A Treasury buyback program today would be mechanically equivalent to quantitative easing and a tailwind for risk assets. Buybacks funded by bill issuance would move cash out of the RRP and into the broader financial system. The end result would be an increase in cash held by banks and non-banks, both whom may rebalance their portfolios into other assets. In addition, the reappearance of a steady bid for coupon Treasuries would put downward pressure on …
Tag: quantitative easing
Published on September 13, 2021 by Joseph Wang Free
The market impact of the Fed’s taper will be moderated by a significant decline in Treasury and Agency MBS issuance. An imminent taper is very likely now that a press trial balloon has been floated right before blackout and even the ECB is tapering. At the same time, Treasury is expected to lower coupon issuance and Agency MBS production is expected to continue to slow. In light of this, tapering can be thought of as …
Published on August 30, 2021 by Joseph Wang Free
There is a plumbing explanation for the conundrum of lower nominal yields and higher inflation. Many factors affect yields, but they are in part determined by who has money and the investment constraints they face. QE mechanically increases the investible “cash” of investors who are most inclined to buy bonds, and they have been buying bonds. In our two-tiered monetary system $1 of QE creates $2 of money – $1 of reserves (money for banks) …
Published on May 3, 2021 by Joseph Wang Free
QE is intended to put downwards pressure on longer dated yields, but its most obvious impact is on the front end. Repo and short dated bills are pinned around the leaky ON RRP floor, with the zombification spreading up along the bill curve. This outcome stems from of our two-tiered monetary system interacting with the constraints of Basel III. In general, every dollar of QE creates two dollars of money – one dollar of reserves …
Published on September 19, 2020 by Joseph Wang Free
This post describes the nitty gritty of what happens when the Fed purchases Treasuries. I will go into detail on the balance sheet implications for each participant, which will vary depending on whether the market participant is a bank or a non-bank. The bank/non-bank distinction matters because non-banks do not have Fed accounts and thus cannot hold reserves. The Fed only does QE trades through Primary Dealers, who generally are not banks (they are broker-dealers) …
Published on August 25, 2020 by Joseph Wang Free
In recent months M2 has exploded higher by almost 3 trillion, generating enormous market chatter. This note briefly describes the mechanics of how Fed actions has led to a spike in bank deposits, which in turn has led to a large increase in M2. Note that M2 is largely comprised of different types of bank deposits, including demand deposits, savings deposits and time deposits. I’ll first go over the basic principles of central bank and …