We should start with this assumption: the market is smarter and faster than you. Prices almost always discount "before" what will happen next. I totally agree with you and the whole content of the article, very nice.
Nice piece, but why does everyone who explains how QE works continue to use the pension fund example? All it does is perpetuate the narrative that the CB is "printing money...they're printing money" as Mike Norman loves to parrot?
I have been asking for 2 years now, why would a pension fund 'sell' a bond to the CB only to then have to go looking to "buy" a bond? Why sell it in the first place? I've also been asking, with no clear answer, how does one tell how much bond buying by the CB is actually from non-banks?
Wouldn't it be closer to reality if when explanting QE we used banks as the other party to whom the CB is buying bonds from?
Jan 17, 2022·edited Jan 17, 2022Liked by Alfonso Peccatiello (Alf)
Alfonso, would you agree that the pace of QT will depend on...
1) whether supply-side disruptions (and inflation) improve organically during 2022. If they dont, the Fed will be forced to be more aggressive with their QT / rate hikes.
2) the DXY levels: if the dollar keeps stregthening, the Fed wont be able to be too aggressive with its QT / rate hikes.
why would private sector banks by USTs at 2% if CPI is at 7%. Just think if CPI lands back at 3-4% then you got to see UST rise. so i have a feeling negative real rates in the US are here to stay
Fantastic article, as usual! It seems to me that the process you're talking about should shift institutional portfolios back towards bonds relative to equities, and that should compress equity multiples. While that's not a bad thing in the big picture, with the quantity of public equities trading at extremely high multiples, I worry a soft landing for the economy (the Fed's priority) may not be so soft for public equities.
Excellent write-up. My issue is that we don’t know what level causes disruption in asset markets. But with more leverage, it probably takes less to cause it. Just look at mortgage rates: The minute they’re above the level of the previous two years, housing demand stalls markedly. Add in the fact that refinancings have already gone to zero by then, and the economy decelerates very quickly.
Alf, when the bank is buying the bonds from the Fed (QT) are they acting as a dealer/market maker, or is there a dealer in between the Fed and the banks?
Superb analysis.. ty for sharing
Superb analysis.. ty for sharing
We should start with this assumption: the market is smarter and faster than you. Prices almost always discount "before" what will happen next. I totally agree with you and the whole content of the article, very nice.
Nice piece, but why does everyone who explains how QE works continue to use the pension fund example? All it does is perpetuate the narrative that the CB is "printing money...they're printing money" as Mike Norman loves to parrot?
I have been asking for 2 years now, why would a pension fund 'sell' a bond to the CB only to then have to go looking to "buy" a bond? Why sell it in the first place? I've also been asking, with no clear answer, how does one tell how much bond buying by the CB is actually from non-banks?
Wouldn't it be closer to reality if when explanting QE we used banks as the other party to whom the CB is buying bonds from?
None of this seems very good for U.S. bank stocks. How much of an impact (if any) do you see? p.s. great analytic work; much appreciated.
Alfonso, would you agree that the pace of QT will depend on...
1) whether supply-side disruptions (and inflation) improve organically during 2022. If they dont, the Fed will be forced to be more aggressive with their QT / rate hikes.
2) the DXY levels: if the dollar keeps stregthening, the Fed wont be able to be too aggressive with its QT / rate hikes.
Opinions? Thanks a lot!
thanks for this. Yes I remember that the RRP has $1.9T in there or so, so it can be deployed.
thanks! very clear.
Thanks adding the podcast to the blog post
Thanks. It's very clear the analysis and your love for the matter
why would private sector banks by USTs at 2% if CPI is at 7%. Just think if CPI lands back at 3-4% then you got to see UST rise. so i have a feeling negative real rates in the US are here to stay
Thank you.
Fantastic article, as usual! It seems to me that the process you're talking about should shift institutional portfolios back towards bonds relative to equities, and that should compress equity multiples. While that's not a bad thing in the big picture, with the quantity of public equities trading at extremely high multiples, I worry a soft landing for the economy (the Fed's priority) may not be so soft for public equities.
Excellent write-up. My issue is that we don’t know what level causes disruption in asset markets. But with more leverage, it probably takes less to cause it. Just look at mortgage rates: The minute they’re above the level of the previous two years, housing demand stalls markedly. Add in the fact that refinancings have already gone to zero by then, and the economy decelerates very quickly.
Your work is very much appreciated. Thank you!
Alf, when the bank is buying the bonds from the Fed (QT) are they acting as a dealer/market maker, or is there a dealer in between the Fed and the banks?