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.