The Perfect Asset Tells a Depressing Tale


In the comments section of a previous post, Ryan Vann takes issue with DTM’s understanding of the role of bank reserves:

His criticism about reserves is a complete joke. If you want money (aka credit) to flow why in the hell would you pay interest on excess reserves? Seems to me you’d want to do the exact opposite.

For a refresher, this is what DTM has to say about excess reserves:

I think he is completely wrong about interest on reserves: the Fed can set reserves levels directly, and that was actually about making sure excess reserves went into it long-term asset buying program, instead of sitting around somewhere.

Well, the stars must be in the perfect alignment lately, because I’ve been having all kinds of luck! Besides the fact that the excess reserves have, in fact, been sitting at the Fed for the entire length of the recession, the PERFECT opportunity has arisen for banks to put their reserves, which are earning a pittance (.25%), into another long-term, liquid, risk-free asset class with a much higher yield:

At auction’s [30-Year TIPS] end, Treasury was stuck with a yield of 2.23% on the $8 billion in new debt, compared with market expectations of about 2.16% before the debt was issued.

That may not sound like much to you and me, but in the strange universe of bond trading it’s a “major price concession,” according to Nomura’s George Goncalves.

We have to wait until next Wednesday to see the movement in reserves.

On a more depressing note, the TIPS spread for all maturities:

  • 5-yr TIPS Spread: 1.92%
  • 10-yr TIPS Spread: 2.25%
  • 20-yr TIPS Spread: 2.46%
  • 30-yr TIPS Spread: 2.5%

Which is particularly depressing considering the CBO estimates of potential output:

In 2019 there is a 15 percent gap between the CBO estimate of potential output and the trend growth path of real GDP. That is $3 trillion of goods and services (at 2005 prices.) Perhaps the CBO is forecasting U.S. convergence with our new role model, France?

So both markets and the CBO forecast that we will never return to the previous trend growth rate. I don’t think you can understate how depressing that is.

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4 thoughts on “The Perfect Asset Tells a Depressing Tale

  1. Be positive, at least you can buy some TIPS that are giving pretty good returns. I actually think a 30 year TIP wouldn’t be so bad because when we do recover (maybe not this or next year, but probably sometime in 30 years), I suspect inflation will be back in full effect. Problem is, who wants there money tied up that long?

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