Gotta keep track of what the mother of all central banks is up to… And weekly numbers last week gave us more of the same. Up to May 20, the Fed’s balance sheet grew by 103 billion dollars compared to the previous week, to a new all-time high of 7.04 trillion. Just to view this gargantuan number in context, it happens to be higher by 2.73 trillion from only 10 weeks ago! Vertical doesn’t begin to describe what’s going on here.
America’s national debt climbed to equally record highs, namely a total of 25.36 trillion. The central US government’s debt mountain grew by a casual 900 billion from the month before. So, when I estimated that Washington is likely to rake up 3-4 trillion of a budget deficit in 2020 in a
post last week, I may have undershot reality. We need to be conscious that America is currently adding a cheeky trillion to the national debt, per month!
Let’s get yet another piece of perspective. Remember how big China’s US Treasury holdings are again? Yep, a smidge more than the Treasury issued in April alone. So much for the pundits’ perceived leverage of Beijing over Washington – exactly, close to zilch. If it ever crossed anyone’s mind in the politburo to “trash” the US bond market by offloading Chinese reserves, think again. People wouldn’t even notice.
On a more serious note, though, the US economy and the Treasury’s tax receipts will have to come back with a vengeance to keep deficit targets spinning out of control and debt below 30 trillion before a president will be inaugurated again in January. Interesting in this context that the Fed has issued a plan to reduce its purchases of US Treasuries to 5 billion per day from the fantastic quantities of 60-75 billion per day at the start of the health crisis.
It may not matter that much what asset class they are focussing from one week to the next. I guess it is a rotating mechanism when the Fed piles into either Treasuries, mortgages, investment-grade corporate bonds, or high yield. From the latest consolidated statement released by the Fed, it can be deduced that it was mostly mortgage securities that were the flavour of the week. There, almost 80 billion of bonds were gobbled up in the week to May 20.
When it comes to Treasuries and those seemingly ambitious plans to curb purchases, however, who on earth is to absorb those gazillions of new issues in the pipeline instead? At one point soon, market pressure will prevail and start to lift the long end at a minimum. 10- and 30-year yields have formed a solid bottom post that unprecedented unwind of a trade and the brutal volatility in March. Pundits like Jeff Gundlach have been keeping their ears on the ground for any potential rumblings in the making.
Just by way of momentum the bond market is ripe for a correction which could quickly elevate yields back up beyond 1% and towards 2%, respectively, particularly if the Fed was true to its word and holds back. To be sure, though, purchases would be expected to swiftly restart if those pain thresholds were to be reached. Well, the Fed has already broken with all taboos out there, and they have gone from buy-the-market to buy-everything-under-the-sun. Equities might soon be next.
