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What effect will the QT increase on 9/1 have on T bills?
Old 08-17-2022, 02:38 PM   #1
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What effect will the QT increase on 9/1 have on T bills?

So QT doubles to $95B on September 1. This will reduce the money supply but how will it affect the yields on T bills?

Selling bills, notes or bonds would they be for sale on the secondary market and if that is true then would that drive the price down due to an increase in the supply? Or does it work the other way to lessen the amount of T bills the treasury will sell in September and that should increase the price due to less supply?

With the FOMC meeting on September 21, we should expect a 50 bp or 75 bp increase to the overnight rate. I would think that increase will cause T bills to yield a bit more. So will T bills have an extra yield boost from the increase in QT or maybe it'll mitigate any increase in the T bill rates?
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Old 08-17-2022, 03:09 PM   #2
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So QT doubles to $95B on September 1. This will reduce the money supply but how will it affect the yields on T bills?

Selling bills, notes or bonds would they be for sale on the secondary market and if that is true then would that drive the price down due to an increase in the supply? Or does it work the other way to lessen the amount of T bills the treasury will sell in September and that should increase the price due to less supply?

With the FOMC meeting on September 21, we should expect a 50 bp or 75 bp increase to the overnight rate. I would think that increase will cause T bills to yield a bit more. So will T bills have an extra yield boost from the increase in QT or maybe it'll mitigate any increase in the T bill rates?
My GUESS is that it will have no measurable effect.

The FED needs to burn off $6 Trillion or thereabouts in bills, bonds, MBS's, or other things they have hiding in the closet, to make an impact on U.S. liquidity in excess. $95 Billion is a drop in the bucket compared to what they need to do (which may never actually get done).

Don't lose any sleep over this.
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Old 08-18-2022, 06:30 AM   #3
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Everyone knows it is coming so the yield curve reflects the most likely impact.
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Old 08-18-2022, 08:00 AM   #4
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Everyone knows it is coming so the yield curve reflects the most likely impact.
Well yeah. Except the bond market mostly ignored the Fed's clear telegraph of its tightening cycle last year.

But I agree the impact will be muted at first and maybe little noticed. Over time it figures to have some impact. But the idea is to try not to generate ripples.
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Old 08-18-2022, 09:28 AM   #5
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Real interest rates are still pretty low. I don't know what will happen because the Fed has taken some unusual actions in the past year or so, like bringing interest rates down to near zero then not acknowledging inflation as a real issue for months afterwards. But if they have learned their lesson on the inflation front, this time they will raise interest rates higher than the market expects in the coming year, eventually higher than inflation, and/or settle for annual inflation more than 2%. That just seems to be how things work. It would unusual by historical precedents for inflation to be brought down with real interest rates still so low.
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Old 08-18-2022, 09:47 AM   #6
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Well yeah. Except the bond market mostly ignored the Fed's clear telegraph of its tightening cycle last year.

But I agree the impact will be muted at first and maybe little noticed. Over time it figures to have some impact. But the idea is to try not to generate ripples.
Nothing is certain but my thinking is that the collective wisdom of many investors in the liquid market for treasuries is a better estimate of future outcomes than random internet people.
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Old 08-18-2022, 09:54 AM   #7
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Nothing is certain but my thinking is that the collective wisdom of many investors in the liquid market for treasuries is a better estimate of future outcomes than random internet people.
Exactly. From Rick Ferri's "All About Asset Allocation" : "There is a classic saying on Wall Street, 'What everybody already knows is not worth knowing.' "

That doesn't mean that the consensus is always right, but IMO the odds that one of us random internet people can make better predictions is zero. Lucky predictions, yes, once in a while. Just like anyone.
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Old 08-18-2022, 10:13 AM   #8
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Weíre building ladders up to five years. That way we donít worry about every twitch in interest rates. If they move up significantly, weíll adjust to longer than five years.
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Old 08-18-2022, 10:17 AM   #9
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Exactly. From Rick Ferri's "All About Asset Allocation" : "There is a classic saying on Wall Street, 'What everybody already knows is not worth knowing.' "

That doesn't mean that the consensus is always right, but IMO the odds that one of us random internet people can make better predictions is zero. Lucky predictions, yes, once in a while. Just like anyone.

The market seems to have been taken by surprise by the initial interest rate hikes this year, despite the Fed widely broadcasting their intent in press conferences and meeting minutes. The impact on bond prices with the rise in interest rates was stuff I remember from high school finance class, so I have my doubts about the whole efficient market theory these days.
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Old 08-18-2022, 10:27 AM   #10
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The market seems to have been taken by surprise by the initial interest rate hikes this year, despite the Fed widely broadcasting their intent in press conferences and meeting minutes. The impact on bond prices with the rise in interest rates was stuff I remember from high school finance class, so I have my doubts about the whole efficient market theory these days.
To say there is a consensus is not to say that "the price is right" or that the market is efficient. The consensus includes emotional/psychological factors to one degree or another. Personally, I think the EMH has to be correct over the very long term but the market is far to volatile for me to believe that the price is always the "true" value of the asset. That's why buy-and-hold works; it averages out the psychological noise.

Here is a very interesting video: Fama/Thaler on Market Efficiency: https://review.chicagobooth.edu/econ...kets-efficient Well worth 42 minutes of any investor's time.
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Old 08-18-2022, 01:04 PM   #11
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Is the Fed actually selling bonds in this round of QT? Or are they just letting their holdings mature and not roll them over into new bonds like they did last time?

I can't find the article back, but it suggested that QT really hasn't started yet and what balance sheet reduction it has done is about 1/2 of what was publicly scheduled. Reuters suggested this was because mortgage refi's dried up so MBS aren't rolling off.

Else where it was suggested that QT has not even started given the Feds increased role in the repo markets.

So far it's been more talk than walk.
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Old 08-19-2022, 06:59 AM   #12
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Nothing is certain but my thinking is that the collective wisdom of many investors in the liquid market for treasuries is a better estimate of future outcomes than random internet people.
I generally share your view, but this cycle, trusting the "market" or the "yield curve" has resulted only in heartache.

Have to recognize that.
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Old 08-19-2022, 07:02 AM   #13
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To say there is a consensus is not to say that "the price is right" or that the market is efficient. The consensus includes emotional/psychological factors to one degree or another. Personally, I think the EMH has to be correct over the very long term but the market is far to volatile for me to believe that the price is always the "true" value of the asset. That's why buy-and-hold works; it averages out the psychological noise.

That is another way of saying the market is not particularly efficient in the short term. And of course we buy stocks and bonds in the spot markets, not long-term markets.

But If emotion/mispricing is recognized there is opportunity.
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Old 08-19-2022, 07:14 AM   #14
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I generally share your view, but this cycle, trusting the "market" or the "yield curve" has resulted only in heartache.

Have to recognize that.
My cycle is 60 years (I'm 40+ in already) years so I don't even bother. I learned a long time ago not to worry about things that I can't control or predict. I don't bet on market movements whether they are in equity or debt.
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Old 08-19-2022, 08:11 AM   #15
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Is the Fed actually selling bonds in this round of QT? Or are they just letting their holdings mature and not roll them over into new bonds like they did last time?
The announced QT is a combination of Treasury coupons and agency / MBS. The Fed doesnít need to sell Treasuries to meet the $60B monthly target but may need to sell agencies.

The resulting slope of the yield curve and impact on interest rates will not be determined by the Fed. The US Treasury will have much greater impact. The debt the Fed is redeeming needs to be reissued, and the term the Treasury Dept chooses will affect rates and yield curve slope. So far it looks like Treasury is issuing shorter term obligations.
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Old 08-19-2022, 08:28 AM   #16
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That is another way of saying the market is not particularly efficient in the short term. And of course we buy stocks and bonds in the spot markets, not long-term markets.

But If emotion/mispricing is recognized there is opportunity.
A further interpretation of that is that strategies should be long term and that short term results are largely a matter of luck.
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Old 08-19-2022, 09:52 AM   #17
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The announced QT is a combination of Treasury coupons and agency / MBS. The Fed doesnít need to sell Treasuries to meet the $60B monthly target but may need to sell agencies.

The resulting slope of the yield curve and impact on interest rates will not be determined by the Fed. The US Treasury will have much greater impact. The debt the Fed is redeeming needs to be reissued, and the term the Treasury Dept chooses will affect rates and yield curve slope. So far it looks like Treasury is issuing shorter term obligations.
Michael, I'm not so sure that the debt the FED is redeeming needs to be reissued. If that was the case, they would not be removing (eliminating) the multi-trillions on the balance sheet that is the underlying reason for QT in the first place.

I have read that the MBS's will be "rolled off" as those mortgages are paid off or refinanced in some form or fashion and the bills/bonds when matured will not be reissued.
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Old 08-19-2022, 10:25 AM   #18
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Michael, I'm not so sure that the debt the FED is redeeming needs to be reissued. If that was the case, they would not be removing (eliminating) the multi-trillions on the balance sheet that is the underlying reason for QT in the first place.

I have read that the MBS's will be "rolled off" as those mortgages are paid off or refinanced in some form or fashion and the bills/bonds when matured will not be reissued.
The Fed balance sheet and the Treasury balance sheet are different. Fed tightening does not change the size of the Treasury market or the amount of treasuries outstanding, but it does change composition of the ownership.

When treasury debt matures, the US Treasury has 2 options, roll it over or pay it. The US Gov’t has no surplus so the Treasury has no income to pay it down, so it needs to be rolled over. They have no choice.

What is different now is when the Treasury sells new debt to roll over the old, the Fed is no longer a buyer, so that means more debt needs to be bought by other buyers. That includes private sector, finance sector, foreign governments and investors. This is about $60B per month, or $2T over this year and next.

You are right that mortgage backed securities probably don’t need to be rolled over.
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Old 08-19-2022, 05:48 PM   #19
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The Fed balance sheet and the Treasury balance sheet are different. Fed tightening does not change the size of the Treasury market or the amount of treasuries outstanding, but it does change composition of the ownership.

When treasury debt matures, the US Treasury has 2 options, roll it over or pay it. The US Govít has no surplus so the Treasury has no income to pay it down, so it needs to be rolled over. They have no choice.

What is different now is when the Treasury sells new debt to roll over the old, the Fed is no longer a buyer, so that means more debt needs to be bought by other buyers. That includes private sector, finance sector, foreign governments and investors. This is about $60B per month, or $2T over this year and next.

You are right that mortgage backed securities probably donít need to be rolled over.
I thought you were referring to the FED's balance sheet which is quite heavy in treasuries and MBS's. And I am sure that if the FED makes any profit during the year though bank repos, etc, that profit is distributed to the Treasury at the end of the year.

It's my understanding, unless I am wrong, is that QT is being done to remove trillions of dollars in liquidity from the economy to help stop/control inflation in addition with increasing the Fed Funds Rate.
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Old 08-19-2022, 06:03 PM   #20
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The Fed balance sheet and the Treasury balance sheet are different. Fed tightening does not change the size of the Treasury market or the amount of treasuries outstanding, but it does change composition of the ownership.

When treasury debt matures, the US Treasury has 2 options, roll it over or pay it. The US Govít has no surplus so the Treasury has no income to pay it down, so it needs to be rolled over. They have no choice.

What is different now is when the Treasury sells new debt to roll over the old, the Fed is no longer a buyer, so that means more debt needs to be bought by other buyers. That includes private sector, finance sector, foreign governments and investors. This is about $60B per month, or $2T over this year and next.

You are right that mortgage backed securities probably donít need to be rolled over.
That was exactly what I was referring to. There will be a lot of treasuries issued (my assumption) and I wonder how that'll affect T bill yields.
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