Submitted by Taps Coogan on the 22th of February 2020 to The Sounding Line.
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Ralph Delguidice, money market observer and global macro strategist at Pavilion Global, recently spoke with Erik Townsend of MacroVoices to deliver a counter intuitive message: despite a massive increase in federal deficits, there is actually a large and growing shortage of marketable treasury debt.
Mr. Delguidice explains what is driving this counter-intuitive dynamic: regulatory changes that have mandated much higher treasury holdings by financial institutions, large treasury purchases by the Federal Reserve, retiring Baby-Boomers, and derivative margin requirements. The discussion references a chart-book that can be obtained for free by registering at MacroVoices (We have no relationship with MacroVoices).
The discussion doesn’t lend itself to excerpts, so enjoy the full discussion below. It is a technical discussion, but well worth listening to.
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We need to seperate out the demand for those who use them aa balance sheet toola from those who need to borrow them, because a cash buyer and leveraged gambler have very different demand profiles. Leveraged gamblmer will close out derivatives pos if the cost of borrowing the collateral for it is greater than exectes return on the pos, kindof intellectually lazy to just assume people will keep their derivatives positions open (even when they lose money by having them open?)
It would definitely be interesting to see and if a large portion is held as collateral for speculative trading activity, it could be a problem. My guess is that the vast majority are institutional reserves and money market funds though
>…institutional reserves and money market funds… Well from Ralph, it seems like both these actors could be in the business of lending out treasuries they are holding for extra yield… or the money market firms can be holding commercial paper that goes bad (or both) and potentially had borrowed UST’s as collateral for their commercial paper positions: “The Reserve Primary Fund was a large money market mutual fund. In 2006 Reserve Primary made the decision to purchase commercial paper, an asset class that Bent had dismissed as recently as 2001. By early 2008 asset-backed and financial-sector commercial paper made up… Read more »