The Fed Can’t See Its Own Shadow
Its asset purchases are squeezing nonbank lending and sinking long-term bond rates. ...
Shortages of long bonds—good collateral—are causing “relentless”
demand and therefore lower yields. That’s why German long bonds have
negative interest rates: not because losing money is a great investment,
but because negative interest is the cost of doing business to get
“pristine collateral” to use in repos.
This is how the global credit system—what Mr. Snider labels the
Eurodollar market—now works. The Fed has become the lender of last
resort for the global market, including banks and shadow banks. It’s
about time its governors figure that out.
So what should they do? Encourage the Treasury to issue more of the
long bonds the market is demanding: 30- or even 100-year. Feed the
beast. Then stop quantitative easing: It doesn’t work and soaks up
collateral. Next, stop paying interest on reserves. Maybe even create a
nontradable “Treasury-R” to act as reserve currency elsewhere, freeing
up more bonds. If history repeats, there are about 90 days until China
repos roll over again.
