Growth of balance sheet means the one time inputs into M2 of QE 1, 2, 3, and the 2020 Panic. What has a remaining effect in this context on interbank interest rates such as the overnight rate and Treasury rates was the policy changes:
1. In which central banks don't drain their own payments and
2. The IOR policy
#1 Sets #2 as the absolute ceiling on the overnight rate. If you disagree, perhaps argue the point with Mosler, whose idea it would seem to be.
Corporate bond rates, rather than bank demand, by #2, drive the two and five year note rates.
10, 20, 30 yr, layered upwards by your term risk, while pulled down toward (or now, the ten yr. is just below) IOR by #1, while held up by IOR-created illiquidity risk.
And the cash management bills and bills, well, as you said, along with the overnight rate, driven up towards, as Francis Coppola points out, the IOR rate by IOR-created illiquidity in the face of some residual overnight borrowing demand despite #1.
"For those who 'like' QE as an explanation"--an explanation preference model of the yield curve?
My article is about the term premium estimate shown in the top panel. The estimated term premium has no longer been significantly positive for a reasonable amount of time (other than one episode) since the Financial Crisis of 2008. This era is characterised by a big Fed balance sheet. So people can argue there is a linkage.
No, no linkage. As your negative term premia are created by the negative liquidity of IOR, not by the 3.4 trillion in reserves, which only have an effect above the IOR ceiling, not below. OR, did I entirely miss the meaning of "five year zero coupon term premium," not myself in reality knowing these terms without trying to look them up on Investopedia?
The question is not just what is happening in the money markets, but the supply of Treasury securities is reduced. Regardless of the mechanism, the conventional argument is that "QE reduces term premia," and the exact mechanism is not the issue. The point being is that I do not agree with that assessment (with some caveats).
So what I am hearing from you down here in the thread is that you feel that banks were willing to just sit on 2.7 trillion in reserve balances at a .25% IOER/IORR rate from December 26, 2008 onwards, so as to drive the rate up on Treasuries into a traditional non-compressed yield curve or "non-compressed series of term premia."
Banks would have had an overbid of 2.7 trillion in bids at treasury auction if they wanted any rate of return above .25 percent on their reserves. They are just letting 2.7 trillion sit on the sideline at .25 percent in order to drive up the Treasury auction rate? And once there are 2.4 trillion, the Treasury can just fill up the TGA with 2.4 trillion in short term cash management bills and then negotiate whether they will have an auction or not.
Note that at a low IOR rate and more than a few billion in reserves sitting idle, banks aren't choosing between spending their reserves on corporate bonds, consumer loans, open market treasuries and the Treasury auction, as reserves aren't digital cash, a limited amount out of which banks buy things or pay each other, as every net payment creates new reserves one-for-one with the net amount one set of banks (the, to be, overnight lenders) is paying more than the other set of banks (the, resultingly, overnight borrowers). So all reserve balances are in excess of, mathematical, utility for actually using for anything other than leveraging down the rate a bit. When IOR first was introduced, were they all panicking thinking it might be jacked up suddenly to five percent?
I cannot tell what your point is here. Either QE compressed the term premium or it didn’t. Whether this model accurately measures the term premium is an open question, but for people who think that QE did lower the term premium, they can point to this model.
Describing money market operations is not really adding much information, since pricing can move independent of flows.
Mr. Romanchuck,
Growth of balance sheet means the one time inputs into M2 of QE 1, 2, 3, and the 2020 Panic. What has a remaining effect in this context on interbank interest rates such as the overnight rate and Treasury rates was the policy changes:
1. In which central banks don't drain their own payments and
2. The IOR policy
#1 Sets #2 as the absolute ceiling on the overnight rate. If you disagree, perhaps argue the point with Mosler, whose idea it would seem to be.
Corporate bond rates, rather than bank demand, by #2, drive the two and five year note rates.
10, 20, 30 yr, layered upwards by your term risk, while pulled down toward (or now, the ten yr. is just below) IOR by #1, while held up by IOR-created illiquidity risk.
And the cash management bills and bills, well, as you said, along with the overnight rate, driven up towards, as Francis Coppola points out, the IOR rate by IOR-created illiquidity in the face of some residual overnight borrowing demand despite #1.
"For those who 'like' QE as an explanation"--an explanation preference model of the yield curve?
My article is about the term premium estimate shown in the top panel. The estimated term premium has no longer been significantly positive for a reasonable amount of time (other than one episode) since the Financial Crisis of 2008. This era is characterised by a big Fed balance sheet. So people can argue there is a linkage.
No, no linkage. As your negative term premia are created by the negative liquidity of IOR, not by the 3.4 trillion in reserves, which only have an effect above the IOR ceiling, not below. OR, did I entirely miss the meaning of "five year zero coupon term premium," not myself in reality knowing these terms without trying to look them up on Investopedia?
The question is not just what is happening in the money markets, but the supply of Treasury securities is reduced. Regardless of the mechanism, the conventional argument is that "QE reduces term premia," and the exact mechanism is not the issue. The point being is that I do not agree with that assessment (with some caveats).
So what I am hearing from you down here in the thread is that you feel that banks were willing to just sit on 2.7 trillion in reserve balances at a .25% IOER/IORR rate from December 26, 2008 onwards, so as to drive the rate up on Treasuries into a traditional non-compressed yield curve or "non-compressed series of term premia."
Banks would have had an overbid of 2.7 trillion in bids at treasury auction if they wanted any rate of return above .25 percent on their reserves. They are just letting 2.7 trillion sit on the sideline at .25 percent in order to drive up the Treasury auction rate? And once there are 2.4 trillion, the Treasury can just fill up the TGA with 2.4 trillion in short term cash management bills and then negotiate whether they will have an auction or not.
Note that at a low IOR rate and more than a few billion in reserves sitting idle, banks aren't choosing between spending their reserves on corporate bonds, consumer loans, open market treasuries and the Treasury auction, as reserves aren't digital cash, a limited amount out of which banks buy things or pay each other, as every net payment creates new reserves one-for-one with the net amount one set of banks (the, to be, overnight lenders) is paying more than the other set of banks (the, resultingly, overnight borrowers). So all reserve balances are in excess of, mathematical, utility for actually using for anything other than leveraging down the rate a bit. When IOR first was introduced, were they all panicking thinking it might be jacked up suddenly to five percent?
I cannot tell what your point is here. Either QE compressed the term premium or it didn’t. Whether this model accurately measures the term premium is an open question, but for people who think that QE did lower the term premium, they can point to this model.
Describing money market operations is not really adding much information, since pricing can move independent of flows.