Treasury bill, or short-term US debt paper, has historically ranged between 15% and 20%. In recent months, this percentage of T-bill of total US debt has broken above 20% and it might well be on it‘s way to 25% (or even higher).
As institutions like pension funds are starved from getting long-dates securities, other have been buying the short end. Who? Banks, credit providers as well as the infamous US stablecoiner provider Tether.
Why is this significant?
This is covet yield curve control or yield supression because it supresses the long-end of the curve.
As a matter of fact, the yield of long-dated treasuries should actually be higher, about 100 basis points by conservative estimates.
The question we need to ask is how will the US get investors back into long-dated treasuries?
-Bring down short-term policy rates (significantly) to make long-end debt more attractive.
-Push for a recession to create save haven demand for long-term treasuries (beat steepener). Rather improbable, no?
-Go new ways. For example, as nostr:npub1s5yq6wadwrxde4lhfs56gn64hwzuhnfa6r9mj476r5s4hkunzgzqrs6q7z has explained, what if the US Treasuries were to back long-dated bonds with a Bitcoin component. Could this be enticing enough for regular investors to buy into long-end Treasuries?
Can you help me understand this? How is extra bill issuance suppressing the long end? How do you estimate the long end should be 100 bps higher?
"This is covet yield curve control or yield supression because it supresses the long-end of the curve.
As a matter of fact, the yield of long-dated treasuries should actually be higher, about 100 basis points by conservative estimates."
If you’re getting 5.5% with a cash like instrument you are not going to want the long duration treasury at 4% recognizing that the treasury reduces sales of longer duration and feeds the short duration need. If treasury was to sell more longer duration the market would want a higher rate which the fed / treasury does not want right now. When they reduce front end rates then the long end will be more valuable. Unless inflation picks up. Then if treasury want to go out into the direction curve the market may demand higher rates. The treasury again has a choice pump more short term tbills until someone comes to the table who is willing to own longer duration. There has to be some incentive to do so (higher rates is usually the incentive for holding duration).
What the US Treasury department is doing is „active duration management“
By not issuing long-dated treauries as much, institutions like pension funds, etc. are starved from getting these long-dates securities. As they are mandated (and incentivized by their business model) to buy long-dates treasuries still, demand „outpaces“ supply, which drives up prices and yields down (there an inverse relation between price of bonds and their yield).
How to measure/estimate this?
One way to do this is to compare the 10 year treasury yield to the yield for bonds on the agency mortgage market. The latter is low-risk and got the backing of the US government ss well, so these bonds are almost like treasuries.
In bond speak however, they have longer duration and greater convexity, which is why, when you compare these you have to factor in these differences. You can do that by help of a calculation where you make these to comparable by filtering out convexity and duration and when you do this, you still get about a 100 basis point difference which indicates that this is by how much US treasuries are overvalued or their yield is suppressed.
nostr:npub1m6y9qq06c74trgs60ya320pgmhz6099grra5lw04akyuxvcz7lvq9ue2p9
At some point, I‘d be happy to talk about these dynamics and other things on Unchained‘s podcast?
