Waning liquidity has been an issue since before the Fed started allowing its massive nearly $9 trillion balance sheet to shrink in June. But this month, the pace of this unwind will accelerate to $95 billion a month — an unprecedented pace, according to a pair of Kansas City Fed economists who published a paper about these risks earlier this year.
At some point, higher yields should attract new buyers, Sengupta and Smith said. But it’s difficult to say how high yields will need to go before that happens — although as the Fed pulls back, it seems the market is about to find out.
So basically the “economists” are saying that since the government, acting through the Fed, is not creating money to buy their own bonds, the treasury bond market will have to be closer to a real market.
Why is this a problem? The only conclusion I can come to is that these “economists” are leftists and want the government to be able to spend as much as they want to control more of the economy.
Certainly you could be correct. Or maybe it’s because the Fed has supported market distortions for SO long that players in an open free market might not be able to cope with a world wherein such Fed meddling has evaporated.
As it is, I think bond interest rates are ridiculously low given the inflation and the United States national debt at 137% of GDP as of Dec 2021. Since then we have piled on even more debt and GDP has decreased so I expect this percentage to be higher.
The markets have gotten used to the Fed buying up treasury and mortgage backed bonds through their quantitative easing over the last 12 years but this is a radical, dangerous policy brought in by helicopter Ben Bernanke.
It remains to be seen whether Powell and the current Fed will have the fortitude to continue through with stopping or even reversing this policy by a small amount. that may cause the S to HTF but better now than later.
The one year treasury broke 4% today, 4.02% to be exact. The two year is 3.94%. The five year TIPS real yield is 1.22% and the five year nominal yield is 3.68% so the breakeven inflation is 3.68-1.22 =2.46%
I suggest that you set up an account at one of the big brokerage firms, like Fidelity, Schwab or Vanguard. Then you can buy treasury securities at auction with no fee as discussed here
For an auction, you specify the maturity , from the available list, and the amount. Then after the auction date, you get the best rate determined by the participants in the auction.
You can buy treasury securities on the secondary market with no fee from the brokers I mentioned. That is very similar to buying stock. You will get a quote with a given price and yield to maturity and you can decide whether you want to buy.
The treasury bond market is huge, bigger than the stock market in terms of dollar volume, and known for being efficient but that’s certainly possible and could affect prices. You can compare the price at different brokers. I have never done that but it would be an interesting exercise.
In the midst of a highly volatile bond market, the Treasury’s offering of a reopened 10-year TIPS — CUSIP 91282CEZ0 — generated a real to maturity of 1.248%, the highest for any auction of this term since July 2010.
This was a stunning result, but also predicable, after the Federal Reserve yesterday made clear its intention to battle soaring U.S. inflation to the bitter end, suggesting increases in interest rates would continue well into 2023.
The result was also historic, because the real yield was the highest for any TIPS auction of the 9- to 10-year term since July 8, 2010, when a new issue 10-year TIPS got a real yield of 1.295%. Since then, there have been 73 TIPS auctions of this term, all of them with real yields below 1.2%. Until today. And it is amazing to consider that less than a year ago, on Nov. 18, 2021, a 10-year TIPS reopening got an all-time low real yield of -1.145%, 293 basis points below today’s result.
(I’m not BUT they keep finding suckers in follow on stock offerings so… )