Quote:
Originally Posted by opendoor
But the amount of money they're holding in deposit (and thus keeping out of the treasury market) isn't even in the same universe as prior yield inversions. Pre-2008, the Federal Reserve's balance sheet was exceptionally modest by today's standards. But right now they're holding about $6T in deposits from banks and money market funds.
And that shows up in yields. Historically in the US, the 3-month Treasury yield is virtually always lower than the Federal Funds rate; usually ~-50 bps pre-2008 and ~-10bps post-2008. And in pre-recession and/or during rate hike situations, it tends to drop even more; it went -100 bps before the 1990 and 2001 recessions and -120bps before 2008. But right now it's positive at about +10 bps. And in the Fall it was +60 bps. That is very abnormal, historically.
And you see the same effect with other short-term yields as well. In this current cycle, 1-and-2-year treasuries are have had notably higher yields relative to the Federal Funds rate than they have historically.
So all that is to say, short-term treasury yields are being pushed up by a fair bit due to the Federal Reserve's holding more money in deposit. And in most cases, that increase in the spread is close to the amount of the yield inversion we've seen. So without that abnormal premium on short-term treasuries existing, there wouldn't be much of an inversion at all. That's what I mean when I say it's less market driven than prior examples.
That's not to say I don't think there will be a recession (I think there will be). But I don't think we can directly compare this current yield inversion (and in particular it's magnitude) to prior examples without accounting for the very different context.
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I agree with all of that. My point was more that the reason the Fed has been so aggressive taking in cash (imo) is that fiscal policy is hugely stimulative, and the money supply has been increasing very fast. Interest rates alone are a weak way to counteract that, so they're basically engaging in quantitative tightening via the discount window.