The “too many” Treasury argument which ignited early in 2018 never made a whole lot of sense. It first showed up, believe it or not, in 2016. The idea in both cases was fiscal debt; Uncle Sam’s deficit monster displayed a voracious appetite never in danger of slowing down even though – Economists and central bankers claimed – it would’ve been wise to heed looming inflationary pressures to cut back first. Combined, fiscal and monetary policy was, they said, eventually going to let loose on consumer prices.
Hogwash. Here’s what I wrote the first time back in March 2016:
The story has problems on both ends; to start with, why are dealers supposedly buying up UST inventory that they will only get stuck with? That has never been a money dealing function, as if there is ever great imbalance it is for dealers to manage but largely get out of the way and let price action take care of it. In other words, primary dealers would likely have been only buying enough to maintain orderly markets, not so much that they suddenly became bloated warehouse units of unhedged risk. It strains credibility already.
The second part is even worse. These banks are supposed to have had trouble selling UST’s during a period when everyone was buying them?…To suggest these banks have had so much trouble offloading their “duty” of emergency support, to the point of being “forced” into worse and worse funding and hedging prices, does not just strain credibility it is patently absurd. Read more…..
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