Ministry of Finance down the field!

On October 28, U.S. Treasury Secretary Janet Yelled admitted that

Liquidity indicators for U.S. Treasuries are at their worst level during the epidemic.

On this issue, I already wrote on October 24

“It’s come to a head”.

As mentioned in the article, CIMB Research, which has used the aggregated pricing error between the Treasury duration pricing model and the actual price of U.S. Treasuries to determine the liquidity of the U.S. Treasury market, concluded at that time that

The current liquidity of the U.S. Treasury market is close to the level it would have been under the impact of the epidemic in mid-March 2020.

Now, the Treasury Secretary himself has confirmed that the current U.S. Treasury market is indeed experiencing liquidity problems.

The Secretary of the Treasury of the hegemonic state of the dollar, of course, cannot just point out the problem, as I did, and that’s it, she also has to put forward ideas to solve the problem, at least to make the market think that the Treasury can solve the problem, otherwise, so purely to shout a voice, will only aggravate the market panic, so that the U.S. Treasury market liquidity problems more serious.

So, before Yelled said this, it is implied that the U.S. Treasury may choose to buy treasury bonds, this Treasury to buy back the treasury bonds, is simply summarized as “fiscal version of QE”.

What kind of logic is this?

The logic is very simple, that is, the real money out of the U.S. taxpayers’ money, to buy back part of the U.S. Treasury bonds, and thus depress the Treasury yields and increases the liquidity of the Treasury market.

It was this implication that gave the market confidence and the US Treasury yields began to fall back while the stock market surged continuously.

In terms of the gap in revenue spending, the U.S. Treasury can now claim to have that bottom line – because over the last year or so, U.S. Treasury revenues have been drifting up while spending has been brushing down.

Look at the two charts above, one revenue up, one spending down, monocle outlet I now have the money to buy back some of their own debt, it is not normal, right?

Generally speaking, there is a liquidity crisis in the Treasury market, which requires the central bank itself to buy Treasury bonds in the market, let’s say that happens after March 2020. But the problem is that now the Fed has announced that it wants to scale down, if you come back to buy Treasuries, it is not while pulling while eating it?

This is a major damage to the central bank’s credibility (in fact, look at the situation since 2008, the Fed does not care about this Billion).

So well, this time to pretend, by the Treasury Department to solve – more importantly, the Treasury Department with taxpayers’ money to buy Treasury bonds, are the deployment of existing funds in the market, and does not involve any additional money printing, can be described as “clean”.

Further, during the outbreak of the new crown in 2020, the U.S. Treasury issued a lot of ultra-low-yielding Treasury bonds at a high price, and now that yields have skyrocketed, the Treasury bought them back at a much cheaper price, and back and forth, the Treasury also earned a fortune from investors in the market!

More importantly, this Treasury to buy Treasury bonds (note that the Treasury is the only one in the world to sell a handful of U.S. Treasury bonds), this thing, the U.S. Treasury is not the first time to do, and now to do, is also considered familiar.

Last time, the U.S. Treasury to buy Treasury bonds, is in 2000, during the Clinton administration.

In early 2000, the U.S. Treasury issued an announcement that it planned to repurchase $30 billion of Treasury bonds in that year (the total amount of U.S. Treasury bonds at that time could not be as large as it is now), while stating that the operation would make a judgment on the market’s response and adjust the prompt period, size, time and operating rules accordingly, also specifying the terms of the repurchase, which included

Publication of the total number of eligible bonds with maturity and repurchases.

The number of tenders for each bond, the maximum acceptable price, and the remaining balance of privately held bonds, etc.

At that time, U.S. Treasury repo operations were conducted through the Federal Reserve Bank of New York’s Open Market Operating System.

However, if you look at the revenue of the U.S. federal government at that time, the same as now, the same high growth, the growth of fiscal spending cannot catch up with the growth of revenue, so, as a “responsible government”, the Clinton administration thought, buy back part of the U.S. federal government debt, to reduce the U.S. government debt. The benefits are for the present and future generations!

Clinton, who was about to leave office, wanted to leave his deputy Al Gore a political interest (Gore was the Democratic Party’s presidential candidate at the time), but to his surprise, Gore unexpectedly lost to George W. Bush Jr. in the 2000 election.

As a result, Clinton saved this small amount of money, “9/11”, immediately after the outbreak of the then President Bush Jr. to squander all, and is fighting Afghanistan, and Iraq, not only squandered, but also completely insufficient, and desperately increase the debt, which led to the U.S. federal government is now in debt.

However, I need to emphasize here, now and 2000 can be completely different, the Biden administration is not the Clinton administration, note the above chart – the Clinton administration, the U.S. government’s total debt of only 10 trillion dollars, and revenue exceeds expenditure, is really profitable, spend some money to buy back the national debt, of course It’s only logical.

But now the federal government, after Trump 2020 and Biden’s own 2021 can be splurged on, the U.S. government debt has already ballooned to more than 30 trillion dollars.

It seems that in 2021-2022, the U.S. revenue is increasing significantly, while fiscal spending is decreasing significantly, but in fact, the significantly reduced fiscal spending is still much larger than the significantly increased revenue, the U.S. government, still continue to run fiscal deficits, their so-called “buyback” of treasury bonds, may only be a temporary Measures.

According to market inference, the U.S. Treasury wants to buy back the money of the Treasury (mainly long-term Treasury bonds), there are three sources.

1) Cash on the books – that is, the U.S. Treasury opened in the Federal Reserve TGA funds.

2) Issuance of short-term Treasuries, which are used to purchase long-term Treasuries.

3) Duration neutral financing – this is slightly more complicated, meaning that any Treasury bonds repurchased by the Treasury will be accompanied by the issuance of a combination of long and short term Treasuries to ensure that the overall remaining maturity of Treasuries in the U.S. market remains unchanged in order to keep the weighted average maturity of outstanding debt constant.

Since the current U.S. government’s finances, have not turned a profit, and I’m sure they don’t intend to, the first and second are more likely, but it’s safe to assume that this is a temporary measure – if this still doesn’t work out, the Federal Reserve will eventually step in to solve the problem.

If it is the first case, we can observe it by looking at the Fed’s TGA (Treasury Account) balance.

If the size of the TGA is decreasing rapidly, it means that the U.S. Treasury is using the TGA balance to purchase Treasuries.

In the second case, since short-dated debt is currently used directly as general collateral in the U.S. interbank repo market, if the U.S. Treasury increases the supply of short-term Treasuries and draws down cash, it will cause the Fed’s overnight rate to rise, which in turn will cause the size of the reverse repo (RRP) on the Fed’s liability side to decrease significantly.

Both TGA and RRP are among the large items on the liability side of the Fed’s balance sheet, and with the current RRP balance sitting near an all-time high, I personally estimate that the second option is a bit more likely to be implemented.

Through this seemingly left hand pour right hand way, not only can improve the liquidity of long-term U.S. Treasury bonds, but also reduce the size of RRP, and at the same time in the short term to help the Fed reduce its balance sheet (regardless of TGA or RRP scale reduction, can achieve the Fed balance sheet reduction), can be said to be a twofer.

We might as well wait and see what the U.S. Treasury performs.


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