The US Federal Reserve

[brutus2]

Question: Why does the Fed need to keep purchasing US government debt and mortgage backed securities if there is sufficient market demand for these assets?

I contend that the obvious answer is that there is not. Some would tend to disagree.

The Fed balance sheet is the largest it has ever been as of yesterday. 7.9 trillion roughly
US government debt represents 5.1 trillion and Mortgage backed securities about 2.3 trillion.

The US trade deficit is at record levels so this should provide lots of foreign demand
US corporations re making record levels of dough so no potential shortage there.
US interest rates are higher than many foreign countries, hence rate differential might attract money, so potential there

The simple fact is that US treasuries are simply not attractive for a variety of reasons, (primary one being quantity needed) and if they want to be able to support the governments
fiscal policies, ( the people that appointed them) then they need to keep rates low enough so that the large deficits can be financed now and into the future.

The Mortgage backed securities are similar, what fool would want to purchase 30 year locked in commitments at these rates.

The only thing making the Fed not have to buy almost all of these assets is that most other central banks are doing likewise. ( keeps the US currency from plummeting )

[Hombre Plata]

If you could print your own money and then go out and buy whatever you wanted, for as long as you wanted to, would you stop? The FED is nothing but legalized theft...

[brutus2]

The largest segment of US Treasuries that the Fed holds is the 1 to 5 year term. ( about 2 trillion)

Why is that ? ( in my opinion)

Why would any rational investor buy in that range with a interest coupon of .04% to .82% and the Fed pretty well telling you inflation will be 2%, at least

I can understand investors needing to park their money in a deep, liquid market for a few months at 0 return
I can understand some insurance companies, or pension funds mandated to buy longer term bonds at 1.62% to 2.32%
I can even see some crazy investors buying the 30 in hopes deflation sets in. Or, if not that 2.32% at least matches or beats inflation and no rate increases happen

But buying a 5 year treasury at .82%, with a strong possibility of a rate increase in the next year or two or three, is just begging for a loss of purchasing power, with very limited upside.

My guess if the Fed was not buying in this range these rates would quickly increase to a more rational level. Not a great scenario if debt keeps increasing dramatically and rates go up.

[vertical1]

search query "interest rates for personal savings in 1970"
Reply : "In the early 70s, the average savings rate started to spike, hitting a peak of 14.6% in May of 1975. The spike in personal savings rates from 1973 to 1975 coincided with the deep recession that was ravaging the country over the same period of time."

Man that was back when banks appreciated holding your money for you. They actually showed ya so. I could use some of those rates right now.

[brutus2]

search query "interest rates for personal savings in 1970"
Reply : "In the early 70s, the average savings rate started to spike, hitting a peak of 14.6% in May of 1975. The spike in personal savings rates from 1973 to 1975 coincided with the deep recession that was ravaging the country over the same period of time."

Man that was back when banks appreciated holding your money for you. They actually showed ya so. I could use some of those rates right now.

I would be in Utopia.

Imagine if you could get 14.5% on a US government 30 year long term bond like in early 80`s If you could put couple million in them and churning out 290,000 per year and after 30 years you get your principal back. ( granted lot less PP)
Hard to beat that type of return over 30 years for any asset., especially on a risk adjusted basis.

On other hand think of government having to pay that out for 30 years.

[vertical1]

I would be in Utopia.

Imagine if you could get 14.5% on a US government 30 year long term bond like in early 80`s If you could put couple million in them and churning out 290,000 per year and after 30 years you get your principal back. ( granted lot less PP)
Hard to beat that type of return over 30 years for any asset., especially on a risk adjusted basis.

On other hand think of government having to pay that out for 30 years.

Only possible is the wall street casino and it holds too much risk for my tastes (apologize for posting a tad off topic)

[LongDonSilver]

I would be in Utopia.

Imagine if you could get 14.5% on a US government 30 year long term bond like in early 80`s If you could put couple million in them and churning out 290,000 per year and after 30 years you get your principal back. ( granted lot less PP)
Hard to beat that type of return over 30 years for any asset., especially on a risk adjusted basis.

On other hand think of government having to pay that out for 30 years.

Don't forget that getting 15% interest rates when inflation is 18% is still losing value in real terms. Best return back then was buying business mortgages from Fanny at a discount and suggesting to the business refinance at a much lower rate when interest rates were dropping under Reagan. We were getting 25 - 50% returns on our investment.

[vertical1]

Best return back then was buying business mortgages from Fanny at a discount and suggesting to the business refinance at a much lower rate when interest rates were dropping under Reagan. We were getting 25 - 50% returns on our investment.

Nothing like that now days

[redraspberry]

What happened to the FED and the US Treasury interaction when Trump was President?

[SilverPalm]

What happened to the FED and the US Treasury interaction when Trump was President?

It became very murky. Some might even say incestuous. It was unclear to me if the treasury was applying influence on the Fed, as you seemed to suggest, or if the treasury was being turned over to the Fed. The latter seems more likely to me.