I am stilll confused. can someone share what yellen did that cause financial conditions to ease? not disputing the point, but no idea what mechanism she pulled.
in the last quarterly refunding announcement, she changed the mix of short-term Bills and long term bonds, reducing the latter. So there has been much less supply of bonds, therefore the price rose, while T-bills have been in demand and are replacing the reverse repo facility with the Fed, bringing even more funding liquidity into markets and the economy. At some point, she will be issuing many more bonds which ought to weigh on the price of bonds and drive yields higher. but for now, lower yields means easier financial conditions
In fact, that announcement was what started the huge market rally in both bonds and stocks. it came on November 1 ahead of the FOMC meeting. it was everything
you lost me at "[T-bills] bringing even more funding liquidity into markets and the economy." how does it work mechanically? i still don't quite understand how it brings more funding liquidity compared to issuing more long-term bonds
the process is as follows: right now there is a Fed facility called the Reverse Repurchase facility, which as of Wednesday held about $782 billion. These are funds that are deposited, either at banks or money market funds, and since those entities are looking for the highest return they can get, they essentially lend the funds to the Fed in exchange for the Fed giving them collateral of short-dated Treasury securities, and the Fed is paying about 5.40% for those funds right now. Back in January, this facility held ~$2.4 trillion, so that difference, the $1.6 trillion has moved from a purgatory-like place of the Fed's balance sheet into the government's account. those funds have been buying T-bills, which have a higher yield than the RRP facility, and so the facility has been shrinking in size. in the meantime, the Treasury has access to the funds and is spending on government stuff.
When Yellen decided to issue more Treasury bills and less longer dated bonds, that opened the door for more of the RRP facilities funds to exit the Fed's balance sheet and work their way back into the economy.
remember, money on the Fed's balance sheet is not working in the economy, but if the Treasury issues paper, they spend all that money on stuff and social security, etc. by encouraging investors to buy T-bills rather than keep their money on the Fed's balance sheet, Yellen has added significant liquidity to the economy and the financial markets. In essence, there was a pool of liquidity that was not doing anything except earning fees from the Fed and she has pulled the stopper and is draining that pool so the liquidity flows into the real economy as well as into financial markets.
thank you for breaking it down for me! i’m still digesting it, but starting to get a handle on the flows and the link between T-bills/bonds issuance and RRP
How interesting Shrub's post! You always warm my heart with your fun posts. Moreover, the prediction accuracy rate is very high, and I would like to thank you from the bottom of my heart for providing such fun and wonderful predictions for free.🥰🥰🌳🥰🥰
Yet another master class from Shrub. I can see Yellen sitting seeing ghosts and having to revisit past/present/future (throwback to Bill Murray in Scrooged - One of the all time great movies)
Shrub my concern is actually that inflation and PCE (collectively top line) are now flat to negative and costs (wages) are still rising so margins and revenue could be at real risk in 2024. The set up to me seems late cycle vs less of that going on in 2018. Maybe the market shrugs it off but could be an actually bigger catalyst to the downside with increased layoffs (unannounced in an election year)
the satirical comedy of a shrub is one of the things I am grateful to have discovered for 2023. Thank you Thank you Thank you.
I am stilll confused. can someone share what yellen did that cause financial conditions to ease? not disputing the point, but no idea what mechanism she pulled.
in the last quarterly refunding announcement, she changed the mix of short-term Bills and long term bonds, reducing the latter. So there has been much less supply of bonds, therefore the price rose, while T-bills have been in demand and are replacing the reverse repo facility with the Fed, bringing even more funding liquidity into markets and the economy. At some point, she will be issuing many more bonds which ought to weigh on the price of bonds and drive yields higher. but for now, lower yields means easier financial conditions
i see, didnt expect adjusting the mix of bills and bonds have that big of an impact, thank you!!
In fact, that announcement was what started the huge market rally in both bonds and stocks. it came on November 1 ahead of the FOMC meeting. it was everything
you lost me at "[T-bills] bringing even more funding liquidity into markets and the economy." how does it work mechanically? i still don't quite understand how it brings more funding liquidity compared to issuing more long-term bonds
the process is as follows: right now there is a Fed facility called the Reverse Repurchase facility, which as of Wednesday held about $782 billion. These are funds that are deposited, either at banks or money market funds, and since those entities are looking for the highest return they can get, they essentially lend the funds to the Fed in exchange for the Fed giving them collateral of short-dated Treasury securities, and the Fed is paying about 5.40% for those funds right now. Back in January, this facility held ~$2.4 trillion, so that difference, the $1.6 trillion has moved from a purgatory-like place of the Fed's balance sheet into the government's account. those funds have been buying T-bills, which have a higher yield than the RRP facility, and so the facility has been shrinking in size. in the meantime, the Treasury has access to the funds and is spending on government stuff.
When Yellen decided to issue more Treasury bills and less longer dated bonds, that opened the door for more of the RRP facilities funds to exit the Fed's balance sheet and work their way back into the economy.
remember, money on the Fed's balance sheet is not working in the economy, but if the Treasury issues paper, they spend all that money on stuff and social security, etc. by encouraging investors to buy T-bills rather than keep their money on the Fed's balance sheet, Yellen has added significant liquidity to the economy and the financial markets. In essence, there was a pool of liquidity that was not doing anything except earning fees from the Fed and she has pulled the stopper and is draining that pool so the liquidity flows into the real economy as well as into financial markets.
Hope this makes it clearer
thank you for breaking it down for me! i’m still digesting it, but starting to get a handle on the flows and the link between T-bills/bonds issuance and RRP
I told my colleagues how Janet and Jay met under the mistletoe to kiss and fuck the bears during the Dec Fomc day
How interesting Shrub's post! You always warm my heart with your fun posts. Moreover, the prediction accuracy rate is very high, and I would like to thank you from the bottom of my heart for providing such fun and wonderful predictions for free.🥰🥰🌳🥰🥰
Yet another master class from Shrub. I can see Yellen sitting seeing ghosts and having to revisit past/present/future (throwback to Bill Murray in Scrooged - One of the all time great movies)
Good piece
Interesting article in the FT de-demonizing Huawei, China is indeed due for a comeback
Shrub my concern is actually that inflation and PCE (collectively top line) are now flat to negative and costs (wages) are still rising so margins and revenue could be at real risk in 2024. The set up to me seems late cycle vs less of that going on in 2018. Maybe the market shrugs it off but could be an actually bigger catalyst to the downside with increased layoffs (unannounced in an election year)
I feel sad that Shrub will never know what it feels like to embed a tweet on substack with just one link😭