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Buy More US Treasuries?
Posted: Thu Jul 12, 2012 8:48 am
by Plumbline
• What is China going to do with a record trade surplus? The answer is buy more US treasuries.
• What are pension plans and corporations going to do if the US is headed into recession? The answer is buy more US treasuries.
• What are those concerned about global growth and the situation in Europe (including capital flight) going to do? The answer is buy more US treasuries. "Mish"
Re: Buy More US Treasuries?
Posted: Thu Jul 12, 2012 9:49 am
by Gumby
The interesting thing about US Treasuries is that they are the only risk free financial asset that US Dollars can be parked into.
By that I mean that foreign debt isn't actually purchased with dollars — you have to trade your dollars to someone else in exchange for foreign currency before you can buy foreign debt. And that someone else would need to find a risk-free place to put those dollars you traded with them.
Assets like Gold are traded for dollars, but those dollars still exist in the private sector after the transaction is complete. So, the only way to store dollars in a risk-free asset is to give them back to the US government for safe keeping — which is obviously safer than giving dollars to a bank or commercial entity for safe keeping.
Re: Buy More US Treasuries?
Posted: Thu Jul 12, 2012 12:41 pm
by cabronjames
Gumby,
great point, that say if one preferred to hold sovereign bonds of a nation they deemed to have superior econ stats (such as trade surplus/low trade deficit, Gov budget suprlus/low deficit), such as say Switzerland, Canada, or S Korea; as you note they would have to trade for that currency, and pay some bid-ask spread cost to do so (not to mention possible extra tax or other costs).
in addition though, supposedly the US Treasury market is "extremely liquid" and presumably has lower bid-ask spread costs itself. Institutional investors perhaps value the "extreme liquidity" not only for the lower bid-ask spread costs, but the fact that their hugeness perhaps would "move the market" to their detriment in pricing in a less liquid sovereign bond market, but is less likely to do so in the more liquid UST market.
Re: Buy More US Treasuries?
Posted: Thu Jul 12, 2012 12:59 pm
by Gumby
cabronjames,
Just to be clear, I'm not talking about FX as a barrier for people to park their money into risk-free assets — because people use FX every single minute of every day to shop around for potentially better foreign assets.
What I'm saying is that when someone who has Dollars decides to buy a foreign asset, they trade Dollars for Euros or Yen...and their Dollars still exist at the end of the transaction. Even though that person winds up with German Bunds in their account, no Dollars are actually converted into risk free assets when someone with dollars trades those dollars for foreign currency. So, the only way for the private sector to convert dollars into risk-free assets (i.e. savings), on a Macro level, is to hand those Dollars back to the US Treasury for safekeeping. Otherwise, those savings keep circulating within the private sector looking for relatively safe home.
Re: Buy More US Treasuries?
Posted: Tue Jul 17, 2012 9:17 am
by hoost
Gumby wrote:
cabronjames,
Just to be clear, I'm not talking about FX as a barrier for people to park their money into risk-free assets — because people use FX every single minute of every day to shop around for potentially better foreign assets.
What I'm saying is that when someone who has Dollars decides to buy a foreign asset, they trade Dollars for Euros or Yen...and their Dollars still exist at the end of the transaction. Even though that person winds up with German Bunds in their account, no Dollars are actually converted into risk free assets when someone with dollars trades those dollars for foreign currency. So, the only way for the private sector to convert dollars into risk-free assets (i.e. savings), on a Macro level, is to hand those Dollars back to the US Treasury for safekeeping. Otherwise, those savings keep circulating within the private sector looking for relatively safe home.
This is a bit of a delay, but that's only if you buy Treasuries at auction. If you buy them on the secondary market, your dollars just go to the previous owner.
And in reality, even if you buy Treasuries at auction, the dollars still exist; they just belong to the Treasury. The dollars are only extinguished if the Treasury repays bonds held by the Fed. Likewise, if the Fed happened to be selling Treasuries and you bought one from them, the dollars would be extinguished (although the Fed will likely turn around and immediately create new dollars to buy a different, longer term bond a la Operation Twist).
But in principle, I agree with the premise that Treasuries are free of default risk (but not interest rate risk) and that someone holding dollars and wanting a risk free dollar denominated investment would be best to hold [short term] treasuries.
If they wanted to hold bonds of a different country they would have to trade dollars for the other county's currency and buy the other country's bonds with that currency.
Re: Buy More US Treasuries?
Posted: Tue Jul 17, 2012 10:01 am
by Gumby
hoost wrote:And in reality, even if you buy Treasuries at auction, the dollars still exist; they just belong to the Treasury.
Yes, However, in reality, the dollars leave the private sector and go into a Federal Reserve spreadsheet — existing only on a government computer screen — that represents the Treasury's account. Those dollars are no longer in the private sector. That's my point. And that lessens the demand for additional risk free assets within the private sector. In other words, the dollars are exchanged from the private sector to the public sector in exchange for a "risk free" piece of paper (i.e. Treasury Bonds).
hoost wrote:The dollars are only extinguished if the Treasury repays bonds held by the Fed.
I wasn't talking about "extinguishing" dollars. All I'm talking about is that Treasuries are the only risk-free dollar-denominated asset that the private sector can buy without continuing to trade those dollars within the private sector.
hoost wrote:Likewise, if the Fed happened to be selling Treasuries and you bought one from them, the dollars would be extinguished (although the Fed will likely turn around and immediately create new dollars to buy a different, longer term bond a la Operation Twist).
The Fed just conjures and destroys dollars in exchange for assets with a few keystrokes on a computer. It doesn't really recycle money in the way our brains imagine it does. Anyway, you already know this. My point is that the private sector
as a whole (on a Macro level) can only buy one kind of risk-free assets (i.e. Treasuries) from the public sector. Everything else is just trading dollars within the private sector.
Re: Buy More US Treasuries?
Posted: Tue Jul 17, 2012 1:28 pm
by hoost
Gumby wrote:
hoost wrote:And in reality, even if you buy Treasuries at auction, the dollars still exist; they just belong to the Treasury.
Yes, However, in reality, the dollars leave the private sector and go into a Federal Reserve spreadsheet — existing only on a government computer screen — that represents the Treasury's account. Those dollars are no longer in the private sector. That's my point. And that lessens the demand for additional risk free assets within the private sector. In other words, the dollars are exchanged from the private sector to the public sector in exchange for a "risk free" piece of paper (i.e. Treasury Bonds).
hoost wrote:The dollars are only extinguished if the Treasury repays bonds held by the Fed.
I wasn't talking about "extinguishing" dollars. All I'm talking about is that Treasuries are the only risk-free dollar-denominated asset that the private sector can buy without continuing to trade those dollars within the private sector.
hoost wrote:Likewise, if the Fed happened to be selling Treasuries and you bought one from them, the dollars would be extinguished (although the Fed will likely turn around and immediately create new dollars to buy a different, longer term bond a la Operation Twist).
The Fed just conjures and destroys dollars in exchange for assets with a few keystrokes on a computer. It doesn't really recycle money in the way our brains imagine it does. Anyway, you already know this. My point is that the private sector
as a whole (on a Macro level) can only buy one kind of risk-free assets (i.e. Treasuries) from the public sector. Everything else is just trading dollars within the private sector.
Agreed, and that's why I thought it was important to distinguish between buying on the primary market and secondary market. As I've stated before I think it's important to clarify what's actually happening and why, because understanding the underlying operations can help people to better understand the system, and will give them both the comfort of knowing that their bonds are free of default risk and the uneasiness of knowing that dollars are meaningless numbers typed into a computer by some guys in the government.
Re: Buy More US Treasuries?
Posted: Tue Jul 17, 2012 2:13 pm
by Gumby
hoost wrote:Agreed, and that's why I thought it was important to distinguish between buying on the primary market and secondary market.
Well, I'm not really sure it matters all that much on a Macro level. Once the Treasuries are purchased at auction, the dollars are no longer part of the private sector. The fact that there's a robust and highly liquid secondary market for those Treasuries doesn't change that.
hoost wrote:As I've stated before I think it's important to clarify what's actually happening and why, because understanding the underlying operations can help people to better understand the system, and will give them both the comfort of knowing that their bonds are free of default risk and the uneasiness of knowing that dollars are meaningless numbers typed into a computer by some guys in the government.
Heh.. Let's not kid ourselves. Treasuries are just meaningless numbers typed into a computer by some guys in the government.
It's all fiat binary when you get right down to it. The only difference is that the government is responsible for securing those Treasuries — rather than a bank or a mattress.
Re: Buy More US Treasuries?
Posted: Tue Jul 17, 2012 2:41 pm
by hoost
Gumby wrote:
hoost wrote:Agreed, and that's why I thought it was important to distinguish between buying on the primary market and secondary market.
Well, I'm not really sure it matters all that much on a Macro level. Once the Treasuries are purchased at auction, the dollars are no longer part of the private sector. The fact that there's a robust and highly liquid secondary market for those Treasuries doesn't change that.
Right, but that's my point. Buying on the secondary doesn't remove the dollars from the private sector. The treasuries are still free of default risk wherever you buy them; but the money only goes out of the private sector via the primary auction.