Great graph (from @EtraAlex ) on the net supply of duration in US bond markets over time

Receipts

Przeworski on Democracy In this paper, Adam Przeworski offers a summary of this ideas on democracy. For those who are interested in Przeworski’s ideas, this paper is a helpful overview. Download: dx.doi.org/10.2139/ssrn.7269…

New #IFDPPaper: Estimating Yield Impacts of Treasury Demand and Supply Changes: federalreserve.gov/econres/i… #EconTwitter

A pullback by pension funds in Treasurys created a void filled by hedge funds. Now, the New York Fed is asking around about the potential risks. wsj.com/finance/investing/bo… via @WSJ Very interesting article. We made a related point—and anticipated some of these developments—in a paper we released last year and presented at the NBER Spring Meetings: “The Effects of QE and Regulation on the Structure of the Financial System.” Our paper focuses on the euro area, but the economics is similar. We show that, over the past decade, euro-area insurers—traditionally major investors in long-term bonds—have substantially reduced their presence in long-term government bond markets. Their share of outstanding long-term government bonds fell by roughly 10 percentage points. If the natural holders of long-term bonds reduce their presence, someone else has to step in and fill the void... Why did insurers retrench from long-term bonds? Historically, European insurers offered long-term retirement policies with guarantees, making their role similar to that of pension funds in the US—hence the connection with the article. These policies create long-duration liabilities that are naturally matched with long-duration bonds on the asset side. Long-term bonds are therefore insurers’ “natural habitat,” making them an important source of demand for long-term government debt. Risk-based capital regulation and a prolonged period of very low long-term interest rates—associated with QE—made guaranteed retirement products less attractive. Insurers sold fewer of these products and shifted their product offerings toward other types of policies. As these liabilities declined, insurers’ demand for long-term government bonds declined with them. With rates now higher, demand for guaranteed products is recovering. But insurers’ liabilities adjust slowly, and the recovery remains far below what would be needed to absorb the increase in the net supply of bonds to the private sector. The broader point is that the past decade produced major structural changes in the financial system through the interaction of regulation and QE. While central banks were absorbing a large share of government bond issuance, these changes in the private investor base were less visible. A similar pattern occurred in the US. As central banks withdraw, the resulting imbalances become much easier to see. The paper is joint with @rogers_ciaran , Philippe and Stelios. We are about to release a revised draft. Here the older version: matteoleombroni.github.io/Fi…

⚠️ Fed hikes 25bps. Time to re-up a chart from '22... markets pricing one of the most shallow Fed hiking episodes in last 30Y. Thinking more akin to a 'mid cycle adjustment'. But those have been historically rare (4 out 6 cycles ended up more hawkish than current sentiment) $USD

THE FIRST INTERESTING SENTIMENT SURVEY IN YEARS Surveys like UMich and Conference Board don't get the attention they used to, because the numbers have been so rancid for so long. But the collapsing mood among Republicans with an R-White House is a real development.

Criminally underfollwed 👇

It's hardly a new observation, but with foreign private sector capital flows into the US absolutely bodying the official sector*, the "reserve currency" conception of the dollar is increasingly inappropriate. It's a "portfolio" or "funding" currency now, and has been for a while:

Good morning. Houthis control west coast of Yemen, including territory immediately adjacent to the Bab al-Mandeb. Saudi East-West pipeline is down, exports out of Yanbu will be reduced until the line is repaired. Riyadh has reportedly urged US to intervene. Trump has declined. Brent now at $103, down from yesterday's highs but unlikely to fall below $100.

A) They did not receive enough acceptable offers (banks are the sellers) B) The banks/customers are focused on spread to OTR. If it was outright yield Treasury would not be getting involved at these yield levels C) Trade has already been front run, fewer sellers at these spreads

The Treasury did not receive enough acceptable bids to fill the entire $6B buyback this afternoon. These are reverse auctions to purchase off-the-run issues. The Treasury uses a non-disclosed model to determine what an acceptable liquidity premium is. Basically, they have the fitted yield curve from the on-the-run issues and a model of how much is a "fair" discount for off-the-run issues. If someone tenders a bid considered fair, they get filled (or put on the demand curve if the number of fair bids exceeds the auction cap). Treasury did not receive enough fair bids today to buy back the entire $6B offered. Higher yields are encouraging dealers to hold on to these bonds. Previous auctions for this maturity bucket had smaller $2B offers and were filled with tender offers of 16.3B and 15.7B in July and 7.4B in august. We don't know how many of these offers were at "fair" prices, but the Treasury knows and likely took this information into account when they set the cap at $6B. This is an encouraging auction with respect to dealer balance sheet capacity. At these yields dealers aren't willing to lower their price much to remove the more illiquid bonds from their balance sheets. If you think one reason bond yields are rising is bondholders are playing a global game of run risk, this is an encouraging public signal.

In 2026, how would US markets react to an announcement of further US fiscal stimulus (say notable stimulus checks)?

So basically an Imperial line officer from Star Wars.

Few (if any) people I have spoken with have thought more deeply about these issues than @stwill1 🧵👇

Thoughts from @stwill1 on this are *always* worth a deep read.

There is a real issue here (beyond the misspelling) but also, this chart suffers from several problems--what is the relative magnitude of the two in the base period for instance. But also some of that construction was supported by Biden legislation which is rolling off/canceled?