Treasury bill, or short-term US debt paper, has historically ranged between 15% and 20%. In recent months, this percentage of T-bill of total US debt has broken above 20% and it might well be on it‘s way to 25% (or even higher).
As institutions like pension funds are starved from getting long-dates securities, other have been buying the short end. Who? Banks, credit providers as well as the infamous US stablecoiner provider Tether.
Why is this significant?
This is covet yield curve control or yield supression because it supresses the long-end of the curve.
As a matter of fact, the yield of long-dated treasuries should actually be higher, about 100 basis points by conservative estimates.
The question we need to ask is how will the US get investors back into long-dated treasuries?
-Bring down short-term policy rates (significantly) to make long-end debt more attractive.
-Push for a recession to create save haven demand for long-term treasuries (beat steepener). Rather improbable, no?
-Go new ways. For example, as @preston has explained, what if the US Treasuries were to back long-dated bonds with a Bitcoin component. Could this be enticing enough for regular investors to buy into long-end Treasuries?
Love this. What an absurd world where one of the options is ‘push for a recession’.
Making people lives more shit because it’s good for the economy just seems like the wildest non-sequitur of MMT.
Burn it all down I reckon
Why not just buy Bitcoin then? Why fiddle with long term bonds in the first place? Bonds are cooked bro.
Can you help me understand this? How is extra bill issuance suppressing the long end? How do you estimate the long end should be 100 bps higher?
"This is covet yield curve control or yield supression because it supresses the long-end of the curve.
As a matter of fact, the yield of long-dated treasuries should actually be higher, about 100 basis points by conservative estimates."
If you’re getting 5.5% with a cash like instrument you are not going to want the long duration treasury at 4% recognizing that the treasury reduces sales of longer duration and feeds the short duration need. If treasury was to sell more longer duration the market would want a higher rate which the fed / treasury does not want right now. When they reduce front end rates then the long end will be more valuable. Unless inflation picks up. Then if treasury want to go out into the direction curve the market may demand higher rates. The treasury again has a choice pump more short term tbills until someone comes to the table who is willing to own longer duration. There has to be some incentive to do so (higher rates is usually the incentive for holding duration).
What the US Treasury department is doing is „active duration management“
By not issuing long-dated treauries as much, institutions like pension funds, etc. are starved from getting these long-dates securities. As they are mandated (and incentivized by their business model) to buy long-dates treasuries still, demand „outpaces“ supply, which drives up prices and yields down (there an inverse relation between price of bonds and their yield).
How to measure/estimate this?
One way to do this is to compare the 10 year treasury yield to the yield for bonds on the agency mortgage market. The latter is low-risk and got the backing of the US government ss well, so these bonds are almost like treasuries.
In bond speak however, they have longer duration and greater convexity, which is why, when you compare these you have to factor in these differences. You can do that by help of a calculation where you make these to comparable by filtering out convexity and duration and when you do this, you still get about a 100 basis point difference which indicates that this is by how much US treasuries are overvalued or their yield is suppressed.
@trey
At some point, I‘d be happy to talk about these dynamics and other things on Unchained‘s podcast?
40 year bond bull has turned. No finessing it. Years , maybe decades bear or even collapse.
Thoughtful note
Is your position that the relative increase in short term issuance drives down long term rates? Because the long term supply decreases against sticky fixed demand from institutions like insurance companies?
Yes!
Then why would they need to push for demand at the long end? There already is an outsized relative demand for the long end, no?
Good observation. I‘d assume that demand is not strong enough, which is why issuance has to be suppressed by scaling down long-dated issuance.
So you think maybe Yellens logic is “there’s not enough demand to finance the government via the long term. We don’t know how soft the long term demand is, so we will over issue on the short end just to be safe”?
To your hypothesis, many bitcoin thought leaders grabbed onto nouriel roubini’s recent paper on covert yield curve control.
Perhaps that’s the case but my view on it is Yellen is financing on the short end because rates are higher but something closer to floating. It’s akin to what many mortgage borrowers are doing right now - considering 3/1 ARMs over 30 year because they don’t want to lock a bad rate in for a long time.
The market has shown us no signs of reduced to demand for the long end (eg the inverted yield curve).
In fact, the swaps market is telling us rates across the curve should be lower. And Powells interest rate policy has held both the long and short end 200-300bps higher than the market expects based on future growth expectations.
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