Monday, September 27, 2021

Treasury holdings

 Another great graph from Torsten Slok at Apollo


Foreigners hold less, Fed holds more. However, the Fed doesn't really hold Treasurys. The Fed turns Treasurys into interest-paying reserves, which banks hold. And banks turn reserves into bank deposits and other assets which we hold. So it is really a big shift from foreign to domestic holding. At, as a commenter on a previous post reminds us, current interest rates, exchange rates, and rates of other opportunities, which may change. So much for exorbitant privilege? 


10 comments:

  1. John,

    If you extend your graph backwards through the early and late 1970's you will see a similar trend in the percentage of US debt owned by the central bank - peaking at 17% in 1974.

    This level gradually fell, hitting a low of 7% in 1990 and then a new low of 4.4% in 2009 (coinciding with the housing and stock market crash).

    This sell off in government bonds owned by the central bank coincided with the end of the Nixon administration and the Vietnam War in 1974.

    Are you starting to see any parallels?

    "History never repeats itself but it does often rhyme" - Mark Twain

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  2. John,

    I presume that you are aware of this:

    https://www.nytimes.com/2021/09/27/business/fed-rosengren-kaplan.html

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  3. Are foreigners monetizing their Treasuries for fresh Fed cash?

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  4. I thought the FED buys treasuries from the primary dealers which are banks...are you saying they return the treasury bonds to these same banks. I don't really understand the process....could you refer us to something that explains how it works. If I went into my basement and printed counterfeit money to buy bonds, I'd end up in prison. What really bothers me is interest rates (a pretty important number in economics) is being mandated by 12 appointees who are not really accountable to anyone...they're manipulating market dynamics, price discovery and it's corrupting the stock, bond and real estate markets. It's corrupting the money itself, not to mention capitalism. Yet when the Chairman testifies in Congress, he's usually treated like royalty. Congress shoveled out trillions in payments to businesses and people, many of them didn't lose a dime of income and the FED enabled it. Airlines did lose income but why are taxpayers bailing them out and why is the FED enabling it....airlines brought COVID into America? I remember when airlines went bankrupt and operated in bankruptcy. I actually know a few pilots who earn over $200,000 a year and were flying once a month, but taxpayers were footing the bill, with interest.

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    1. Jeff,

      "I thought the FED buys treasuries from the primary dealers which are banks...are you saying they return the treasury bonds to these same banks."

      Not exactly. The FED holds onto the Treasuries and tells the banks that the money they receive back must be held onto as reserves. The money that the banks receive back cannot be lent back out.

      The FED then takes the interest payments they receive from Treasury and pay that interest back to the banks as interest on reserves.

      What this rigamarole basically does is convert a liquid asset (marketable Treasury bond) into an illiquid asset (Treasury bond held by central bank).

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  5. FRestly,

    When banks get Fed reserves, don't they expand liabilities to match? And can't those be deposit liabilities, which can be used to buy anything, including (but not limited to) real economy goods?


    Jeff,

    You can write an IOU same as banks, but you need a reputation and social standing before Treasury will accept it?

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    Replies
    1. RSM,

      "When banks get Fed reserves, don't they expand liabilities to match?"

      Nope, that is why it is called money held in reserve. They are effectively lending that money to Treasury because they are receiving interest from Treasury through the Fed, but they can't sell that loan in the open market and make new ones.

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    2. RSM,

      "When banks get Fed reserves, don't they expand liabilities to match?"

      Nope, that is why it is called money held in reserve. They are effectively lending that money to Treasury because they are receiving interest from Treasury through the Fed, but they can't sell that loan in the open market and make new ones.

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  6. FRestly, from https://fedguy.com/follow-the-money/#more-2011

    《 QE adds reserve assets (money for banks) and deposit liabilities (money for non-banks) to the banking system. This allowed bank deposits to grow even as banks were not able to extend credit. The Treasury also issued trillions in Treasury securities, which are a form of money in the financial system. 》

    《 The post GFC round of deposit creation went almost exclusively to the institutional community, with the level of retail deposits little changed. 》

    So it's up to the banks to do what they will with the deposit liabilities associated with QE reserves? They could lend in the normal fashion, by expanding their balance sheet on both sides, backstopped by whatever Basel III requirements set their LCR at, but Fed QE-sourced reserves count as HQLA, right? Banks just choose to lend or not based on whim, not for lack of reserves? (Please correct me if I'm wrong?)

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