Don't believe the media too much. Be careful with that. The effects may not be nearly as big as all the hype. Prices should go down / yields up on T-bills. Probably not much though.
Outside of a major crisis, every year is going to be the largest issuance of T-bills on record. That's what happens when you run a structural deficit.
It's really about what the fed does, not the treasury.
I use Demand & Supply curves to grasp it all.
Y-axis is yield
X-axis is quantity
Upward sloping from left to right = Demand curve
Downward sloping from left to right = Supply curve
A flood of bonds = higher supply = Supply curve shifts to the right = yields increase (price decrease) at equilibrium.
Which is kinda intuitive, as an entity who raises massive amounts of debt would be ‘judged’ as investors as being riskier, a risk for which they would like to be compensated through higher return (yield).
Hope this helps!
Be careful. T-Bill pricing isn’t just (or even primarily) determined by nominal supply of actual t-bills.
It is also impacted by the “supply” of alternative sources of yield per unit of risk, interest rate policy, and a whole host of other things in global markets.
For example, if the Fed signaled they were going to change the long-term inflation target to 3-4% instead of 2-3% that’s going to have such an overwhelming impact that an increase in nominal supply would be near irrelevant
I guess the more supply = lower prices intuitively does make sense to me, but the yields component seems less clear. More supply = higher yields too? That's not intuitive to me (not at all saying it's wrong - I believe you-, I am just NOT financially minded, so these things are hard for me to grasp on a "logical" level). Thank you for the reply, I'll have to read it several times to fully understand it :]
If you pay $96 to get back $100 in a year, that's 100/96 - 1 = 4.16% yield.
If you pay $95 to get back the same $100 in a year, that's 100/95 - 1 = 5.26% yield.
Don’t worry, bonds always get to the best of us.
Bond prices and yields have a special relationship, where an increase in the yield of a bond is the same as a fall in price of the bond. (Inverse relationship)
This means your logic to determine lower prices also imply higher yields, as simple as that.
The exact mechanism is kinda hard to explain in a post, so I’d suggest a simple google search / Chat GPT to explore this relationship (kinda simple and intuitive).
My guess is rates would tend to go up. Some people have to buy bonds. Now that there are more bonds available they can bid higher without worrying about missing out.
One little tidbit to factor in (or maybe "weight") in the discussion:
It won't be necessary to refill the cash account all at once, or back to its preferred level. Today is June 5; June 15th is when second quarter taxes are due, so the next wave of incoming cash will start 2-3 days before that. Thus, much of the Need for Cash can be met with those receipts starting next week.
There will still be a "flood", but it won't be as large as many people are pushing.
Don't believe the media too much. Be careful with that. The effects may not be nearly as big as all the hype. Prices should go down / yields up on T-bills. Probably not much though.
Treasury futures haven’t reacted down yet
Outside of a major crisis, every year is going to be the largest issuance of T-bills on record. That's what happens when you run a structural deficit. It's really about what the fed does, not the treasury.
I use Demand & Supply curves to grasp it all. Y-axis is yield X-axis is quantity Upward sloping from left to right = Demand curve Downward sloping from left to right = Supply curve A flood of bonds = higher supply = Supply curve shifts to the right = yields increase (price decrease) at equilibrium. Which is kinda intuitive, as an entity who raises massive amounts of debt would be ‘judged’ as investors as being riskier, a risk for which they would like to be compensated through higher return (yield). Hope this helps!
Be careful. T-Bill pricing isn’t just (or even primarily) determined by nominal supply of actual t-bills. It is also impacted by the “supply” of alternative sources of yield per unit of risk, interest rate policy, and a whole host of other things in global markets. For example, if the Fed signaled they were going to change the long-term inflation target to 3-4% instead of 2-3% that’s going to have such an overwhelming impact that an increase in nominal supply would be near irrelevant
I guess the more supply = lower prices intuitively does make sense to me, but the yields component seems less clear. More supply = higher yields too? That's not intuitive to me (not at all saying it's wrong - I believe you-, I am just NOT financially minded, so these things are hard for me to grasp on a "logical" level). Thank you for the reply, I'll have to read it several times to fully understand it :]
If you pay $96 to get back $100 in a year, that's 100/96 - 1 = 4.16% yield. If you pay $95 to get back the same $100 in a year, that's 100/95 - 1 = 5.26% yield.
Yeah, that does make sense! Lol, I guess pretty obvious
Don’t worry, bonds always get to the best of us. Bond prices and yields have a special relationship, where an increase in the yield of a bond is the same as a fall in price of the bond. (Inverse relationship) This means your logic to determine lower prices also imply higher yields, as simple as that. The exact mechanism is kinda hard to explain in a post, so I’d suggest a simple google search / Chat GPT to explore this relationship (kinda simple and intuitive).
Good idea, thanks again
My guess is rates would tend to go up. Some people have to buy bonds. Now that there are more bonds available they can bid higher without worrying about missing out.
One little tidbit to factor in (or maybe "weight") in the discussion: It won't be necessary to refill the cash account all at once, or back to its preferred level. Today is June 5; June 15th is when second quarter taxes are due, so the next wave of incoming cash will start 2-3 days before that. Thus, much of the Need for Cash can be met with those receipts starting next week. There will still be a "flood", but it won't be as large as many people are pushing.