it, is conducive to higher yields. But, higher yields can mean tighter financial conditions. And tighter financial conductions can imperil the recovery.
So far, the Fed's answer has been to suggest that the backup in ra
Another alternative the Federal government should consider is to swap a high portion (say 2/3) of the Fed’s holdings in UST bonds for a special 100 year floating rate bond the Fed would hold. The Fed still would have a balance sheet they could conduct policy with. The bond would be callable at anytime and the rate would float annually based on the average cost of all UST debt oustanding each year. That would free up a lot of space over the next 30 years for the UST to issue regular UST bonds since the bonds that they swapped for could be retired and would not have to be rolled over and refinanced. If UST so chose they could call any of the bonds the Fed held at par.
They could call any or all of the special 100 year bond I meant to say.
Maybe I will write Yellen and Powell….about this
My goal is to never have to trade and to rarely have to readjust my portfolio. I just want to keep enough of an understanding about what is going on, mostly at a macro level, to remain confident about staying long, setting it and forgetting it.
The most important issue that you have covered (over the yrs) related to my goal- and about which I have completely changed my thinking over time- is the issue that you covered in this post. Up until recently, I rarely saw much else written about this topic (except here) and to be honest, I have mostly stopped looking.
I remain primarily interested in understanding the status of the US within the world ( GDP, political, and as a world leader on the environment), money printing (around the world) and what it is used for (short or long term benefit to USA and the world), recirculating money within the USA via taxes and the USD as the world’s reserve currency, etc.
I remain interested in learning about other topics- but they are mostly relevant to “traders”- a group I hope I am not “forced” to join.
Great article. Very interesting take on the inequality catch-22. I think Yellen and the Biden administration are keen on taking on inequality and have very little to zero concern about some of the high flyers coming back to reality.
That isn’t to say there won’t be enormous pushback from the chattering class via their employers.