It's not just us investors who drive
U.S. markets.
We also pay attention to foreign investors in U.S.
securities. And Thorsten Slack of Apollo is here
with one of his charts to show where foreign investors are putting their
money. So before the pandemic, there was
appetite among foreigners for buying. In particular, U.S.
government bonds and also U.S. equities.
Foreigners have also historically bought a lot of U.S.
credit. But broadly speaking, the trends were
that foreigners had appetite for buying both U.S.
fixed income and buying U.S. equities.
So over the months ahead, we still have that.
The Federal Reserve is doing quantitative tightening to the tune of
roughly 60 billion dollars every single month.
At the same time, we also have a budget deficit, which is roughly around 5
percent of GDP, and that amounts to roughly in round numbers, about one
hundred billion dollars in issuance of treasuries every single month.
Combining both Kuchi and the budget deficit with this new issuance on the
other side of this debt ceiling deal now potentially being quite substantial.
It does raise questions about who is it that would be buying treasuries in
particular in an environment where the hedging costs for foreigners continue to
be quite elevated. Aaron Brown of PIMCO and Barbara
Reinhart Avoid are still with us. Su Keenan, let me start with you here.
We've been following this after the debt ceiling got put behind.
This is which we did this week. There's the question of replenishing the
larder essentially in the U.S. Treasury to get their stock back up.
It's going to be a lot of T bills. Do we have the buyers for those T bills?
Thorsten mentioned, I mean, the challenges from a foreigner's
perspective. If you're a Japanese investor and you're
looking to buy 10 year government bonds after the ethics hedging cost measured
by the sort of three month ethics forward hedge, it will it will cost you
negative 2 percent. Your yield that you're getting is about
negative two point two percent on a 10 year bond.
You can buy JCB for about 40 basis points.
So from a foreigner's perspective, it's better to buy the local bonds than to
take into account the ethics hedging costs and buy U.S.
Treasury bonds, even though U.S. treasuries, at least from a yield
perspective in the U.S., is yielding more.
So it's really unattractive right now just because of ethics, hedging costs to
buy U.S. government bonds from the foreigners
perspective. You know, there's another problem, a
wrinkle that I'm going to throw in to, you know, the challenge that we have
with respect to supply. Not only do we need to refill the
coffers of the TGA and we have to fund the fiscal deficit.
But also, keep in mind, from an international perspective, you have
you're going to start to have the TLT here rose also that are going to start
adding to additional supply in in Europe as well.
So you have a lot of government supply that's going to be hitting the market in
the second half this year, which is going to create a challenge, certainly,
you know, in terms of or raise the question in terms of who's going to be
the incremental buyer for that. The problem with the debt ceiling being
passed and it's good from a political perspective and good from a stability
perspective, but it does mean that you now have have to refill those coffers
that can be significant amount of issuance over the next couple of months.
And the Treasury is saying that they want to rebuild to about six hundred
billion dollars. That TGA just means a significant amount
of issuance over the next three to four months.
So far I was because I had thought about the Telstra issue.
But whatever it is, what's going to do to liquidity in the marketplace and what
could that mean? Right.
To marry. That money's got to come from someplace.
It does. But a lot of times you're talking about
cash buyers moving over to a different cash instrument.
In the past 20 years, there have been four times that the Treasury general
account has had to raise significant amount of assets like it is this time.
Each time it was able to do it without an issue.
We don't rule out that something could potentially be a miss this time and
cause some indigestion. But the Fed is very well versed in the
plumbing of the Treasury market, and we don't think that it's necessarily going
to be a very big issue for the for the front end market.
Plus, also, think about this. You're now getting interest rates that
are almost in excess of headline inflation to be parked in t bills.
Right. So it's just a very attractive
investment for many investors. And many of the bank depositors are
looking at the table market thinking I can go over the money markets and get
much better rates of interest. So I think there's going to be a lot of
natural buyers. What does that mean?
Let me just look for the banks actually for their capacity to lend, because that
sounds good from the depositors point of view.
Right. Whatever the banks point of view, they
may not have as much to lend. I don't think that JP Morgan's going to
have a problem with that. Not speaking about a company very
specifically. But I do think that, look, the smaller
regional banks do have the issue with commercial real estate and with local
lending. That's a little bit of a different
story. But those are not your big money market.
Those are actually big money market buyers.
You're big buyers. They're coming from the, you know,
significant amount of deposits that are in the major money center banks.
I don't think you're gonna have an issue with it.
The TGA should be able to be refunded with various problems in the market.
Aaron, I interrupted you. No, no.
I take a slightly different approach. I think that, you know, there's two ways
or two liabilities that need to adjust lower as the TGA gets rebuilt.
The first is through the reverse repo facility.
Now, as Barbara said, if you had TGA rebuild, be very cleanly met with
a reverse repo offset. So as TGA goes up, reverse repos go
down, then that should have no impact on liquidity.
However, I do think that frictions are going to emerge, particularly because
right now the banks or money markets are getting a really good deal by parking
the money at the Fed. They're getting, you know, 5 basis
points over the 5 percent level. So they're getting about five point 0 5
percent right now. Treasury bills have been trading below
that. So that means that to make it attractive
for money markets to move over into buying bills, you're going to have to
see bills go up in yield. The second is that with respect to bank
reserves, as reverse as reserves leave the system that does put that generally
means that deposits are leaving banks and that generally means that it hurts
credit creation, something the general economy.
So I actually think it's going to be a bigger impact on liquidity.
