I was curious to note an article in the FT late last week that said 'Treasury volumes raise liquidity concerns'. The article referred to a shortage of US Treasury bonds to trade and the mentioned the similar shortage in German bonds.
Now, of course both issues are prompted at least in part by quantitative easing programmes but the simple fact is that net of necessary government repurchases of bonds needed to keep other markets liquid there so seem to just not be enough government bonds in issue right now to meet demand.
Could it be that markets are signalling something politicians just do not want to hear, which is that the real economy really does think we need bigger deficits and more bonds? I think that's exactly what is being said.
So why is the message falling on such deaf ears?
Answers on the back of postcard please to:
Rt Hon George Osborne MP
11 Downing Street
London SW1A 2AA
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
No, because gilt prices are not set by the market any more, they are set by QE. One of the (many) purposes of QE is to cut government borrowing costs thus enabling higher deficits than would be possible under normal market conditions.
A price in a market that is that heavily manipulated, in one direction, by the entity everyone takes pretty seriously when they manipulate a market, is not a very useful piece of information.
I think you fundamentally miss the point
Quite possibly. Could you enlighten me? I’m observing (related primarily to your third paragraph) that a manipulated price, in this case one deliberately increased by creating an artificial shortage, doesn’t tell us very much about what other market participants want.
Artificial shortage?
Don’t you get the fact that the shortage is despite the debt?
Or has that passed you by in Germany?
I think you’ve missed the point of the article. People aren’t worried about bond market liquidity in terms of supply – there is plenty of that. They are worried about it in terms of demand as currently there are a lot more sellers than buyers.
There simply aren’t enough people willing to buy bonds at the moment, with their prices artificially high thanks to QE, supply still large and the FED looking to start hiking rates in the face of better growth and inflation coming off a low base.
This is reflected in the price action of bonds. 10y Gilts were trading as low as 1.30% in Jan, now trading close to 2%, US 10y has gone from 1.65% to 2.35% and Bunds have moved from as low as 0.07% to 0.82%. These absolute yields might seem low, but these are huge moves for bond markets and are massively painful in duration/PVBP terms for those holding longs.
I think you have it wrong: the fact is buyers are hanging on to bonds
They want them
So there is a lack of activity in the market
Have you any evidence that buyers are hanging on to bonds?
Bond markets have been smashed in the last few months. Yields are much higher, which suggests that people are actively trying to sell holdings.
We’ve also seen generally poor demand at auctions, but no real drop in futures turnover – again suggesting people are expecting bonds to sell off, yields to go higher but are finding it hard to find buyers for their paper so are having to resort to the derivatives market to hedge risk.
It’s fairly public knowledge that the big funds are all heavily cutting exposure to government bonds at the moment. For example:
http://www.investmentnews.com/article/20150610/FREE/150619997/pimco-total-return-dumps-most-of-its-treasuries-ahead-of-selloff
We also know that soveriegns have been cutting their US tresury holdings as well:
http://www.zerohedge.com/news/2015-02-18/russia-dumps-most-us-paper-ever-china-reduces-treasurys-holdings-january-2013-levels
All the evidence is pointing to the fact that people don’t want government bonds at these expensive prices, and the lack of liquidity in the market is simply being caused by more supply than demand, and the banks/market makers being unwilling and unable (thanks to legislation to a great extent) to buy and hold the stock they get.
That’s an interpretation
I have offered another
Your’s isn’t much of an interpretation though is it?
You are suggesting that there is a lack of liquidity due to high demand in government bonds.
The fact that government bonds have sold off dramatically over the last few months – something which is unarguably true – suggests exactly the opposite.
Supply/demand is pretty basic economics.
If there was dramatic sell off there would be liquidity
Actually the exact opposite is true
I’d argue you’re wrong
But can’t be bothered to do so again
Please don’t bother to reply: I have heard you and still don’t agree
It’s pretty clear you have no clue about the markets.
There has been a big sell off in bonds.
Liquidity is poor as there are more sellers than buyers and the market making banks won’t and can’t hold risk.
This selloff is observable. There is simply no arguing it isn’t the case unless you are delusional. Are you?
Do you even know how much money you would lose if you owned 100m 10y gilts and yields moved 1% higher?
Sorry: all of that is absurd
The article says there are few sellers:
And there is a guaranteed buyer – the QE funded schemes
I suggest you’re the peddler of myths
Or worse
And of course I know the risks: that is why QE has to continue
“Relative paucity of actual selling”
This does tend to happen when there is nobobdy to sell to. And with it the markets become more volatile and less liquid.
We also know, from FED and CME data that there has been massive selling of US treasuries, and they have *outperformed* other bond markets.
As for your guaranteed buyer. US and UK QE schemes have ended new purchases, and only buy to replace maturing bonds. It’s relatively small and is dwarfed by the size of new issuance. Only European QE is actually in process – and despite ECB purchases European bonds have managed to have a massive sell off.
But in your 1984 style economic model, bonds are selling off despite their scarciity. If anyone is peddling myths here its you, I’m afraid. The real world evidence points to an oversupply of bonds which are too rich already.
But it seems to be a theme that your word is the last word and you’ll tell us all you are right, I am wrong despite you having exactly zero experience in this matter.
So why does the FT say otherwise?
And what do you think is going to happen?
I suppose an article in a newspaper makes it truth? And you regurgitating it makes it more so?
Bonds across the world have sold off hard. That is suggesting that there isn’t a shortage. Nobody is rushing to buy government bonds at the moment as they are expensive, global growth is looking better, inflation is starting to pick up after the oil price dip and the FED is going to raise rates – potentially as soon as tonight (though consensus is September).
You haven’t even got the basic premise of the article correct. It’s not talking about issuance volumes – it’s talking about traded volumes. Liquidity is poor because there aren’t enough buyers out there. And I don’t even know what you mean when you talk about;
“the simple fact is that net of necessary government repurchases of bonds needed to keep other markets liquid…”
The sentence doesn’t even make sense, let alone the idea that you need government bond repurchases to keep other markets liquid.
Maybe you should think twice about commenting, and proffessing expert status on things you clearly know very little or nothing about.
Can you even tell me what the profit/loss on 100m UK 10y gilts would be, even roughly, as the yield went from 1.30% to 2.00%??
So you don’t understand that QE was about creating liquidity?
Go on, tell me next that you don’t realise that lending creates money? Because I bet you don’t
And yes, the sentence should have said out of necessity
But I’d guess that was obvious
Except to someone who has no clue about QE or money, as it seems pretty clear you don’t
And re the last one – stop wasting my time – just tell us if you’re so clever
Think I have a pretty good understanding of QE. Though I’m not sure you do – given your inexplicable inability to understand that what you are suggesting in terms of Green QE is debt free, when you also say notes and coin is not debt free. Of course, Green QE is really just printing money in a purely monetaristic way.
QE works primarily through two mechanisms:
1. By buying government bonds, thus reducing their yields. This means longer term interest rates are lower, reducing corporate/private borrowing costs. it also forces investors out of low yielding govvies and into other investments, the idea being it increases M3/M4.
2. It serves to increase M0 base money by replacing long term cash (in the form of government bonds) with short term cash. Which tend to be more liquid.
What QE definately does not do is “print” money, nor does it write off any debt.
In answer to your specific questions:
Lending means extending credit. Which increases the M4 money supply, but not the M0. No new note and coin are created, and that credit extended still needs to be asset backed and in most cases covered. I think you don’t fully understand the difference between money and credit.
Still have no idea what your sentence actually means. Your english is terrible. Reading some of you other posts though, it looks like you’ve either taken a course in double-speak or are just getting rather confused.
But it still doesn’t mean you need government to repurchase bonds to keep markets liquid.
Now do me the honour of actually answering my questions. If you can, that is. Bond maths is very basic financial maths/economics, so I would expect an expert of your standing to be able to do that.
As for me being clever? Everything is relative, but it is pretty clear I know more about my subject than you. Though this shouldn’t be a surprise, given you have no actual relevent experience. No, tax justice warrior and self-appointed economics expert doesn’t count. Have you ever even traded a government bond, or ever worked in any kind of financial markets based institution?
Sorry – but all you prove is you do not understand the reality of QE
You are wasting my time
You clearly don’t even understand the reality of money – you are just the type who the BoE said had got it all wrong last year
But I grant you something: you’re a master at stroking your own ego and being patronising
Don’t bother to reply
Do you ever answer a question, or do you simply go straight to rhetoric when someone disagrees with you?
In your blog from the other day you directly contradict yourself. Note and coin is NOT debt free, yet somehow Green QE is.
Your assertion is that Green QE can, cost free, supply near unlimited cash for infrastrucure. All debt free.
The logical extension might be of help to the Greek crisis. Why doesn’t Greece pull out of the Euro and have their central bank do a version of Green QE? Let’s call it Greek QE for arguments sake. Then they can simply magic up enough money to ay all their bills – and their creditors as well! Problem solved thanks to the intellect that is Richard Murphy.
You clearly aren’t an economist, or ahve any experience in finance. Your career seems to involve small time accountant to shouty left wing activist. You don’t understand the difference between M0 and M4, money or credit. You clearly can’t even do simple bond maths. You also seem to struggle with basic asset/liability accounting on a balance sheet – which the BoE manages by the way – which would immediately throw up the problem with Green QE.
Maybe, when you have no experience or understanding about what you are talking about, you should perhaps not talk about it. And maybe at the same time be humble enough to understand that there are people out there who do have more experience and understanding of the subject you are talking about. Rather than just proclaiming you are an expert in everything.
Have you noticed the Greeks have asked the quite reasonable question as to why Green QE can’t be sued to fund their development?
No?
Maybe because you aren’t keen on the real world
I am
And it doesn’t seem to be me throwing the ad hominems here
What is more, if you bothered to read Green QE you would see all the issues you raise are completely addressed. But I very mush suspect you have not done that
At least I bothered to read, absorb and understand what I commented on
I haven’t seen any questions raised from the Greeks about Green QE or similar being used to fund their developement. I’m sure you can provide evidence of this if they have. You I assume also know that the ECB is prohibited from the direct financing of governments.
Of course, QE doesn’t help with their debt situation anyway.All it does is increase money supply and reduce bond yields.
I have also had a long look through Green QE and the mechanism you describe for it’s function. I assume this is yours?
http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/
You make several mistakes.
Firstly, you assume that QE was solely to provide new money for the banking system when the real purpose was to lower long term interest rates. The clue is in the name – quantative EASING.
Second, you then assume that the debt is then cancelled. It clearly isn’t according to the BoE. It is sitting there on the BoE’s balance sheet you so helpfully linked to the other day. And yes, one part of government can owe anther money.
Your most grevious error comes when you ignore asset liability accounting. You say the goovernment can issue debt (true, leaving the govt with cash asset, debt liability) then the BoE can buy it through QE (also true, leaving BoE with debt asset, cash liability). Then you make your magic money tree mistake. You make the assertion that the liability side of the government’s balance sheet can simply be cancelled without affecting the asset side of the BoE – thus creating the new money to fund your Green QE, in your world, debt free.
Of course, in real life, cancelling that debt also cancels out the asset side of the BoE’s balance sheet, leaving it with more liabilities than assets. So effectively bankrupt. Which means that the government would have to replace those assets to make the BoE whole again.
So either the government actually generates no extra net cash, or it has to print the money, Weimar replublic monetarist style, to hand back to the BoE. Which rather defeats the whole purpose.
So basically what we are saying here is that you haven’t come up with anything new, and you haven’t come up with a form of QE, you have simply clothed a nakedly monetarist viewpoint with the language of QE.
You might want to have a look at the asset/liability and balance sheet discussion from the BoE itself before continuing to spout such utter rubbish.
Ad hominem attacks seem to be the territory you move in to as soon as someone disagrees with you. Have a look through the comments you make to me for a quick recap.
John
This is tedious
Many – Adair Turner, Martin Wolf and others – agree WQE debt can effectively be cancelled and is because although ti exists in single entity accounting it is lost in consolidation. If you don’t understand that learn some accounting
Second, being =on the BoE balance sheet does not require repayment to take place – – which means effective cancellation
Third the BoE says this was about liquidity creation = interest rates were already at 0.5%
And printing money – which QE does – is exactly what private sector banks do day in day out, not Weimar style as you put it but as an economic fact. The government can and has to do the same
As I said, you have no clue about money, at all. Go and read the BoE on the issue
And yes this is money creation – but so what – that’s what banks do! Don’t you get that?
You have also not been reading http://yanisvaroufakis.eu
1. Adair Turner and co. specifically talk about monetizing debts – doing what you have in Green QE. Which is NOT QE as it stands.
http://www.berfrois.com/2015/02/bharat-azad-meets-adair-turner/
You can make an argument for the monetization of debt, but do everyone a favour and don’t call it QE.
2. Bonds on the BoE balance sheet do need repayment when they mature. Otherwise, once again, the assets on their balance sheet would not match liabilities. This can be done by redeeming the cash printed through QE, monetizing cash or issuing new bonds into the market, but it never allows the bonds to be cancelled. I fear you are confusing the bonds coupons with the redemption itself.
3. Agreed. QE was about liquidity creation. Increasing M0 while lowering bond yields. I’ve been banging on about that point for a while.
4. I have read the BoE on the issue.
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
I would point your attention to figure 3 in the report especially, which clearly shows the balance sheet of the BoE during QE. Figure 2 shows what happens in the banking system when a loan is made. Again, the balance sheet effect is neutral.
It is important to note that there is never an imbalance in the assets/liabilities for any party to the transaction. So no new *wealth* is created – no no new net assets can be purchased without the offsetting liability, which is in this case debt.
What the BoE calls money creation is more usually termed credit creation – or sometimes broad money supply or M4. I have never argued that commericial banks can’t create credit (M4). They definately cannot create base money (M0) though. And when these banks create some credit through making a loan, the borrower has a new asset (money in his acocunt) but he also has a new liability (his loan) and he is net no richer than he was beforehand. It’s balance sheet neutral. So he can use that money to buy a different asset (like a house) but that doesn’t remove his liability. No net wealth effect.
Which rather scuppers Green QE. The only, and I mean only way to create your liability free assets in the way yoou suggest is monetization.
The BoE state this themselves:
Two misconceptions about how QE works
Why the extra reserves are not ‘free money’ for banks
While the central bank’s asset purchases involve – and affect
– commercial banks’ balance sheets, the primary role of those
banks is as an intermediary to facilitate the transaction
between the central bank and the pension fund. The
additional reserves shown in Figure 3 are simply a by-product
of this transaction. It is sometimes argued that, because they
are assets held by commercial banks that earn interest, these
reserves represent ‘free money’ for banks. While banks do
earn interest on the newly created reserves, QE also creates an
accompanying liability for the bank in the form of the pension
fund’s deposit, which the bank will itself typically have to pay
interest on. In other words, QE leaves banks with both a new
IOU from the central bank but also a new, equally sized IOU to
consumers (in this case, the pension fund), and the interest
rates on both of these depend on Bank Rate.
It’s just as applicable to to the financing of governments.
5. I have also been following Varoufakis.
He explicitly states that his ideas do NOT involve the monetization of debt (which it isn’t allowed to do). He wants a form of debt pooling.
http://yanisvaroufakis.eu/euro-crisis/modest-proposal/4-the-modest-proposal-four-crises-four-policies/policy-2-limited-debt-conversion-programme-ldcp/
The investment he wants to happen in infrastructure etc doesn’t involve QE/monetization either. He wants the EIB and EIF to issue bonds into the markets to fund developments and infrastructure projects. No mention of QE or monetisation of debts, just regular borrowing albeit not on individual government balance sheets.
http://yanisvaroufakis.eu/euro-crisis/modest-proposal/4-the-modest-proposal-four-crises-four-policies/policy-3-investment-led-recovery-and-convergence-programme-ircp/
I’m not arguing the merits of his plan, but what it definately isn’t is monetization of debt, and no “Greek QE” either.
I note your first comment and that all the rest is a footnote
I thank you for your agreement that all you are fussed about is preserving your won semantics
The debate is closed
The shortage is created by QE. If we didn’t have QE we’d (with almost complete certainty) have higher yields, which would tend to indicate a not-shortage situation.
So it’s difficult to say what the market wants in a market that is so heavily manipulated. Now if we dumped all the QE’d debt on the market and that did not impact yields, I’d definitely agree that’s a signal that the market wants more government debt. And that the government would be mad not to take advantage of such cheap borrowing (whether it needs the money is a different question). But how can we tell that would be the case while still, something like 30% of government debt is held in limbo by the BoE.
But we do have QE for good reason
In that case there is a shortage of debt
You are assuming that there is a market in government debt where there is no government as such – it’s a pretty weird assumption to make
For argument’s sake let’s just accept that there is huge demand for government debt and people are crawling over each other to buy as much as possible.
Ideal time for the central banks to sell their debt holdings then, isn’t it? If there is demand for something, why not satisfy it using existing stock rather than creating more?
Have you noticed government deficits?
Apparently not
But that’s not the real economy is it? The real economy is sans government intervention surely.
Get real
Indeed, those government deficits are there. And long-term at least, those cumulative deficits exceed the willingness of private investors to purchase. The proof of that is: QE. For if there was enough private money to fund all those deficits all the time we wouldn’t need QE, would we? So the fact that we have QE at all rather suggests that markets are not, in fact, signalling a desire for government to run up more debt.
QE is needed because the market will not borrow
The result is a shortage of money
QE prints money: that’s its prime aim, not deb repurchase
QE shows markets cannot or will not create what the world needs
You’re wrong again
“QE is needed because the market will not borrow”
QE is needed because the market will not lend surely?
If the market will not borrow there is no lending and so no bank created money and so QE is needed