RE:RE:RE:RE:My worry for the future
DZtrader wrote:
Hi TJ and thanks also. So there seems to be a bit of contradictory in two of those "thoughts"
"The demand is simply not there. In other words, supply of treasuries exceeds demand of treasuries." &
"Janet Yellen wants Jay Powell to lower the Fed funds so she can continue to borrow at the front end."
I had posted a number of times earlier that I was quite concerned with the record amount of issuance of late (at the time and still currently) in particular at a time in which the three larger(est) buyers had for all intents and purposes gone, that being the FED, China and Japan. The concern obviously being if no one is buying then supply and demand as you correctly suggest come into play and thus rates have to head much higher. Fast forward, and I will agree, somewhat to my surprise, for the most part the auctions have been more or less reasonable, ie actual demand was and has been demonstrably better than I and others had anticipated. Not saying sometimes haven't been a bit "squishy" but for the most part certainly better than expected.
If in fact, as you reference that supply does or is exceeding demand at a time in which the Fed is reducing its balance sheet (albeit suggesting they will soon slow this reduction) how do you account for perceived rate cuts to happen in this environment. In fact, (or in theory at least) base soley on supply and demand , given your scenario, rates should be heading higher. It doesn't jive that Yellen would/could influence cuts while there remains more supply then demand. I recognize the Fed has or does control the short end of the curve moreso than the long end, so if there is an imbalance there between supply and demand either the Fed completely reverses course (not just slows) and turns to buying treasuries again or rates climb from here not go down as has been implied by the Fed. Or of course, demand is adequate to keep a level playing field.
.
The demand from the private sector is not there and has to be fulfilled by the Fed to bring yields down.
The supply of treasury exceeds the demand for treasuries which pushes yields higher. However, the Fed comes in as a buyer when the private sector cannot fulfill the price and quantity required at auctions. This pushes yields down and allows the government to borrow at a rate within their target. In other words, the government can continue to borrow at cheaper rates because the Fed can always bail them out. The Fed can lower the Fed funds rate but that doesn't prevent yields from pushing outside of its targeted range. This is especially true when the government requires $1 trillion every 100 days to finance their deficit.
The BoC did this recently when the overnight lending rate between financial institutions exceeded the 5% Policy rate. The BoC injects liquidity to the financial system so that the Policy rate remains within their target. If there is too much collateral in the system and not enough bank reserves, then yields move higher.
Even though the Fed may be targeting a 2% inflation rate doesn't mean the 10 year and 30 year treasuries will follow the narrative. The Fed only has control over the front end of the curve