Thanks for the article. Extremely informative , however I had a little bit of difficulty understanding the treasury part.I will give this a read again to get around it.
"The Treasury has chosen to reduce issuance significantly, thereby further limiting liquidity growth" ... When the Treasury ISSUES securities (bills/notes/bonds), they are REMOVING liquidity from the system (i.e. they give you a piece of paper and take your cash). So issuing LESS would be removing LESS liquidity, no?
The aggregate sovereign balance sheet (net of intra-govt holdings) is what matters for our liquidity calculations. When the Treasury issues bills (the primary concern here) they create two effects. First, they create a vehicle for repurposing existing cash balances into government injections into the real economy. Second, they create pristine collateral, which serves a home form cash balances which cannot be secured under FDIC. Further, they serve as a means of financing for market finance- i.e. they are the best collateral for repo etc.
This comes together in the current MMF issue. MMFs simply don't have a home, and RRP uptake is due to the lack of liquid, high quality collateral assets to park cash pools. The issuance of Treasury bills would reduce RRP uptake (which is a drain on reserves) and ameliorate the impact of QT. Hope this clears things up.
IMO one of the greatest sources (besides Darius Dale) for putting the macro environment into regimes.
Thank you.
Thanks for the article. Extremely informative , however I had a little bit of difficulty understanding the treasury part.I will give this a read again to get around it.
"The Treasury has chosen to reduce issuance significantly, thereby further limiting liquidity growth" ... When the Treasury ISSUES securities (bills/notes/bonds), they are REMOVING liquidity from the system (i.e. they give you a piece of paper and take your cash). So issuing LESS would be removing LESS liquidity, no?
The aggregate sovereign balance sheet (net of intra-govt holdings) is what matters for our liquidity calculations. When the Treasury issues bills (the primary concern here) they create two effects. First, they create a vehicle for repurposing existing cash balances into government injections into the real economy. Second, they create pristine collateral, which serves a home form cash balances which cannot be secured under FDIC. Further, they serve as a means of financing for market finance- i.e. they are the best collateral for repo etc.
This comes together in the current MMF issue. MMFs simply don't have a home, and RRP uptake is due to the lack of liquid, high quality collateral assets to park cash pools. The issuance of Treasury bills would reduce RRP uptake (which is a drain on reserves) and ameliorate the impact of QT. Hope this clears things up.