Sunday, March 7, 2021

Wealth Transfer To The Banks: "Yellen’s steeper yield curve lets banks finance the huge US budget deficit"

It gets even better for the banks if, on top of the borrow short/lend long, with the short end capped so they don't get surprised by an upside-down loan book and the liquidity risk of demand deposits non-existent, if the Fed then institutes Yield Curve Control on the long end the banks have a "take the capital gain or keep the interest rate spread" question, a nice problem to have.

The author, David Goldman was one of those guys who couldn't keep a job:

  • Global head of credit strategy at Credit Suisse
  • Global Head of Fixed Income Research for Bank of America
  • Global Head of Fixed Income Research at Cantor Fitzgerald

I think one of his requirements for moving on was a "Global Head" title.

Now he's Deputy Editor (Business) at AT.

From Asia Times, February 25:

US treasury secretary's off-hand comment aggravates sharp sell-off 

An off-hand comment by Treasury Secretary Janet Yellen that “issuing longer-term securities certainly seems to make some sense” February 22 aggravated the sharp sell-off in long-term Treasury securities and widened the differential between shorter and longer maturity bonds.

That’s a man-bites-dog story, because central banks engaged in monetary stimulus usually want to keep long rates down. That helps households and corporations take on cheaper long-term debt to buy houses and capital equipment. 

But Secretary Yellen, a former Fed chair, has another problem on her agenda: Financing a government deficit swollen to an astonishing 16% of GDP. Yellen needs the commercial banks to keep buying trillions of dollars of Treasury securities a year, and the banks need a steeper yield curve to make money buying Treasuries. 

Put another way, the United States now resembles Italy, Europe’s basket case, where the main function of commercial banks is to finance the state deficit, while the state hands out subsidies to various political constituencies.

The bond market’s rush out of longer maturities might seem an overreaction to the Treasury Secretary’s passing remark, except for the context: Central banks engaged in monetary stimulus usually do their utmost to keep long rates down, usually by buying longer maturities. 

In fact, most of the Treasury’s massive issuance of debt this year came in shorter maturities. That reduced the average maturity of outstanding US government debt sharply, as shown in the following chart from the US Treasury website:...


He followed up with March 5's "Fed lures banks to buy unwanted US Treasuries".