Quote of the day: “The cash has to go somewhere”

With Treasury securities at all time lows you get the feeling fundamentals is not the only thing driving the rally in U.S. government bonds.  After all, the Fed has been lowering interest rates and showering the financial sector with money. So, I wanted to highlight a comment that I find fitting.

“The cash has to go somewhere and the most likely vehicle is going to be some sort of Treasury,” says Bill Knapp, investment strategist for MainStay Investments, the retail arm of New York Life Investments.

Now, Bill goes on to say some other things but his comment here crystallizes in a sentence why the rise in Treasurys is a problem.  Well done.

Will Treasurys Stop Rallying? – Market Beat

  1. hbl says

    I agree on the new money helping drive demand (and the Fed promise to buy assets across durations also contributes) and have commented on this elsewhere as an explanation for treasuries and stocks being able to rally at the same time. As for whether or not it reflects fundamentals, I guess it all depends on one’s expectation of the likelihood of that money being used for lending or investment in risky assets in the foreseeable future. I haven’t denied that treasuries could be in a bubble, only questioned assertions of certainty that they are.

  2. Edward Harrison says

    @hbl:it’s definitely no certainty that treasurys are a bubble, just my opinion. What’s your take on whether that cash will be deployed? I just put out a video in which Jamie Dimon claims JP Morgan Chase is doing just that but I suspect many are not.

  3. John Creighton says

    Saw a good article on this:

    Didn’t something like this happen to the yet during the Asia Crisis?

  4. John Creighton says

    Would the flattening yield curve stop this trend?

  5. John Creighton says

    I’m trying to understand the banking rules:


    If I understand that banks can put money into treasuries without having to back it up with capital. However, if they put it into a mortgage the risk adjusted value is half the value of that mortgage and they must have total capital of at least 8% of the value of the risk adjust capital. So they need 8% of half the value of the mortgage. As long as the yield curve is positive the banks can make money on bonds by borrowing in the short term and lending for the long term. They can can pretty much do this indefinitely until the yield curve flattens.

    However, I’m not sure that the BIS rules adequately rate the risk in treasuries since the value of the bonds will fall if either interest rates increase or inflation increases. I think the fed should re-asses the rules about risk ratings of treasuries.

  6. Edward Harrison says

    @John Creighton, hi John, glad to hear you on the blog. I share your concerns about the capital requirements as now implemented being inadequate. Institutions that looked well-capitalised have written down so much that they became under-capitalised. There has been a lot of talk about changing the capital requirements according to the business cycle so that they act as counterweight against increased leverage and risk.

    I am sure that would help but ultimately innovative people will find a way to increase risk and leverage if the credit and interest rate environment allow then to do so. The capital requirements can only be effective in combination with sound monetary policy which does not promote the type of behavior we have had over the last years. The bubble in treasurys shows as you point out, John, that people will use the rules to find a place where they can get the highest return on capital. And right now, that’s in treasury securities.

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