Why wouldn’t it be?
The United States government is likely to run a record fiscal deficit this year due to lower tax receipts. And given deficits since 2001, Federal debt is soaring (chart below). In the immediate aftermath of the last recession, the Federal Reserve was a major buyer of U.S. Treasury bonds.
Since 2014 though, the Fed isn’t really a buyer of Treasury bonds. The question is who is buying federal government debt?
Central Banks have grown their balance sheets significantly in the past 20 years and almost exponentially since the 2008 financial crisis. Here’s how much the balance sheets of the Bank of Japan, the Swiss National Bank, the Federal Reserve and the European Central Bank have grown in the 21st century,
Total assets: 540.8036 trillion Yen (JPY) = 4.93 trillion US Dollars (USD)
As of date: May 1, 2018
Asset size as percentage of GDP: 101% of GDP
Interesting information: The Bank of Japan has a target to buy 6 trillion Yen ($54 billion) worth of exchange traded funds a year. It now holds almost 82% of all ETFs in Japan and is indirectly the largest shareholder in many large Japanese companies, almost about half of listed companies in Japan.
Interest Rates
What a difference a year makes. The Federal Reserve has hiked interest rates thrice (in December, March and June) with a target rate range of 1.75% to 2% now. The Eurozone meanwhile maintains its zero-interest rate policy.
Central Banks have grown their balance sheet in the past 20 years and almost exponentially since the 2008 financial crisis
Bank of Japan
Total assets: 540.8036 trillion Yen (JPY) = 4.93 trillion US Dollars (USD)
As of date: May 1, 2018
Asset size as percentage of GDP: 101% of GDP
From the Federal Reserve’s definition of Money Velocity and Money Supply,
Money Velocity
The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Continue reading “The curious case of low U.S. money velocity”
The US government has around $20.5 trillion in debt and pays around $558 billion in interest payments a year (an effective interest rate of 2.72%).
Bond yields have been rising recently in the US on the back of a strong economy. The 10-year bond yield topped 3% (up 0.66% over the past year) recently, the highest since January 2014. The 2-year bond yield topped 2.5% (up a massive 1.18% over the past year), the highest since July 2008 (Read more here). Continue reading “Can the US government really cope with rising bond yields?”
Banks in the US can hold excess reserves with the Federal Reserve. In 2008, as part of the Emergency Economic Stabilization Act of 2008 it was mandated that interest would be paid on reserve balances held with the Federal Reserve. What is of significance is the interest rate on excess reserves.
Since 2015, the Federal Reserve has set the interest rate on excess reserves equal to the top of the target range for the federal funds rate. Why is this important? Look at the graphs below.
Goldman Sachs computer model warns a bear market is near, but the firm’s analysts don’t believe it (read here). So, if a bear market arrives – they were right (well their computer model was), no bear market – they were still right.
JP Morgan has said investors are ‘overreacting’ and investors should buy the market dip for a big rally ahead (read here). How big? 13%. Which would just about take us back to the highs the market hit at the end of January. Will they do as they say? Who knows.
Meanwhile, 10-year US bond yields have fallen 12 bps (to 2.78%) in the past week since the 0.25% Federal Funds rate target increase. As the Federal Reserve pares back its bond holdings, the US government is bringing more to market, yet yields have been falling.
Here are some interesting things from the FOMC releases (text in italics are our comments), Continue reading “On Equities – Do as they say, not as they do? On Bond Yields – some things from the FOMC minutes”
The European Central Bank (ECB) is by far the biggest holder of European bonds and the biggest (possibly the only) buyer of the weaker Eurozone (Italy, Spain, Portugal and Greece) countries debt.
Bond yields are being held artificially low by the buying programme. Continue reading “The ECB balance sheet is now over 4.5 trillion Euros, some 45% of Eurozone GDP”
The Federal Reserve under new chairman Jerome Powell approved a 0.25% hike that puts the new benchmark funds rate at a target of 1.5% to 1.75%.
There was once a time when no one knew what to expect when Central Bankers met. Times have entirely changed, they are so predictable. Continue reading “As LIBOR moves upwards, Central Banks remain so predictable”