Comments on: The T-Bill conundrum http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/ Wed, 07 Jan 2009 21:01:13 +0000 http://wordpress.org/?v=2.6.1 By: Guest http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97194 Guest Thu, 21 Jun 2007 12:25:53 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97194 Kater - sounds more like the real explanation. Kater - sounds more like the real explanation.

]]> By: Kater http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97193 Kater Thu, 21 Jun 2007 07:56:41 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97193 Another explanation for the low level of bill rates is the paydown by the Treasury. Treasury began paying down bills in April because of heavy tax receipts, and paydowns in June have been substantial as well. The Treasury will probably begin raising new cash in the bill market in July and bill rates will probaly move into closer alignment with the fed funds rate at that time Another explanation for the low level of bill rates is the paydown by the Treasury. Treasury began paying down bills in April because of heavy tax receipts, and paydowns in June have been substantial as well. The Treasury will probably begin raising new cash in the bill market in July and bill rates will probaly move into closer alignment with the fed funds rate at that time

]]> By: I.Kitov http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97192 I.Kitov Thu, 21 Jun 2007 03:57:13 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97192 T-notes. Time to buy? There is an important implication of my ( http://inflationusa.blogspot.com/ 0 long-term prediction of inflation in the USA. In 2007, inflation, as measured by GDP deflator, will be approximately +3.1% +-0.4%. This is the highest value during several previous and many future years. In 2012, inflation will drop below zero, i.e. a deflationary period will start. It will be observed for 5 to 8 years. Therefore , a safe long-term investment would be in 10- to 15-year T-notes, or 20-year T-bonds. Having about 4.5% coupon rate and negative inflation one can expect a stable and relatively high cash flow, if to consider other economic circumstances related to deflation. Real economic growth should not be too strong, as Japan have been demonstarting the last 15 years. Also, the best time to buy is the end of 2007, when their price will be far below par price. For obvious reasons, I would not recommend TIPS. T-notes. Time to buy?
There is an important implication of my ( http://inflationusa.blogspot.com/ 0
long-term prediction of inflation in the USA.
In 2007, inflation, as measured by GDP deflator, will be approximately +3.1% +-0.4%. This is the highest value during several previous and many future years.
In 2012, inflation will drop below zero, i.e. a deflationary period will start. It will be observed for 5 to 8 years.
Therefore , a safe long-term investment would be in 10- to 15-year T-notes, or 20-year T-bonds.
Having about 4.5% coupon rate and negative inflation one can expect a stable and relatively high cash flow, if to consider other economic circumstances related to deflation. Real economic growth should not be too strong, as Japan have been demonstarting the last 15 years.
Also, the best time to buy is the end of 2007, when their price will be far below par price.
For obvious reasons, I would not recommend TIPS.

]]> By: Guest http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97191 Guest Thu, 21 Jun 2007 01:23:16 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97191 Brad - fair assessment of auction results and CB influence. Perhaps the interpretation is somewhat malleable, given behavioral considerations. But I was interested to see the composition of the results referred to by Emmanuel above: http://www.publicdebt.treas.gov/of/releases/2007/ofstats0612200702.pdf Emmanuel's point, a good one, was that successful (i.e. accepted) indirect bids were unusually low relative to tendered bids, and indirect bids include official buyers. I don't follow auction results closely, but its also interesting to note that indirect bids tendered (i.e. interest at some price) were only 12 % of total bids tendered. I wonder how this ratio compares to the norm, because it seems low at least at this auction, relative to an intuitive notion of CB involvement generally in the market. It doesn't seem to point to outsized marginal pricing influence, even if the full indirect tender had been accepted. This ratio compared to the norm might also give additional sense as to the offical interest (at some price) at this particular auction relative to the norm. Also, it raises the general question as to the mix of CB sourcing of teasuries - at the auctions or in the secondary market. Brad - fair assessment of auction results and CB influence. Perhaps the interpretation is somewhat malleable, given behavioral considerations. But I was interested to see the composition of the results referred to by Emmanuel above:

http://www.publicdebt.treas.gov/of/releases/2007/ofstats0612200702.pdf

Emmanuel’s point, a good one, was that successful (i.e. accepted) indirect bids were unusually low relative to tendered bids, and indirect bids include official buyers.

I don’t follow auction results closely, but its also interesting to note that indirect bids tendered (i.e. interest at some price) were only 12 % of total bids tendered.

I wonder how this ratio compares to the norm, because it seems low at least at this auction, relative to an intuitive notion of CB involvement generally in the market. It doesn’t seem to point to outsized marginal pricing influence, even if the full indirect tender had been accepted.

This ratio compared to the norm might also give additional sense as to the offical interest (at some price) at this particular auction relative to the norm.

Also, it raises the general question as to the mix of CB sourcing of teasuries - at the auctions or in the secondary market.

]]> By: bsetser http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97190 bsetser Wed, 20 Jun 2007 19:57:16 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97190 i agree to a degree with guest's comments about central banks not buying amid a lot of volatility, though i would argue that not buying makes one a price maker if the absence of an expected source demand ends up changing others views about the market. and in any case, someone is (or was) making a price of t-bills that was well below the fed funds rate ... i agree to a degree with guest’s comments about central banks not buying amid a lot of volatility, though i would argue that not buying makes one a price maker if the absence of an expected source demand ends up changing others views about the market.

and in any case, someone is (or was) making a price of t-bills that was well below the fed funds rate …

]]> By: bsetser http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97189 bsetser Wed, 20 Jun 2007 19:54:36 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97189 Tater -- if expectations about the fed have changed, how would you explain the low yield on t-bills observed at the start of this week? it is hard to square t-bills trading at yields below the fed funds with the of expectations that the fed will ease -- and i think you may be underestimating just how much central banks are buying -- they basically now buy the treasury's net issuance, and recently, their total demand for "safe" us securities has topped the issuance of treasuries and the agencies own debt. Tater — if expectations about the fed have changed, how would you explain the low yield on t-bills observed at the start of this week? it is hard to square t-bills trading at yields below the fed funds with the of expectations that the fed will ease –

and i think you may be underestimating just how much central banks are buying — they basically now buy the treasury’s net issuance, and recently, their total demand for “safe” us securities has topped the issuance of treasuries and the agencies own debt.

]]> By: Movie Guy http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97188 Movie Guy Wed, 20 Jun 2007 17:12:45 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97188 There are some good technical comments, but few conclusive explanations. Why isn't it fairly obvious as to what happened? Who's in the back room making the swing moves? Which central bankers? Which hedge funds? Which whomever else? I agree with Kater's observations [Kater on 2007-06-20 14:23:51] in his first two paragraphs. I made that observation last month with friends as the developments unfolded. The size and speed of the interest rate movements during from May 10th to the first week of June still surprised me. How did New Zealand's interest rate moves fall out of the discussion? I don't see why the subsequent release of the May 9th FOMC meeting minutes caused any concern. Yet, I had more than one banker tell me that bank prime interest rates would rise quickly due to inflation concerns. I looked at each them as if they were nuts. The FOMC meeting minutes were being treated as if the Fed had just made another move, though this was weeks later. Overnight, the rates rocketed up. Why? Someone explain that if they can. Then explain the resurgence in global economic growth from the first quarter. And why New Zealand is having inflation problems, other than it's renewed popularity for relocation. > There are some good technical comments, but few conclusive explanations. Why isn’t it fairly obvious as to what happened? Who’s in the back room making the swing moves? Which central bankers? Which hedge funds? Which whomever else?

I agree with Kater’s observations [Kater on 2007-06-20 14:23:51] in his first two paragraphs. I made that observation last month with friends as the developments unfolded.

The size and speed of the interest rate movements during from May 10th to the first week of June still surprised me.

How did New Zealand’s interest rate moves fall out of the discussion?

I don’t see why the subsequent release of the May 9th FOMC meeting minutes caused any concern. Yet, I had more than one banker tell me that bank prime interest rates would rise quickly due to inflation concerns. I looked at each them as if they were nuts. The FOMC meeting minutes were being treated as if the Fed had just made another move, though this was weeks later. Overnight, the rates rocketed up. Why?

Someone explain that if they can.

Then explain the resurgence in global economic growth from the first quarter. And why New Zealand is having inflation problems, other than it’s renewed popularity for relocation.

>

]]> By: Guest http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97187 Guest Wed, 20 Jun 2007 13:37:51 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97187 Backing off on an auction doesn't necessarily mean those who missed are price makers. Quite the contrary. It may mean they're risk averse in the short term, but price takers in the long term - back in the auctions at normal participation levels if/when volatility recedes. Backing off on an auction doesn’t necessarily mean those who missed are price makers. Quite the contrary. It may mean they’re risk averse in the short term, but price takers in the long term - back in the auctions at normal participation levels if/when volatility recedes.

]]> By: Emmanuel http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97186 Emmanuel Wed, 20 Jun 2007 13:12:05 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97186 Let me lift my post from another blog: Do look at the <a href="http://www.publicdebt.treas.gov/of/releases/2007/ofstats0612200702.pdf">results </a>of the most recent 10-year note auction more closely. If you inspect this series in recent years--say after the 2001 recession--indirect bidders usually get 80% or more of their bids awarded. Indirect bidders, of course, are the category which includes official buyers. What happened in the auction on Jun 12? Only 34.3% of indirect bids were awarded meaning that, conversely, nearly two-thirds of indirect bidders put in bids for yields higher than 5.23% (They may have put in some noncompetitive bids, but they rarely do.) Primary dealers, who almost always get a lower percentage of bids awarded, actually got a higher percentage awarded here (39.4%). It's just one auction, but should this trend continue, there'd be only one possible explanation--indirect bidders are no longer content with el cheapo rates from Sammy. Hence, rising yields on the long end of the yield curve. Let me lift my post from another blog:

Do look at the results of the most recent 10-year note auction more closely. If you inspect this series in recent years–say after the 2001 recession–indirect bidders usually get 80% or more of their bids awarded. Indirect bidders, of course, are the category which includes official buyers.

What happened in the auction on Jun 12? Only 34.3% of indirect bids were awarded meaning that, conversely, nearly two-thirds of indirect bidders
put in bids for yields higher than 5.23% (They may have put in some noncompetitive bids, but they rarely do.) Primary dealers, who almost always get a lower percentage of bids awarded, actually got a higher percentage awarded here (39.4%).

It’s just one auction, but should this trend continue, there’d be only one possible explanation–indirect bidders are no longer content with el cheapo rates from Sammy. Hence, rising yields on the long end of the yield curve.

]]> By: Kater http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97185 Kater Wed, 20 Jun 2007 10:23:51 +0000 http://blogs.cfr.org/setser/2007/06/19/the-t-bill-conundrum/#comment-97185 I don't find this explanation entirely satisifying. I find it difficult to square with basic term structure theory. Changes in the shape of teh yield curce should be associated with either changes in expected interest rates or with changes in term premiums. I don't think central banks could drive the shape of the yield curve sharply out of line with what is consistent with expectations and required term premiums. They are big players, but not that big. From a different perspective: If central banks could alter the shape of the curve (which I doubt), and if they were were piling into bills, then the twisting would be concentrated in the bill sector with little twisting throughout the coupon sector. However, the coupon sector also has twisted -- look at the 10-2 spread. A more likely explanation: market participants now have different expectations for the economy and interest rates. With the economy picking up and the Fed no longer expected to ease (many now looking for tightening), expectations of future short-term interest rates have changed, and hence the shape of the yield curve has changed. I don’t find this explanation entirely satisifying. I find it difficult to square with basic term structure theory. Changes in the shape of teh yield curce should be associated with either changes in expected interest rates or with changes in term premiums. I don’t think central banks could drive the shape of the yield curve sharply out of line with what is consistent with expectations and required term premiums. They are big players, but not that big.

From a different perspective: If central banks could alter the shape of the curve (which I doubt), and if they were were piling into bills, then the twisting would be concentrated in the bill sector with little twisting throughout the coupon sector. However, the coupon sector also has twisted — look at the 10-2 spread.

A more likely explanation: market participants now have different expectations for the economy and interest rates. With the economy picking up and the Fed no longer expected to ease (many now looking for tightening), expectations of future short-term interest rates have changed, and hence the shape of the yield curve has changed.

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