{"id":89403,"date":"2016-05-09T16:15:28","date_gmt":"2016-05-09T20:15:28","guid":{"rendered":"http:\/\/countingpips.com\/?p=89403"},"modified":"2016-05-09T06:16:12","modified_gmt":"2016-05-09T10:16:12","slug":"the-federal-reserve-wants-more-u-s-treasury-bonds","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2016\/05\/the-federal-reserve-wants-more-u-s-treasury-bonds\/","title":{"rendered":"The Federal Reserve Wants More U.S. Treasury Bonds"},"content":{"rendered":"
May 9, 2016<\/div>
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By WallStreetDaily.com<\/u><\/a> \"The<\/p>\n

The Federal Reserve holds $4.4 trillion worth of assets on its balance sheet.<\/p>\n

Of this total, $2.3 trillion is in U.S. Treasury notes<\/a> and bonds. These Treasuries are parked in the System Open Market Account, which contains assets acquired via open market operations \u2013 including quantitative easing (QE).<\/p>\n

I bring this up in response to a Bloomberg article penned by Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis.<\/p>\n

In the article, titled \u201cThe World Needs More U.S. Government Debt<\/a>,\u201d Kocherlakota claims the U.S. government isn\u2019t issuing enough bonds to satisfy household and corporate demand.<\/p>\n

Well, if there aren\u2019t enough Treasuries for private investors, perhaps the Fed should sell off some of its<\/em> own stockpile of Treasuries. Don\u2019t you think?<\/p>

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Of course, this would effectively function as reverse QE, which would cause financial asset prices to fall.<\/p>\n

In other words, the Fed won\u2019t be shrinking its massive balance sheet and kindly releasing those bonds into the wild anytime soon.<\/p>\n

There are too few Treasury bonds for investors, yet the Fed will continue to hold a big chunk of them.<\/p>\n

Obviously, Kocherlakota is making a contrived argument.<\/p>\n

Reach for Evidence<\/h2>\n

Kocherlakota even accidentally admits that QE causes systemic risk:<\/p>\n

\u201cWithout enough Treasury bonds to go around, investors \u201creach for yield\u201d by buying\u00a0apparently<\/em>\u00a0safe securities from the private sector (remember all those triple-A-rated subprime-mortgage investments of the 2000s?). If such behavior becomes widespread, it can create systemic risks that tip the financial system into crisis.\u201d<\/p>\n

As we know, QE takes Treasury bonds out of circulation. Therefore, QE leads to a reach for yield, even by Kocherlakota\u2019s own admission.<\/p>\n

The entire quote is accurate, except for the misguided reference to the housing bubble. He\u2019s really reaching there.<\/p>\n

The apex of the reach for yield phenomenon occurred in 2014 during the Fed\u2019s third QE program (QE3). Kocherlakota was a Fed governor at the time.<\/p>\n

You see, he doesn\u2019t want to admit that they caused a reach for yield during his tenure with the Fed, which began in 2009. So, he provides the housing bubble example, which keeps his career out of the picture but simply doesn\u2019t make sense in this context.<\/p>\n

When the housing bubble peaked in mid-2006, the 10-year U.S. Treasury rate was around 5%. If there weren\u2019t enough T-Notes to go around, as he claims, then why was the yield so high?<\/p>\n

During QE3, benchmark U.S. high-yield (junk) bond yields hit an astoundingly low 5.2%.<\/p>\n

We should be receiving an apology from Fed governors for the capital misallocation that this true<\/em> reach for yield caused.<\/p>\n

Hidden Agenda<\/h2>\n

Kocherlakota concludes that the government\u2019s reticence to issue more debt will sow the seeds of the next financial crisis.<\/p>\n

This statement is far from altruistic, however, and his entire article promotes a thinly veiled agenda.<\/p>\n

The Fed governors \u2013 both former and current \u2013 are pleading with the government to issue more debt so that the Fed, itself, can buy more Treasuries.<\/p>\n

In fact, as I write, the following comment from John Williams, President of the Federal Reserve Bank of San Francisco, is crossing the Bloomberg newswires:<\/p>\n

\u201cWILLIAMS: FED COULD DO QE4, USE FORWARD GUIDANCE IF NEEDED.\u201d<\/p>\n

So there you have it \u2013 all roads seemingly end with more QE stimulus.<\/p>\n

I believe the Fed wants more government debt issuance in order to alleviate concerns about illiquidity in the Treasury market as a result of QE. And they want to conduct more QE in order to boost the stock market, which has struggled to rise without any stimulus.<\/p>\n

The S&P 500 Index is hovering around the same level it was at near the end of 2014, right after the Fed stopped QE3. However, the Fed desires higher stock prices in order to produce the \u201cwealth effect.\u201d<\/p>\n

Clearly, Kocherlakota\u2019s article is biased. It really should have been called: \u201cThe Fed Wants More U.S. Government Debt to Buy.\u201d<\/p>\n

Safe (and high-yield) investing,<\/p>\n

Alan Gula, CFA<\/p>\n

The post The Federal Reserve Wants More U.S. Treasury Bonds<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com The Federal Reserve holds $4.4 trillion worth of assets on its balance sheet. Of this total, $2.3 trillion is in U.S. Treasury notes and bonds. These Treasuries are parked in the System Open Market Account, which contains assets acquired via open market operations \u2013 including quantitative easing (QE). I bring this up in […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-89403","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/89403","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=89403"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/89403\/revisions"}],"predecessor-version":[{"id":89421,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/89403\/revisions\/89421"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=89403"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=89403"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=89403"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}