E The Fed Scares Everyone About Treasuries From Time To Time. Is It A Scam?

From time to time, the Fed and its cronies scare everyone. And maybe those who are not actually cronies, chime in. Certainly this issue of lack of liquidity is scaring people. Articles abounded in the second quarter regarding this coming liquidity crunch. 

Yet when push came to shove, China was able to unload 100 billion dollars worth of treasury bonds through Belgian dealers. No crisis there. So what is really going on? From a distance we need to distinguish two issues. 

The first issue is this fear of liquidity. Dealers in America are not making markets in treasury bonds, due to regulations forcing them to be more conservative. But the Belgian dealers had no trouble dispensing Chinese owned US treasury bonds with no liquidity problems at all. 

The second issue has to do with a shortage of bonds, due to the fact that the Fed and China and others have a bunch of them and yet bankers want to use them for collateral in clearing houses in the derivatives market. 

So, some have tried to fuse the two issues. But I think one issue is real and the other is fake. The real issue is the second issue. There is a need for treasury bonds as collateral. The fake issue is issue number one, and is really a new twist on an age old plan, to scare people to unload bonds so the clearing houses can get them and so there can appear to be less demand for the bonds than there is. 

The demand from clearing houses for more collateral in deals is new, but fear of rising interest rates is old. So, scare people with the threat of rising interest rates, and they sell these valuable bonds that can then be used for collateral. 

So, what are the telltale signs of the conspiracy. First, the Fed has one job, and one alone. Its job is to buy and sell bonds, preferably to sell them. The Fed wants to sell bonds, and stimulate the bond market so that clearing houses won't face a shortage of bonds. 

It is necessary to know that we have two threads of commentary going on at the same time. First, the Globe and Mail said we had a shortage of bond buyers. Hmmm. Wolf Richter said that everyone will head for the exists when it is time to sell these bonds out of fear. His view is that they are overleveraged. People will have to get out. 

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I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Gary Anderson 5 years ago Author's comment

Author note: According to Bloomberg, there is a potential scam pushing bond prices lower and yields higher. The yields should be lower, and there is more demand for bonds than the bankers are allowing, according to the lawsuit: www.bloomberg.com/.../primary-dealers-rigged-treasury-auctions-investor-lawsuit-says