Spot on. We might see S&P way above 3000 before it happens. Boy but when it does, it will be a perfect storm.
Fed’s QE Unwind Reaches $535 Billion, Balance Sheet Drops to $3.94 Trillion, Old Autopilot Still Eng
- Thread starter Banjo
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Spot on. We might see S&P way above 3000 before it happens. Boy but when it does, it will be a perfect storm.
Erm, that's self-contradictory. If the banks are required to hold more treasuries, demand for treasuries should be higher, not lower.
Hmm. That's not read I got from it, but it would be interesting to understand your reasoning a bit more.
I have been obsessed by china economy, literally obsessed... Ever since I dug in and laid my eyes on there numbers, my life hasn't been the same... I am fascinated by the sheer amount of Financial Misrepresentation that is going on in that country, it is the Biggest Ponzi Scheme ever in the history of this world, the blow back from it will rival Argentina, it will be the biggest financial collapse in modern history, beyond a doubt... It's not even up for debate when facts get taken into account
Michael Pettis is a great mind and a great economist I respect him a lot, he thinks china will have two lost decades of stagnation, I decided to produce a counter Thesis arguing his latest writing he put up two days ago... I will start it tomorrow and should be done within a week or so, I can PM you the Thesis when done, you will understand the depth of what's coming on a Economic level to china, there stock market can go to infinite if they want, they create yuan out of thin air... If they wanna dump 400-500 Billion Yuan a trading day into there markets, they can. Which they have been doing since January, when they released there CB would buy stock assets, on top of bonds which they were already doing for a long time already
China's Economy is the Biggest Lie Ever Told
Re "self contradictory": I see what you mean about how it sounds that way, but the way I see it the leverage caps combined with required Treasury holdings would mean that the banks' capital, especially that to be allocated to treasuries, is fully invested/very close to being "topped up" at any point in time, thus leaving the banks saturated with treasuries already, so they being large and steady market participants means a large portion of the market of would-be Treasury buyers is saturated and unable/unwilling to buy more without a substantial increase in yields. I'm not saying that that will necessarily drive yields higher, though it could, but just that the treasury market is very saturated already, so the ability to hold that much supply isn't there anymore.
Re: the second point, I'm totally guessing, but why would they want to buy more bonds so that they can let more bonds roll off? That makes no sense if that's the only reason they're doing it. So there must be a reason, so why would they want to be active in the shorter maturities? Same reason they want to be active in any of the maturities. And/or the Treasury has stated that they want to shorten the duration of debt issued to have lower financing costs, so the Fed wants to play ball by adding demand for the shorter duration paper. That's my view, anyway.
It does not work this way. At least, if you have a certain amount of regulatory capital that you have to hold in riskless bonds, you are going to be buying more bonds on regular basis (you know, coupons and maturities add up
). As an aside, there is a general shortage of safe assets in the world (I could talk about it at length) and USTs are kinda a product of choice for a variety of reasons.
For OMO, they can only (because of the separation of CB and Treasury) trade out of stuff already in the SOMA. So if they have specific exposure they are targeting, they want to buy more bonds even if the net principal is decreasing.
An alternative explanation is that they are trying to offset the recent fiscal policy changes (as they have stated more than once) and, since they can't hike anymore, OMOs is their best bet. A simple constant dollar move from say 5s to bills would have a drastic effect on the intermediate rates with no top-line balance sheet change.
It does not work this way. At least, if you have a certain amount of regulatory capital that you have to hold in riskless bonds, you are going to be buying more bonds on regular basis (you know, coupons and maturities add up
I agree that they'll be buying more bonds on a regular basis, but figuring that the top banks that fall under those requirements need X amount of bonds in total, X is going to increase at the rate that the banks increase their total assets which is slower than the rate (in terms of sum dollar figures) that the total deficit increases, so the excess bonds need to go somewhere, so the Fed will have taken a huge amount of money out of the banking system (if they want to raise rates or continue raising), which it already has, while maintaining a much-larger-than-historically-normal sized balance sheet.
Also, what do OMO and SOMA stand for?
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OMO - open market operations
SOMA - system open market account
PS. Sorry, I should have clarified right away.