Who Will Buy Us Treasuries Now?
Great interview Chris. Kind of went off the title’s topic now and then but what was covered was equally important. I enjoy the discussions that ask/answer the implications of the event covered in the topics.
Here’s what I was left wondering about after this interview: If the US banks are able to give their treasuries to the Fed in exchange for 100% face value cash (i.e. they don’t have to take the capital loss from the interest rate differential in order to get cash), what’s to stop all the banks from transferring all their treasuries in exchange for cash? I sure would do it. Then they can take the cash and invest in new treasuries (or other safe investments) that are yielding higher returns. It’s basically a get out of jail free card for US banks.
But what about international entities, like China et al, that are invested in 1.7% 10 year or 2.2% 30 year treasuries? If they want access to their cash, they have to take the capital loss. Doesn’t seem like fair treatment to all participants to me.
But what’s more important is that now that US banks are off the hook for future interest rate differential losses and therefore removing the financial risk of interest rate hikes, the Fed is free to continue raising rates. Considering these international entities, who in their right mind would continue to buy Treasuries when they know (at least fairly certainly) that rates will continue to increase, leading to potential capital losses? I certainly wouldn’t. I’d be waiting until I was certain that rates had finished going up. Then maybe buy.
However with the Gov’t running huge deficits for the foreseeable future that will need to be financed by someone buying Treasuries but no one will be buying them because of the fore-mentioned reasons. Who buys them then? The Fed? That won’t be great for inflation.