Fed distortion

[ScroogeMcDuck]

1 month t-bill rate got 80bps below the fed funds rate, not because of expectation of a sudden huge drop in rates, but because there wasn't enough supply of t-bills for the market to clear at a higher yield. The fed's QT powers should be extended to issuing bills. Otherwise they're just giving a massive subsidy to whoever has an account at the fed by giving them almost 1% above-market interest risk-free. They need to push rates up in the middle of the curve too.

Correct me if I'm wrong, but right now any participating bank can basically do this which amounts to a huge subsidy from the fed:

1. Buy a 30 year treasury from Nov 2021 at 40% below par
2. Lend it to the fed for par in cash
3. Lend out 1.66x your original money at 5.08%+

Which basically QE. Assets flow into the fed and cash flows out. Pick a lane, fed!

 

[M.W.]

1m does not sit at 80bps below ff. You got your quote wrong. The term structure is inverted because of expectations of lower rates in the future. 1m sits at around 5.39% at the moment. There is a tiny risk premium embedded in that rate.

1 month t-bill rate got 80bps below the fed funds rate, not because of expectation of a sudden huge drop in rates, but because there wasn't enough supply of t-bills for the market to clear at a higher yield. The fed's QT powers should be extended to issuing bills. Otherwise they're just giving a massive subsidy to whoever has an account at the fed by giving them almost 1% above-market interest risk-free. They need to push rates up in the middle of the curve too.

Correct me if I'm wrong, but right now any participating bank can basically do this which amounts to a huge subsidy from the fed:

1. Buy a 30 year treasury from Nov 2021 at 40% below par
2. Lend it to the fed for par in cash
3. Lend out 1.66x your original money at 5.08%+

Which basically QE. Assets flow into the fed and cash flows out. Pick a lane, fed!

 

[countryBoy641]

c
1. Buy a 30 year treasury from Nov 2021 at 40% below par

Just have to wonder where an FDIC bank goes to buy bonds at the FED at prices hugely below the market?
Not a FED.watcher here.
Just curious.

 

[piezoe]

1. Buy a 30 year treasury from Nov 2021 at 40% below par

If that's true, then you can do it too! The fed buys and sells on the secondary market as do you.

 

[ScroogeMcDuck]

any 30y treasury that was issued with a coupon of 1.8% a couple years ago is worth 66% of par now but can be used as collateral for its par value in the fed's repo facility. No idea what interest rate the fed is charging on that so it might not be a windfall for the banks.

 

[piezoe]

any 30y treasury that was issued with a coupon of 1.8% a couple years ago is worth 66% of par now but can be used as collateral for its par value in the fed's repo facility. No idea what interest rate the fed is charging on that so it might not be a windfall for the banks.

talking about collateral then. The fed may not do the calculation the way your broker would.