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Wednesday, August 12, 2015

Fed Never Intended to Raise Rates or an Intentional Treasury Crash is Dead Ahead???

Need to put a couple pieces together here to give a full picture...


1- US federal debt reported by the Treasury has not officially increased for over 150 days...it has been locked at $18T,151B.  This is being done as congress has not authorized a new legal debt ceiling limit.  In these "extraordinary" times, the secretary of the Treasury borrows from federal pensions and other available "trust funds" to avoid issuing new debt for the ongoing deficit spending (on track for about $600B this year).  This avoids breaching the debt ceiling.  Mr. Lew has stated he can do this until Oct 30 at which time all available funds will be depleted and a debt ceiling hike will be necessary to enable ongoing deficit spending.  Lets assume the ceiling is raised by Oct 30 and treasury debt is again sold to the "public".  The Treasury will need to sell the $300 to $400 billion to pay back the borrowed funds plus the new debt.


2- Interestingly, the Fed has also stated a target for a rate hike in September or December along with the potential to start unwinding (either via not reinvesting some portion of maturing debt or some modest amount of outright selling) the Fed's $4.5 trillion balance sheet.  Perhaps $500B/yr for 6/yrs to get back to a $1.5T balance sheet (still double the '08-'09 starting balance). 


3- So, combine the ongoing federal deficit, the debt catch-up, the Fed normalization juxtaposed with the buyers of all debt since '11 turning to net sellers (Fed turning to an outright seller, in '15 foreigners have net sold $83 billion in US Treasury debt...and intra-governmental holdings have decreased by another $83 billion (no surpluses to be recycled).  Chart below shows how insignificant the domestic public has become...and what an amazing ask this is to believe the domestic public will maintain the Treasury bid (not to mention the impact on all other asset classes as all cash is drawn away to buy Treasury's???).  Change and total holdings respectively in the charts below.




4- All of this adds up a very large debt issuance upcoming and all intended to be sold to the only remaining potential buyer...the US domestic public (pensions, banks, insurers, domestic public).
And if the domestic public buys it, they go bankrupt from the low yields and if they don't buy it the US government goes bankrupt from the high yields.
Jus saying...wtf.

10 comments:

  1. I would argue they never intended to raise rates. The old fool me once shame on you, fool me twice shame on me. They have been talking up rates for years now. Let's see some action out of the Fed or they really are the boy that cried wolf. I'll believe rates will increase when I see it. The data does not show a need to raise rates and increase the strength of the dollar unless they plan on engineering a crash. Hmm....then follow up with a decrease in IOER and get the higher inflation to save the day?

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    1. All the chat about a 1/4pt hike but the real story is the 6yrs it would take at $500B a year to normalize the balance sheet to a target of $1.5 T...(approx. $42B/mo in rolloff or outright sales in addition to new debt and if foreigners keep selling...TIMBER...almost all Fed discussions have focused on reducing Treasury holdings and maintaining MBS to maturity)...sure hope nothing bad happens over the next 6 years while they "normalize" just to get the balance sheet back to where it's only double what it was when all this started.

      How can something so ridiculous be accepted as "the plan"?

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  2. Chris - Yeah I don't see the Fed having the ability to stop rolling over existing Fed held UST. The data you have here, combined with maturing UST on the Fed's balance sheet, and a slowing global economy does not bode well for reducing the Fed balance sheet. There still is a lot of excess cash on the sidelines for individuals and corporations. I just don't see the want or need to buy UST right now. Looks to be setting up for a potential spike up in rates without continued low rates, Fed rolling over debt, and maybe even buying more.

    Interesting that Alan Greenspan came out the other day saying watch out for the bond bubble. Not good when he comes out and says watch out below!

    http://www.bloomberg.com/news/videos/2015-08-10/greenspan-be-afraid-of-pending-bubble-in-bond-market

    Looks to be setting the stage for debt monetization like Japan this year.

    Interesting times. As always, thanks for your input.

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  3. Interesting read if you have time.

    https://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf

    I'll take door number 5...financial repression for a couple decades.

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  4. the fed books the interest they receive on their holdings back to the treasury. So all the bonds which have been taken on the balance sheet are basically the same as the usd bills in circulation. The fed has already monetized part of the debt. Now let say the interest goes up. The fed simply roles over the old treasury in a new treasury and pays again the interest back to the treasury. rinse and repeat. In this case the interest rate can go up. In fact the governmental debt is not 18 trillion but - 4.5 trillion balance sheet fed = 14.5 trillion. Debt to GDP = than 13.5/18151*100 = +/- 74 pct

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    Replies
    1. sorry 2 mistakes,
      1. the fed not books it back but pays it back.
      2. In fact the governmental debt is not 18.151 trillion but - 4.5 trillion balance sheet fed = 13.5 trillion. Debt to GDP = than 13.5/18151*100 = +/- 74 pct18

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    2. again a mistake.
      2. In fact the governmental debt is not 18.151 trillion but - 4.5 trillion balance sheet fed = 13.651 trillion. Debt to GDP = than 13.651/18151*100 = +/- 75.37 pct

      NB: If my statement holds this will also apply to the for example the central banks of japan England and now also the EU. And in the future probably Russia, Brazil etc etc basically to all central banks.

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    3. Well your statement does not hold, that is not the way government debt is calculated. I hope that helps.

      Also there are a couple of mistakes in this article

      1) There is nothing to stop foreign buyers buying treasury notes after Oct (though I believe there will be less interest as China has broken its 'effective' peg against the dollar, so no longer needs as many dollars

      2) The US public wont become bankrupt because they bought a low yielding bond..that's a stupid statement..not that I am suggesting they should buy them as there is clearly a bond bubble that will have to burst at sometime....though not yet...

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    4. 1) Of course there is nothing to stop foreigners from buying US Treasuries but the fact is they have been net sellers thus far in '15 and foreign nations are holding fewer dollars (and thus need fewer dollar reserves...aka, Treasury debt) as foreign exchange thanks to the many trade deals China, Russia and many other nations are making to avoid the necessity of dealing in dollars.

      2 - The "US Public" is simply the catch all for all US banks, US Pensions, US Insurers that make up the vast bulk of domestic Treasury buying...they typically need to make 7.5% to allow them to meet their distributions...if they sell stocks and buy 10yr Treasury debt at 2% or 2yr at .7% in any significant quantities...they will go bankrupt.

      BTW - your tone sucks.

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  5. One thing to consider is IOER currently at 0.25%. If the Fed raises rates IOER goes up too. With approx. $2.5T in excess reserves that is NOT going back to the US Treasury. That money is going to the banks. At what point do we reach in IOER that there is sufficient political blowback? Right now we will pay over $6B in interest to the banks, 40% going to foreign banks. At 2% that becomes much more significant, even at 1% that is fairly significant.

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