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All that liquidity has to go somewhere.
Not really, it can just sit in excess reserves earning 25 basis points.
yes last year the Fed bought 77% of Federal debt thus allowing Barry to issue more and more debt. Without the Fed doing this the party would be long over and we'd be on the road a responsible fiscal policy much as Europe appears to be.
Thoroughly idiotic since the yields even at the long end of the curve, which the Fed can't control, are at an all time low. The Fed has nothing to do with "the party", the government can borrow so cheap because everybody in the world wants to hold Treasury securities.
Over half of the Treasury recent supply has been bought as the Fed has extended the duration on it's portfolio. So the Fed does greatly influence the long end of the curve.
Even if the Fed is not engaged in QE, it still has significant influence on the long end because of the term structure premium that investors are willing to receive further out on the curve.
All that liquidity has to go somewhere.
Not really, it can just sit in excess reserves earning 25 basis points.
That's "somewhere." It can go other places too.
If a portfolio's assets and liabilities are duration matched at, say 4 years, and the Fed buys your bond, the duration of cash is zero, and now there is a mismatch. So the investor takes the cash and buys something else to match duration again at 4 years, pushing up the price of the asset. And voila! The liquidity went somewhere.
Thoroughly idiotic since the yields even at the long end of the curve, which the Fed can't control, are at an all time low. The Fed has nothing to do with "the party", the government can borrow so cheap because everybody in the world wants to hold Treasury securities.
Over half of the Treasury recent supply has been bought as the Fed has extended the duration on it's portfolio. So the Fed does greatly influence the long end of the curve.
Not at all. It doesn't matter how many Treasuries the Fed buys, they can't lower long yields with Open Market Purchases at the zero lower bound. What are they affecting by purchasing long bonds? They're not changing the risk or term premia. They're not changing the term structure, because short rates are already at zero. If they honestly believed they could control long rates with OMOs, then they would be specifying a target rate for long bonds rather than specifying a quantity of purchases of long bonds.
The only way OMOs work at the ZLB is as forward guidance; if the market takes it as a signal that the Fed will hold rates at zero for longer, thus changing the term structure. But this is a really weak and unclear form of forward guidance, so it takes billions and billions of dollars of purchases just to shift long yields a couple of basis points. The special thing about the recent Fed announcement wasn't that they're doing more QE, it's that they're starting to use stronger forward guidance like making the QE open-ended until "significant improvement in the labour market" and promising not to tighten prematurely if a recovery picks up.
Even if the Fed is not engaged in QE, it still has significant influence on the long end because of the term structure premium that investors are willing to receive further out on the curve.
Yeah it affects the term structure, but remember the Fed has an inflation target which stops them doing much with the long end of the yield curve. The Fed can't just promise to keep rates at zero forever, for example. If the Fed lowers the interest rate today then it's expected that they'll raise it again in the future to keep inflation on target. It gets a little trickier at the ZLB, but you get the point.
Over half of the Treasury recent supply has been bought as the Fed has extended the duration on it's portfolio. So the Fed does greatly influence the long end of the curve.
Not at all. It doesn't matter how many Treasuries the Fed buys, they can't lower long yields with Open Market Purchases at the zero lower bound. What are they affecting by purchasing long bonds? They're not changing the risk or term premia. They're not changing the term structure, because short rates are already at zero. If they honestly believed they could control long rates with OMOs, then they would be specifying a target rate for long bonds rather than specifying a quantity of purchases of long bonds.
The only way OMOs work at the ZLB is as forward guidance; if the market takes it as a signal that the Fed will hold rates at zero for longer, thus changing the term structure. But this is a really weak and unclear form of forward guidance, so it takes billions and billions of dollars of purchases just to shift long yields a couple of basis points. The special thing about the recent Fed announcement wasn't that they're doing more QE, it's that they're starting to use stronger forward guidance like making the QE open-ended until "significant improvement in the labour market" and promising not to tighten prematurely if a recovery picks up.
Even if the Fed is not engaged in QE, it still has significant influence on the long end because of the term structure premium that investors are willing to receive further out on the curve.
Yeah it affects the term structure, but remember the Fed has an inflation target which stops them doing much with the long end of the yield curve. The Fed can't just promise to keep rates at zero forever, for example. If the Fed lowers the interest rate today then it's expected that they'll raise it again in the future to keep inflation on target. It gets a little trickier at the ZLB, but you get the point.
You just have to look at the real return of bonds to see the impact QE has had. The real return on the 10y tbond has been negative for most of the past 16 months, even when accounting for core CPI. That wouldn't be happening if the Fed weren't by far and away the largest buyer of tbonds.
All that liquidity has to go somewhere.
Seems pretty clear its going into the market.
And as the real estate market seems to be slowly turning around, the whole point of easing seems to be doing the job it was intended to do.
All that liquidity has to go somewhere.
Seems pretty clear its going into the market.
And as the real estate market seems to be slowly turning around, the whole point of easing seems to be doing the job it was intended to do.
Liquidity? Are you kidding? This is merely increasing the supply of currency without regard to the loss in value of said currency.
Look genius, the only reason why the Fed can fire up the printing presses is because it continues to hold interest rates at unrealistically low rates.
Interest rates should be permitted to float with the market.
After the marketplace calmed down, an immediate upturn in business activity and thus consumer spending would cause interest rates to fall.
Not at all. It doesn't matter how many Treasuries the Fed buys, they can't lower long yields with Open Market Purchases at the zero lower bound. What are they affecting by purchasing long bonds? They're not changing the risk or term premia. They're not changing the term structure, because short rates are already at zero. If they honestly believed they could control long rates with OMOs, then they would be specifying a target rate for long bonds rather than specifying a quantity of purchases of long bonds.
The only way OMOs work at the ZLB is as forward guidance; if the market takes it as a signal that the Fed will hold rates at zero for longer, thus changing the term structure. But this is a really weak and unclear form of forward guidance, so it takes billions and billions of dollars of purchases just to shift long yields a couple of basis points. The special thing about the recent Fed announcement wasn't that they're doing more QE, it's that they're starting to use stronger forward guidance like making the QE open-ended until "significant improvement in the labour market" and promising not to tighten prematurely if a recovery picks up.
Yeah it affects the term structure, but remember the Fed has an inflation target which stops them doing much with the long end of the yield curve. The Fed can't just promise to keep rates at zero forever, for example. If the Fed lowers the interest rate today then it's expected that they'll raise it again in the future to keep inflation on target. It gets a little trickier at the ZLB, but you get the point.
You just have to look at the real return of bonds to see the impact QE has had. The real return on the 10y tbond has been negative for most of the past 16 months, even when accounting for core CPI. That wouldn't be happening if the Fed weren't by far and away the largest buyer of tbonds.
I don't understand why you're assigning that to QE. Yes, real yields on long bonds are low. Why would that not be happening if the Fed weren't buying bonds? Of course it would be happening, low prospects for real growth have driven the term premium down.
Really, what is the Fed doing by buying long bonds? What are they changing? They're not lowering the default risk premium. They're not lowering the liquidity premium. They're not changing the term structure. Do you think they're affecting the term premium some how?
You just have to look at the real return of bonds to see the impact QE has had. The real return on the 10y tbond has been negative for most of the past 16 months, even when accounting for core CPI. That wouldn't be happening if the Fed weren't by far and away the largest buyer of tbonds.
I don't understand why you're assigning that to QE. Yes, real yields on long bonds are low. Why would that not be happening if the Fed weren't buying bonds? Of course it would be happening, low prospects for real growth have driven the term premium down.
Really, what is the Fed doing by buying long bonds? What are they changing? They're not lowering the default risk premium. They're not lowering the liquidity premium. They're not changing the term structure. Do you think they're affecting the term premium some how?
Are you saying demand does not affect price? The Fed is a massive buyer of securities. They make almost all of the other whales look like minnows. Buying increases the price. That's what the Fed is doing.
If you believe that the tbond is some indicator of growth, you are saying that the bond mkt is forecasting a decade of negative economic growth. I know no one in the bond mkt who believes that. When I talk to guys who buy bonds, they are first and foremost focused on what the Fed is doing. It's not some textbook theoretical construct.
I don't understand why you're assigning that to QE. Yes, real yields on long bonds are low. Why would that not be happening if the Fed weren't buying bonds? Of course it would be happening, low prospects for real growth have driven the term premium down.
Really, what is the Fed doing by buying long bonds? What are they changing? They're not lowering the default risk premium. They're not lowering the liquidity premium. They're not changing the term structure. Do you think they're affecting the term premium some how?
Are you saying demand does not affect price? The Fed is a massive buyer of securities. They make almost all of the other whales look like minnows. Buying increases the price. That's what the Fed is doing.
If you believe that the tbond is some indicator of growth, you are saying that the bond mkt is forecasting a decade of negative economic growth. I know no one in the bond mkt who believes that. When I talk to guys who buy bonds, they are first and foremost focused on what the Fed is doing. It's not some textbook theoretical construct.
That's exactly what I'm saying. If you want to talk about textbook constructs, I think you've gone ahead and implicitly assumed one: downward sloping demand curves. A demand curve only slopes downward, and so affects price, if utility from the good in question experiences diminishing marginal returns. Does that assumption hold for a T-Bond?
What's the marginal benefit from a T-bond? The more or less standard approach is that it's the discounted expected future cash flows. Maybe that's where you disagree? I'm assuming that's the benefit from holding a bond, which is why we can can "value" bonds mathematically, something you can't do for say, apples. Given that, we discount it with the term structure plus any relevant premia. So the value of the bond doesn't depend on the quantity in circulation, just the parameters mentioned. Given those parameters, the demand curve for the bond is horizontal.
"If you believe that the tbond is some indicator of growth, you are saying that the bond mkt is forecasting a decade of negative economic growth."
That doesn't follow.
" When I talk to guys who buy bonds, they are first and foremost focused on what the Fed is doing"
Okay, what are they saying? I presume it's to get better estimates of expected future interest rates. If the Fed does more QE, it can be taken as a signal that they'll hold off on tightening for a while, so rates will stay at zero. If their demand curve slopes downward, why?
Translation: Money is going where the investors want it to go, not where Baghdad Ben wants it to go....You can't push a rope.The Fed is not looking at a DCF of a bond. Their marginal utility is to lower interest rates and get the economy going.
The bond market is factoring what the Fed is doing and trading around the Fed's actions. They aren't discounting decade-long negative growth scenarios.
Are you saying demand does not affect price? The Fed is a massive buyer of securities. They make almost all of the other whales look like minnows. Buying increases the price. That's what the Fed is doing.
If you believe that the tbond is some indicator of growth, you are saying that the bond mkt is forecasting a decade of negative economic growth. I know no one in the bond mkt who believes that. When I talk to guys who buy bonds, they are first and foremost focused on what the Fed is doing. It's not some textbook theoretical construct.
That's exactly what I'm saying. If you want to talk about textbook constructs, I think you've gone ahead and implicitly assumed one: downward sloping demand curves. A demand curve only slopes downward, and so affects price, if utility from the good in question experiences diminishing marginal returns. Does that assumption hold for a T-Bond?
What's the marginal benefit from a T-bond? The more or less standard approach is that it's the discounted expected future cash flows. Maybe that's where you disagree? I'm assuming that's the benefit from holding a bond, which is why we can can "value" bonds mathematically, something you can't do for say, apples. Given that, we discount it with the term structure plus any relevant premia. So the value of the bond doesn't depend on the quantity in circulation, just the parameters mentioned. Given those parameters, the demand curve for the bond is horizontal.
"If you believe that the tbond is some indicator of growth, you are saying that the bond mkt is forecasting a decade of negative economic growth."
That doesn't follow.
" When I talk to guys who buy bonds, they are first and foremost focused on what the Fed is doing"
Okay, what are they saying? I presume it's to get better estimates of expected future interest rates. If the Fed does more QE, it can be taken as a signal that they'll hold off on tightening for a while, so rates will stay at zero. If their demand curve slopes downward, why?
The Fed is not looking at a DCF of a bond. Their marginal utility is to lower interest rates and get the economy going.
The bond market is factoring what the Fed is doing and trading around the Fed's actions. They aren't discounting decade-long negative growth scenarios.
That's exactly what I'm saying. If you want to talk about textbook constructs, I think you've gone ahead and implicitly assumed one: downward sloping demand curves. A demand curve only slopes downward, and so affects price, if utility from the good in question experiences diminishing marginal returns. Does that assumption hold for a T-Bond?
What's the marginal benefit from a T-bond? The more or less standard approach is that it's the discounted expected future cash flows. Maybe that's where you disagree? I'm assuming that's the benefit from holding a bond, which is why we can can "value" bonds mathematically, something you can't do for say, apples. Given that, we discount it with the term structure plus any relevant premia. So the value of the bond doesn't depend on the quantity in circulation, just the parameters mentioned. Given those parameters, the demand curve for the bond is horizontal.
"If you believe that the tbond is some indicator of growth, you are saying that the bond mkt is forecasting a decade of negative economic growth."
That doesn't follow.
" When I talk to guys who buy bonds, they are first and foremost focused on what the Fed is doing"
Okay, what are they saying? I presume it's to get better estimates of expected future interest rates. If the Fed does more QE, it can be taken as a signal that they'll hold off on tightening for a while, so rates will stay at zero. If their demand curve slopes downward, why?
The Fed is not looking at a DCF of a bond. Their marginal utility is to lower interest rates and get the economy going.
I don't understand what you're saying here. We're not even talking about what the utility for the Fed is. I'm talking for an investor. I'll try and make myself clearer:
Say there are two apples. I get utility of $1 from eating my first apple. For the second apple I get extra utility of 50c; I've already had one apple, I value that extra second apple less. The price of apples is 50c. Somebody comes and takes away the second apple. There's only one apple. The quantity has changed, we move up the demand schedule, the price is now $1. If somebody adds some apples so there are 3, the price will be 25c, moving down the demand curve. Classic downward sloping demand curve, which happens because the extra utility I get depends on the quantity of apples I consume.
Now think of a bond market. My utility from one bond is its DCF, which is also its price. Somebody gives me an extra bond, my extra utility from that bond is its DCF. I get another bond, my extra utility is its DCF. My extra utility from bonds isn't going down like it does with apples. It's got a flat demand curve. So if somebody comes and doubles the quantity of bonds, their price will be the same as if somebody halved the quantity of bonds. Demand is perfectly elastic, quantity doesn't affect price.
Is that clearer?
The bond market is factoring what the Fed is doing and trading around the Fed's actions. They aren't discounting decade-long negative growth scenarios.
decade-long negative growth? What on earth are you talking about? You keep saying this kind of stuff but not actually addressing the substance of my points...
The Fed is not looking at a DCF of a bond. Their marginal utility is to lower interest rates and get the economy going.
I don't understand what you're saying here. We're not even talking about what the utility for the Fed is. I'm talking for an investor. I'll try and make myself clearer:
Say there are two apples. I get utility of $1 from eating my first apple. For the second apple I get extra utility of 50c; I've already had one apple, I value that extra second apple less. The price of apples is 50c. Somebody comes and takes away the second apple. There's only one apple. The quantity has changed, we move up the demand schedule, the price is now $1. If somebody adds some apples so there are 3, the price will be 25c, moving down the demand curve. Classic downward sloping demand curve, which happens because the extra utility I get depends on the quantity of apples I consume.
Now think of a bond market. My utility from one bond is its DCF, which is also its price. Somebody gives me an extra bond, my extra utility from that bond is its DCF. I get another bond, my extra utility is its DCF. My extra utility from bonds isn't going down like it does with apples. It's got a flat demand curve. So if somebody comes and doubles the quantity of bonds, their price will be the same as if somebody halved the quantity of bonds. Demand is perfectly elastic, quantity doesn't affect price.
Is that clearer?
The bond market is factoring what the Fed is doing and trading around the Fed's actions. They aren't discounting decade-long negative growth scenarios.
decade-long negative growth? What on earth are you talking about? You keep saying this kind of stuff but not actually addressing the substance of my points...
When the Fed buys a bond, the duration of cash is zero, causing buying across the curve, which lowers rates.
I am assuming that you are coming from an academic standpoint. I am telling you what I'm seeing in the financial markets.
@DSGE. Like Japan has done? (Shudder!)
Japan didn't do enough soon enough and/or didn't do it "right".@DSGE. Like Japan has done? (Shudder!)
Of course he's coming from an academic standpoint....They never have to produce any actual results out in The World.I am assuming that you are coming from an academic standpoint. I am telling you what I'm seeing in the financial markets.
BINGO!...I have referred to the Quantitative Easing schemes as "printing fake money"..
Of course the Obamabots are just giddy with glee. Meanwhile other major currencies rise vs the weaker US Dollar.
Further proving the fact that every time government steps in with an attempt to manipulate the marketplace, disaster is usually not far behind.
This manipulation has no recognition of party lines. Both Nixon and Carter attempted wage and price controls with negative results.
yes last year the Fed bought 77% of Federal debt thus allowing Barry to issue more and more debt. Without the Fed doing this the party would be long over and we'd be on the road a responsible fiscal policy much as Europe appears to be.
Thoroughly idiotic since the yields even at the long end of the curve, which the Fed can't control, are at an all time low. The Fed has nothing to do with "the party", the government can borrow so cheap because everybody in the world wants to hold Treasury securities.
