Hi, thank you for the post. I do not understand why repayment of THOSE securities destroys reserves? You write "... allowing its Treasury and mortgage-backed securities to mature. Repayment of those securities destroyed reserves. By September 2019, that process reached a breaking point in the repo markets: the Treasury's attempt to issue debt caused repo rates to spike." Is it that the issuers (banks) repay their MBS by reducing their reserves? And is it that the Treasury repay by reducing its TGA or its reserves, in a manner of speaking? Repo rates spike because T's got depleted in the repo market AND the T tried to issue more T's?
If the Fed is the lender, any other borrower repays by 1) acquiring reserves, i.e. liabilities of the Fed, then 2) destroying those reserves and simultaneously destroying the asset. This is the case only because the Fed is the issuer of reserves, which are good for final settlement.
When Treasury debt matures, technically it may correspond to a reduction in the TGA. But the Treasury is not retiring debt overall, so the TGA will increase again when the Treasury borrows elsewhere. In other words, the TGA balance is smaller than the likely runoff in the Fed's holdings of Treasuries.
Hi, thank you for the post. I do not understand why repayment of THOSE securities destroys reserves? You write "... allowing its Treasury and mortgage-backed securities to mature. Repayment of those securities destroyed reserves. By September 2019, that process reached a breaking point in the repo markets: the Treasury's attempt to issue debt caused repo rates to spike." Is it that the issuers (banks) repay their MBS by reducing their reserves? And is it that the Treasury repay by reducing its TGA or its reserves, in a manner of speaking? Repo rates spike because T's got depleted in the repo market AND the T tried to issue more T's?
If the Fed is the lender, any other borrower repays by 1) acquiring reserves, i.e. liabilities of the Fed, then 2) destroying those reserves and simultaneously destroying the asset. This is the case only because the Fed is the issuer of reserves, which are good for final settlement.
Neilson, when we talk about TS,
........................................Fed...............................................
-Treasuries -TGA
.................................................................................................
when we talk about MBS
..................................Fed...................................................
-MBS -Reserves
..............................................................................................
............................Bank........................................................
-reserves -deposits
...............................................................................................
...........................PD.................................................................
-deposits
.............................................................................................
What do you think?
When Treasury debt matures, technically it may correspond to a reduction in the TGA. But the Treasury is not retiring debt overall, so the TGA will increase again when the Treasury borrows elsewhere. In other words, the TGA balance is smaller than the likely runoff in the Fed's holdings of Treasuries.