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Biggest myth is that Treasuries ever existed in a true free market.
1. Pre-1913: Tsy monetized debt with National Bank Notes.
2. 40s: Fed pinned Treasury rates, of all maturities, until 1951. https://twitter.com/lisaabramowicz1/status/1349501511802490880
1. Pre-1913: Tsy monetized debt with National Bank Notes.
2. 40s: Fed pinned Treasury rates, of all maturities, until 1951. https://twitter.com/lisaabramowicz1/status/1349501511802490880
All of the Fed's history, Tsys have by far the best terms for collateral at discount window for banks. All Treasuries had zero capital charge or % of capital limits. Post-WW2 to 50s banks look similar to today, where Treasuries and reserves are an overwhelming portion of bank BS.
Now, banks owning Tsys vs Fed has an important difference: banks have to get matched rate swaps. Asset-liability matching for insurers and pension funds have given a huge demand for duration though. So even though Fed has bought a lot of Tsys, banks have absorbed a lot too.
But let's say the Fed buys no Treasuries while the expected path of future short-term rates stays at "ZIRP forever." How much really would yields go up? I wouldn't enjoy 10% return from owning 1% 10 yr Treasury, but if you have $1bil, that's $100mil more versus cash earning 0%.
Point is, QE's effect is the same as Tsy switching more to bill issuance. But nobody would say "Long-term Tsys are cheap because Tsy is issuing bills instead."
QE only works like bills vs bond issuance. QE is not usually necessary for a liquidity benefit.
QE only works like bills vs bond issuance. QE is not usually necessary for a liquidity benefit.
I say "usually" because bank regs did create liquidity issues in Sep 19 and Mar 20. But that's not typical over history of banks, dealers and Fed. Fed has always stood to provide liquidity against Tsys and, outside of SLR, Tsys didn't need capital. Tsy only had rate risk. /Fin
