No we are debating if the circumstances for the FED will change. Otherwise the FED’s policy will stay in place.
So far the likelihood of the circumstances changing keeps rising.
The problem was not allowing the Wall Street banks to suffer the consequences of their choices. Only Lehman went bust. Almost all the of them should have been allowed to crash and burn. That would be where GWB was responsible. Repeal of G-S would have happened quickly under GWB anyway, so you are talking about a matter of months–or a year at max–before repeal happened if not under Clinton.
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Clinton was more than willingly a supply side president trying to pull us along as if he were demand side. He was far from it.
Who are they all selling to? The japanese, the fed, and the europeans, who are they selling their bonds to?
It is not necessary to know that. You can look up different institutions to see if their portfolios have shifted and how if you need to know. What is important is the supply in the market might spiral out of control. Buying the Yen or EUR is getting more and more attractive.
I think the fed is a special case. First of all, the fed is reducing their balance sheet by $95B each month, roughly $60B from their treasuries and $35B from their MBS.
Now, because the Fed owns SO MANY treasuries, much of that $60B comes from maturing treasury bills/notes/bonds. It’s even possible that in some months they don’t have to sell any treasuries at all.
As far as MBS goes, it’s a good question. I don’t know who they are selling those to. First of all, they are surely selling them at a loss. When they bought them, mortgage rates were 2.xx% or perhaps 3.xx%, so they are definitely worth less today than when purchased. Additionally, the expected duration has probably gone up because nobody will be refinancing those anytime soon. They are likely trading at a 6% yield or thereabouts. So it could be that insurance companies and pension funds are buying them from the fed.
And I have no idea who is buying the treasury bonds from Japan and Europe. That is, if they are indeed selling in quantity. I suppose we will know how much they sold sometimes next quarter when the BER updates those charts (the “Foreign ownership” charts) on FRED.
Not yet…but here…look at these charts…the idea in Japan is to sell our paper and buy the JPY. It looks like the EUR is out ahead of the JPY in appreciating. Both are rapidly breaking out.
At this time, the Fed is still buying since the rolloff from maturing Treasuries is still higher than their target of $60 B per month.
They aren’t selling. The Fed’s bonds (Treasuries and mortgage) are currently worth much less than their original values, but they do not have to mark to market as long as they hold them on the books. If they sold they would have to declare the loss.
As for foreign holders, the Treasury publishes the amount but not whether the bonds are maturing and not being replaced (rolling off) or whether they are selling.
https://ticdata.treasury.gov/Publish/mfh.txt
Wendy
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It is late here. I am going to tuck myself in…but…
Yep. Just like you and I, if we hold a treasury bond to maturity, there is no capital loss. But I only mentioned losses with regards to the MBS. Those are definitely being sold at a loss. Likely nearly all $35B each month is being sold at a loss.
Looks like Japan has indeed reduced their holdings of US treasuries by about $180B in 2022 so far.
This is worth reading. This is on the selling of US paper as of a month ago.
I will include Yellen’s reaction. It is known as Operation Twist.
snippet
Instead, Treasury Secretary Janet Yellen has hinted that the US Treasury may buy back Treasury bonds, and earlier this month the Treasury called primary dealers to discuss the details of those repurchase operations. In the past, repurchases of treasuries tended to occur during periods of fiscal surplus. But this time the situation is fundamentally different, and it is still uncertain how these goals will be achieved. The Treasury may use a variation of Operation Twist, which the Fed employed in 2012, by essentially injecting liquidity into the market by raising short-term Treasury debt and lowering long-term Treasury rates. The reputation of that program is controversial, however, and there is concern that this policy would clash with the Fed’s deflationary efforts. The path forward is unclear, as the rise in yield rates necessary to induce greater demand could also mean higher costs of lending for both private and public actors.
The EUR is appreciating. I can not find stories on the European central banks selling US paper but do not be surprised.
It is super baffling. Nominal rates at 2%, but inflation at 10% across Europe and around 15-25% in the Netherlands, Poland, Estonia etc. That’s -8% real rates to -23% real rates.
The British pound has risen from 1.04 to the USD up to about 1.23 to the USD.
Despite RPI at 16% and nominal rates at 3%. That’s -13% real rates.
I don’t understand. Why do people like negative real rates so much right now?
It seems that the euro bottomed out on the exact same day that the dollar index (DXY) peaked.
DB2
Keep in mind even with Forex swings the fact is as interest rates go higher all the major currencies, USD, JPY, EUR, and GBP in fact are internally appreciating their respective buying power.
The US led the way with FF rate hikes. The others will follow from here. That is the expected change. The FED meanwhile is slowing its rate of hikes.
The reason the FED led the way is our shift to demand side economics. The EU is the laggard shifting to supply side econ.
The UK should come in with demand side econ next.
Japan’s cycle is not clear to me yet but I think it will be a sort of demand side economics.
WTIC is ignoring the forex
The gold market always trades on perceptions of printing more currency. This could be short lived for gold.
Both charts show the 200 MA has changed to a downward trend.
One of the problems for gold with Operation Twist is the selling of the short end of the yield curve by the FED. Meaning it is not all printing but mainly a swap of short yield for long yield. Not a perfect exchange with no printing but much less printing that at first assumed possibly.