Nice post to end the year with. 2023 should prove to be damn interesting.
A couple of points:
1. Regarding footnote 5. Its actually the principal from prepaying mortgages that makes up the majority of monthly MBS payments to the FED. The principal portion of regular mtge payments is ~5b/mnth on the FEDs 2.6T MBS portfolio, thus prepayments accounted for ~12b of the FEDs MBS reduction this month. Prepayments used to dominate much more before mtge prepayments speeds collapsed. Since the 5b/mnth for regular principal payments is close to static, when the FED was receiving 40b/mnth in MBS payments (early last spring) the split was more 5/35. Sorry for the nitpick but thought you and your readers might find the nuance interesting.
2. Treasury's payments to the fed to payoff UST maturities each month is debt ceiling neutral I believe since regardless of whether its the FED (reinvestment above the QT cap) or rest of market (up to the 60b cap) that funds the rollover, from a debt ceiling perspective its maturing debt so Treasury can reissue the same amount of debt without impacting the debt ceiling number. So I think its really the deficit spending (including servicing costs for existing debt) that drives the TGA drawdown once the debt ceiling is hit and the only new debt Treasury can issue is rollover of maturing debt (in amounts anyways composition of the new vs. maturing debt may change e.g. Bills -> coupons to keep the coupon issuance schedule)
3. One thing to account for on when the TGA will exhaust in the absence of a ceiling hike is tax receipts. My general understanding is they are heavier through April/May which would offset pressure on the TGA drawdown for a bit and may explain why many estiamtes dont anticipate exhaustion until Q3
4. My last point is more a question. What is the causal relationship (if any) between base money "liquidity" and equity prices/S&P level. Defining base money "liquidity" as more or less the level of bank reserves (total FED B/S liabilities - (TGA + RRP) ) given that currency is pretty constant. I recognize the clear correlation between the two over the past 2 years but I can think of no logical causation. I would love to hear any thoughts you have on that causation or lack thereof. Perhaps an article topic for sometime in 2023.
Thank you TLBS for all you have shared with us this past year! It is fabulous content and very much appreciated.
I just gotta laugh at these yearly debt ceiling shenanigans. Congress has no intention of ever limiting their spending or paying any debts. Even if it was 100% true republicans, the spending would go on and on and on...
Forget the Fed. Real rates should be in the 7-10% range at least and maybe over 12%. The entire rate scheme and financial system is now so convoluted and contorted that reality has become inaccessible. Thus, at some point it will rear its head and make up for all the sins of the Fed placating to the top 5%.
We had the opportunity to clear the decks of much of the corruption and rubbish in the 2008-2010 period, but the Fed went chicken and now we are in a much worse place. It's not gonna be pretty but we are close to the point of no return.
Happy and healthy new year to you and your family. As always I enjoy all of your articles. I question where you place your extra money given the current bear market?
TLBS, thanks for the "tour"! I've been looking for a high quality article on this topic. While this article is now more than 3 months old, it is only growing in importance, as the deadline looms ever closer. The funny thing is that the MSM isn't talking much about the liquidity consequences, which you might think would be a hot topic that complements the banking crisis / emerging credit crunch.
Once again, I understand that I know very little about the financial sausage works. I’m late to this party but wanted to let you know that I have enjoyed the content in 2022 and look forward to being an avid “like the post” guy throughout 2023. Happy new year TLBS
Nice post to end the year with. 2023 should prove to be damn interesting.
A couple of points:
1. Regarding footnote 5. Its actually the principal from prepaying mortgages that makes up the majority of monthly MBS payments to the FED. The principal portion of regular mtge payments is ~5b/mnth on the FEDs 2.6T MBS portfolio, thus prepayments accounted for ~12b of the FEDs MBS reduction this month. Prepayments used to dominate much more before mtge prepayments speeds collapsed. Since the 5b/mnth for regular principal payments is close to static, when the FED was receiving 40b/mnth in MBS payments (early last spring) the split was more 5/35. Sorry for the nitpick but thought you and your readers might find the nuance interesting.
2. Treasury's payments to the fed to payoff UST maturities each month is debt ceiling neutral I believe since regardless of whether its the FED (reinvestment above the QT cap) or rest of market (up to the 60b cap) that funds the rollover, from a debt ceiling perspective its maturing debt so Treasury can reissue the same amount of debt without impacting the debt ceiling number. So I think its really the deficit spending (including servicing costs for existing debt) that drives the TGA drawdown once the debt ceiling is hit and the only new debt Treasury can issue is rollover of maturing debt (in amounts anyways composition of the new vs. maturing debt may change e.g. Bills -> coupons to keep the coupon issuance schedule)
3. One thing to account for on when the TGA will exhaust in the absence of a ceiling hike is tax receipts. My general understanding is they are heavier through April/May which would offset pressure on the TGA drawdown for a bit and may explain why many estiamtes dont anticipate exhaustion until Q3
4. My last point is more a question. What is the causal relationship (if any) between base money "liquidity" and equity prices/S&P level. Defining base money "liquidity" as more or less the level of bank reserves (total FED B/S liabilities - (TGA + RRP) ) given that currency is pretty constant. I recognize the clear correlation between the two over the past 2 years but I can think of no logical causation. I would love to hear any thoughts you have on that causation or lack thereof. Perhaps an article topic for sometime in 2023.
Thank you TLBS for all you have shared with us this past year! It is fabulous content and very much appreciated.
Happy New Year,
John
Great article as always, very insightful about the mechanics between the treasury the fed and the markets.
Wish you a great 2023!
I just gotta laugh at these yearly debt ceiling shenanigans. Congress has no intention of ever limiting their spending or paying any debts. Even if it was 100% true republicans, the spending would go on and on and on...
Forget the Fed. Real rates should be in the 7-10% range at least and maybe over 12%. The entire rate scheme and financial system is now so convoluted and contorted that reality has become inaccessible. Thus, at some point it will rear its head and make up for all the sins of the Fed placating to the top 5%.
We had the opportunity to clear the decks of much of the corruption and rubbish in the 2008-2010 period, but the Fed went chicken and now we are in a much worse place. It's not gonna be pretty but we are close to the point of no return.
What an article TLBS! Love to always learn from your writings, just came to say thank you and happy new year!!
I found your Substack this year and it has been an absolutely gem! Thank you for your content and have a wonderful new year!
Great article!
Happy new year to you and your family!
Happy and healthy new year to you and your family. As always I enjoy all of your articles. I question where you place your extra money given the current bear market?
TLBS, thanks for the "tour"! I've been looking for a high quality article on this topic. While this article is now more than 3 months old, it is only growing in importance, as the deadline looms ever closer. The funny thing is that the MSM isn't talking much about the liquidity consequences, which you might think would be a hot topic that complements the banking crisis / emerging credit crunch.
Once again, I understand that I know very little about the financial sausage works. I’m late to this party but wanted to let you know that I have enjoyed the content in 2022 and look forward to being an avid “like the post” guy throughout 2023. Happy new year TLBS