I'm confused how a still significant net issuance of new treasuries constitutes QT. I'm sure it's me missing something but I don't know what I'm missing.
> confused how a still significant net issuance of new treasuries constitutes QT
When the Fed sells a bond, it's taking cash out of the system and exchanging it for a bond. In monetary terms, it's destroying cash. That's tightening. When the Treasury issues a bond, it swaps it for cash. Same as the Fed.
Whether the Treasury or the Fed sells a bond, it has the same monetary effect. The difference is the Treasury's issuance is twinned to public spending, making the net effect neutral. (When the Treasury spends it creates cash.) In the short term, however, when spending precedes issuance (or vice versa), the gross effects can be real.
> it for a bond. In monetary terms, it's destroying cash.
Too lazy to search for the exact link but I seem to remember reading some editorial in the financial section of The Economist about 3-4 months ago where they were saying that bonds are sort of cash-like, or were sort of cash-like when that article was written and when the papers on which that article was based had been written. If that premise were to hold true (even in part, meaning bonds are sort-of-cash), maybe most of the "rules" economists have written down until now when it comes to the cash vs. bonds relationship would need to be re-written.
For the matter, I don't take much of what it's written down in The Economist at face-value anymore but their financial stuff is still pretty spot on.
Yes. But that cash has to come from somewhere. If there's less cash in the system in aggregate, those with it gain leverage. Which means they can get a higher rate. Which raises rates.
The leaky bit in this equation are banks. They can magic money out of nothing to lend against a bond. The patch to the problem is capital requirements.
so really what likely happens is that for every dollar of bond the fed sells, you're really only reducing pennies in circulation, given capital requirements for secured loans.
> significant net issuance of new treasuries constitutes QT
The Fed doesn't make decisions about treasury issuance. Congress decides to spend money and instructs the Treasury to figure out how to finance it. That determines the net level of issuance.
QT entails reducing the size of the Fed's balance sheet, which means Fed reduces net purchases of these treasuries. These treasuries must be purchased by other market participants who do so at whatever price the market clears.
The key is this observation from the article: "QT does not change the size of the Treasury market but does change the composition of ownership. By the end of QT Non-Fed investors should hold $2t more Treasuries as Fed holdings decline by $2t."
Basically QT means fewer bonds owned by the Fed and correspondingly more bonds owned by others (banks, investors, other countries).
The article also notes that private investors have no appetite for more bonds and prices will crater as a result. Could this lead to higher yields and thus higher borrowing costs for the government? Are interest payments about to make a major jump in the federal budget?
If you ask me, yes and yes. But I don't think they will get very high. I've seen claims of low demand for US bonds before and it turned out the exact opposite.
Consider this example: The Fed has issued $2 worth of treasuries in the past, which mature today. If the Fed then issues only $1 of new treasuries today, the overall amount of treasuries in circulation shrinks.
> The Fed has issued $2 worth of treasuries in the past
The Fed doesn't issue treasuries. That's the job of the US Treasury, which is responsible for making decisions about how to issue debt. When Fed purchases treasuries, it increases the quantity of bank reserves (which are less fungible) and also increases flows of capital to money markets.
The Fed purchases securities like treasuries, mortgage backed securities, and (in emergencies under 13(3)) things like commercial debt. NY Fed offers a breakdown of policies taken during covid [0].
> The big question is 'are they assets'? They bought 'assets' which literally nobody else wants
The Fed made massive profits on its crisis-era purchases. Many were held to maturity. Your "literally nobody else" is a multi-trillion dollar pool of buyers.
> They did this in 2009 and over 10 years never exited those 'assets'
The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels.
>The Fed made massive profits on its crisis-era purchases. Many were held to maturity.
The graph from multiple OPs literally say otherwise.
>Your "literally nobody else" is a multi-trillion dollar pool of buyers.
Like normally there's a multi-trillion dollar pool of buyers and the market is healthy. The fed came in when they stopped buying. That's kind of tautological.
>The Fed has been buying, selling and dollar rolling its Agency MBS portfolio virtually every quarter between the end of the financial crisis and beginning of the pandemic [2]. "Never exited" is false, particularly if you're citing the '09 assets. Even if we amend that to consider net positions, the very article this thread is attached to posits the reduction of those levels.
The balance sheet is not some spot where the government makes investments for profits. Sure they had to cycle assets but they certainly didn't exit anything.
Why did the fed not do this pre-2009. why was this only during economic disasters like covid as well? This isn't some brilliant play by the government. This is them taking on the highest risk securities and eating the cost during bad time.
If they didn't take these actions the situation would have been worse. It's good they did what they did but this was certainly not some brilliant profitable play.
Not sure what this refers to. But whoever those OPs are, they're wrong. The Fed has remitted tens of billions of dollars to the Treasury every year since 2011 [1], including from realized (not mark to market) gains.
> normally there's a multi-trillion dollar pool of buyers and the market is healthy
You said the Fed "bought assets which literally nobody else wants." Present tense. Literally.
> balance sheet is not some spot where the government makes investments for profits. Sure they had to cycle assets but they certainly didn't exit anything.
They sold. You can tell because "transaction category," column C, says "sale" versus dollar rolling.
> Why did the fed not do this pre-2009
If by "this" you mean QE, 2008 was the first true American credit crisis since WWII and the first depression-level threat since the Great Depression.
> this was certainly not some brilliant profitable play
Of course not. Making money isn't the Fed's job. It will lose money trimming its balance sheet because its policy goal, higher rates, directly reduce the value of those assets. (In the same way that its 2008 policy goals, lower rates and financial stability, directly increased the value of its purchases.)
The Fed bought assets, in 2009 and '10, which people want to buy and have wanted to buy for a decade. They verifiably sold many of those assets. They're planning to sell much more in the near future. To buy these assets they had to issue liability in the form of money, which is literally their job. Every claim in the original comment [2] is materially incorrect and/or fundamentally misguided.
What you’re missing is the Fed does not issue bonds. The government issues bonds to borrow money. If the Fed sells bonds they currently hold and reduces their balance sheet, it’s QT.
