The Shortage of Treasury Bonds as Collateral Is Here and Now

The predicted shortage of pristine collateral in the repo market is now here. This shortage can cause liquidity problems and bring down an economy. Sometimes the bankers (sters) change the rules and make less pristine collateral work, like bad MBSs in the last housing bubble meltdown.

So, hopefully we won't go down the road on that mistaken train again. But the Fed owns too many treasuries and need to stop scarfing them up, because now people are paying interest to get them! I predicted that and it is already coming true.

Well, we shall see if treasuries, the new gold, multiply enough to satisfy the financial markets going forward.

As a background, we know:

Treasury bonds are used as collateral in financial markets, They are the gold of financial markets because the US has never defaulted on the debt. They are in major demand as the deficit shrinks and the the Fed hoards them to stimulate the economy. The Fed hoarding is causing a shortage of the bonds when collateral is due. It means there is a delay in the collateral being supplied, and if it gets bad enough it could freeze financial markets. So, in a debt based society, bonds are gold. But there is, like gold, not enough supply.

If the Fed sits on the collateral too long, and they resort to less pristine collateral, like MBSs, the money markets could crash. The overnight borrowing market collapsed in 2008 and the economy tanked.


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