I have to get to bed. But, let me just say that of course the Fed is impacting the demand. That's their job. They have always done this with POMO transactions. QE is nothing new. Nobody ever complained about POMO until they started calling it "QE".Bean wrote:So is the Fed not a part of the demand curve for overall T-Bond market? Also, saying that my comment is nonsense because the primary auctions are not swayed by the most liquid and vast secondary market in the world has me really confused.Gumby wrote: Nonsense. The Fed is buying bonds on the secondary market that have already been purchased by the private sector. The private sector would buy these bonds even if the Fed wasn't buying them because that's how the private sector saves the cash that comes from deficit-spending.
In other words, deficit-spending creates excess reserves and T-Bond auctions drain those reserves.
I guess if I translated what you are saying into my slower thought process, it would be like saying the used car market has no impact on the new car market.
However, Libertarian666 has implied that the bond market would automatically "crash" if the Fed stopped impacting the demand for T-Bonds. But, he has offered no evidence that the private sector would stop wanting to save their cash as T-Bonds. So long as people own savings accounts, the Primary Dealers will have a need to drain their excess reserves into T-Bond auctions — and as Primary Dealers they are required to anyhow. So, the demand for T-Bonds will always be healthy as long as people have a desire to save. And as long as the government spends money, they can continue to issue new bonds if they wish to and deem it appropriate (since the money to buy those bonds can simply come from more government spending swelling excess reserves).
Let me put it this way, if the Fed stops buying bonds and the stock market rises for whatever reason, the demand for T-Bonds should naturally go down. If the Fed stops buying bonds and the stock market crashes for whatever reason, the demand for T-Bonds should increase (which is what happened after QE2 ended).
My guess is that the Fed will stop buying bonds when it wants to loosen its grip on interest rates. That's all these legacy bond auctions and POMO transactions are used for in a fiat monetary system — just controlling rates.
I would also point out that the Fed has been doing POMO transactions for decades and the bond market had never "crashed" just because the Fed stopped its POMO purchases for any period of time. And why would it crash when there is always a healthy demand for saving cash?
