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Who is buying all the Treasuries?


911Truther
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With $28 Trillion in treasuries outstanding, only $5.4 Trillion is held by the Fed (this assumes my quick Google search, which brought me to the St Louis Fed page, was right).

A YouTuber I follow says the Fed has a secret balance sheet.  (I lean heavily towards this belief myself.)

I did a Google search for how much money is being managed by pensions.  The top of the search brought up an OECD report.  It indicated worldwide pension assets are $35 Trillion and of that, $20 Trillion was in the US.  So I think I get it, a pension manager has a commitment to pay dollars, with no regard for what those dollars will buy.  So perhaps pension managers would be willing to hold Treasuries with a yield that is practically guaranteed to lose purchasing power at maturity.  Or perhaps they are required to have a percentage of assets in US treasuries.  Either way, it’s the pension recipient who has to worry about his pension dollars not having purchasing power.  I don’t know if that $20 Trillion figure was all US pensions, which is what I’m thinking, or if it was only non-government pensions.

I know that when I was working in corporate America, around 2000, all the giant corporations started ending their pension programs.  Workers were no longer working toward a pension.

I also know that many (if not most) pensions, are underfunded.  Which would force pension managers into risk on assets, as opposed to US Treasuries.

I understand foreign governments also own US Treasuries.  A recent podcast I listened to indicated that Japan owns $1 Trillion in US Treasuries.

Regardless, when these Treasuries held by foreign governments have Treasuries come to maturity, why on earth would they want to roll them over when CPLie is 5.3% and the 30 year is at 2%?

Outside of foreign governments and pensions, who is buying all these treasuries, besides the Fed?  I know Russia recently dumped all their US Treasuries.  New funds coming into pensions, I would guess, is earmarked for risk on assets, since most are underfunded.  And, again, why would a foreign government roll over for a guaranteed loss of purchasing power?

WHO IS BUYING ALL THESE US TREASURIES????

 

 

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Joseph Wang
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Great question. Broadly speaking Treasuries come in two forms - marketable debt and non-marketable debt. Marketable debt is what we think of as the Treasury market, whereas non-marketable debt are mostly Treasuries issued to other parts of the government (basically and accounting trick). Most recent data shows there are 22t in marketable Treasuries and 6t in non-marketable Treasuries. 

Fed data breaks down the ownership as follows: 

7.2t foreigners

5.5t Fed

Asset managers (4.3t) - mutual funds (1.3t) money market funds (2t) private pension/insurers (1t) 

households (including hedge funds) (1.3t) 

Banks and Government sponsored enterprises 1.5t

and the rest by non-financial corporations, securities dealers, ETFs etc.

 

Note that foreigners don't but Treasuries because they are good investments, but because they want to hold dollars (perhaps for FX intervention, or to support the dollar needs of their businesses). If you have billions of dollars you don't deposit that in a bank (credit risk), you buy Treasuries which are credit risk free. In a sense, Treasuries are just dollars that pay interest. 

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911Truther
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Ok, so maybe that explains it.  When I look at a large corporation’s balance sheet, and I see tens of billions in cash & cash equivalents, they don’t have the majority of that in cash at the bank.  The majority is in US Treasuries.

I’ve always wondered how the large corporations bank.  Their bank is essentially the US Treasury.

With Bullard’s admission yesterday that inflation may stay well above the 2% target for some time, I would guess we might be seeing more companies (like Palantir) move some of their cash and cash equivalents into gold.  As these treasuries are sold for cash to buy gold, it only puts more and more pressure on the Fed to be the buyer of last resort.

I’m with Gregory Mannarino and Peter Schiff:  the Fed won’t taper.  If they do, they’ll have to reverse course soon after.

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911Truther
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I was thinking about this issue yesterday.  Once I saw that non-financial corporations are in the "rest" category (in terms of who is buying the Treasuries), I may have jumped to the wrong conclusion.

When yields on the US Treasury went from 0.6% in August of 2020 to 1.2% by February of 2021, doesn't that mean the Treasury note actually lost half its value?

I must have jumped to the wrong conclusion.  When you wrote that non-financial corporations are in the group that hold the "rest" of the balance of Treasuries outstanding... it made sense.  From what I understand, the FDIC limits the guarantee on US checking accounts to $250,000 and there's no exception for large corporations.

In more normal times, a 0.6% move, from say, for example, 8% going to 8.6%, the price of the Treasury Note would only move about 7%.  But with interest rates this low, a 0.6% move is a massive move.

I am guessing no CFO would be comfortable with that kind of risk.  Not only that, but when I look at balance sheets of some of the larger corporations, there wasn't much change in their "Cash & Cash Equivalents" line item during that period (when Treasuries lost half their value.)

So I think we can rule out non-financial corporations as a large buyer/holder of US Treasuries.

I am guessing these large corporations are keeping their cash in banks.  In this environment, holding Treasuries does not equal holding cash.  Or am I missing something?!?!??

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Joseph Wang
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@911truther 

The relationship between yield and market value depends on the how remaining maturity of the security and its coupon payment. If it's short term debt then changes in interest rates won't have a big effect on its market value. This is called duration, see here for a more detailed explanation.

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911Truther
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@josephfedguy-com I see.  So the large corporations only hold short term Treasuries.  Interesting.

When I look at a company like Palantir, they have $2.6 Billion in cash & equivalents.  Their revenues for the most recent quarter were only $341 million.  I would guess they might keep a months worth of operating expenses in cash at the bank and the rest is in Treasuries.

Would you agree with that guesstimate?  Or would we typically see a quarter's worth of operating expenses in cash at the bank?

Either way, the US Government is sitting on one hell of an adjustable rate mortgage with something close to $9 Trillion needing to be rolled over every year.

Correct me if I'm wrong, but is it safe to say that Corporate america is the biggest buyers of short term Treasuries and Corporate america holds somewhere in the neighborhood of $9 Trillion worth?

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Joseph Wang
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@911truther They biggest buyers of short-term treasuries are money market funds, who manage short-term money for a wide range of investors. Investors view MMFs as if they were banks - they put $100 in a MMF and expect to be able to withdraw it at any time. The MMF would they take the $100 and purchase short-term Treasuries. Many investors use MMFs to manage their cash, including corporations. Non-financial businesses have $700b in MMF shares. They are not big direct holders but can be indirect holders. 

Every company manages cash differently, but it's usually not a good idea to hold a lot of it since the return is so low. I'm not sure if there is a typical cash management style. 

I wouldn't worry about US government debt. Fed can always just buy it all.

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911Truther
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@josephfedguy-com Thanks for you help on this.  I've got a lot to learn and figure out.

I am looking at Y-Charts 1-month Treasury Rate.

https://ycharts.com/indicators/1_month_treasury_rate

On June 14th, the (annual) yield on the 1-month US Treasury was 0.01%.

On June 15th, the (annual) yield on the 1-month US Treasury jumped to 0.02%.  Does that mean those 1-month US Treasuries lost half their value in a day?

And by Jun 17th, the (annual) yield on the 1-month US Treasury had jumped to 0.05%.  Does  that mean a buyer of this debt instrument on June 14th had lost 80% of their purchase price by June 17th?

Am I doing the math wrong?

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