Bond Shortage?

Ever since the Fed began buying US Government securities for its own account, the meta-issue of a Bond Shortage has floated around. First, and foremost, it is important to recall that when Note prices fell this topic went into hiding, even though the base fundamentals remained.

If we look back at the killing of the 30 year bond on Oct 31 2001, the huge rally was not blamed on a shortage. The long populist drive for a balanced budget failed to include the consequence of dwindling supply. The financial system had grown around the regularly scheduled and, until then, steadily increasing, issuance of Ts. That rates trended, jaggedly, lower throughout the splurge was omitted from the narrative.

Unlike Bill Clinton, who boldly snatched the balance budget "victory" from Newt, Pres. Obama has not been deft enough to spin the declining budget as a triumph. Away from the politics of debt and deficits (they're bad I am repeatedly told), the question remains - Is there a shortage of US Treasuries? The common belief is the "debt" is a future tax obligation on our children. This is only partially correct as in practice the interest on the note is paid by the issuance of a like note. Thus, the massive dollar amounts of interest payments - ripping off savers I am also told - and refundings are the core of T schedules. A key point here, the US REFUNDS, other less fortunate nations RESCHEDULE.

T auctions were over subscribed even at budget imbalance peaks. The Treasury Dept. could "snap auction" additional securities to lock rates and sate demand if the concept of shortage resonated with them. The T Dept. has extended portfolio duration somewhat, although not aggressively because of the optics and counter weight to Fed LSAPs and twisting. If and when T prices fall, will the "shortage" have miraculously fixed itself? If so, aren't shortage birthers merely applying a "sounds right" economic argument to falling yields? The germinated seed idea to this narrative is the concept of "normalization." The Fed has promulgated, and haters have vocalized, the belief that "if not for x y z, rates would be higher." Amusingly, Fed bashers have embraced both the "distorts rates" and "doesn't work" critiques.

I would suggest that there cannot be a shortage of a virtually freely supplied product. When budgetary realities alter issuance amounts participants adjust risk  and play elsewhere. Shortage-birthers conveniently omit pre-govvie issuance history from their story. Sydney Homer (#GIK) is frowning. The GSE credit party that grew from a balanced budget, fears of limited supply and homes for everyone good intentions started with the notion of shortage. Bond shortage? Color me doubtful. Understanding shortage? full blown bubble.

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