I want to start first with Scott Benson. What the Treasury is exactly trying to do, and whether history might actually be set aside with regards to the potential effectiveness of some of this bond buying.
Well, the first thing is that it really is three things. You started with the intervention that was pushing long rates down. Then you had the FEMA intervention. The 2 billion went to 4 billion, which also has been pushing rates down. And today we heard some talk about, well, maybe the Treasury general account will also be used to low on long term interest rates. So that's almost an almost campaign from the Treasury in an attempt to try to put a cloud over rates markets, that is, attempting to try to limit how much rates can be going up. So on their own, these initiatives have had so far more limited effect. But the fact that this cloud is hanging over the market, that suddenly something could happen, especially if the to the Treasury general account for the Treasury and the fits the account of the Treasury's account that fit is being used, that could potentially have a bigger impact.
Well, well, when we talk about the bigger impact, though, I would assume the number the dollar figure has to get a little bit bigger than just 2 to 4 billion or whatever he said he might go up to here. I mean, is there a number that you look at where you think that A would have an impact, but more importantly, a lasting impact?
Yeah. That's why today's news about the Treasury General account, which really is the Treasury's like checking account, uh, the Federal Reserve that has more than $900 billion in it at the moment. And that could potentially be a much bigger impact on the market, because the threat of using as much as hundreds of billions of dollars on buying long rates could potentially have some implications. But that being said, a checking account always needs to be refilled with new issuance. So in that sense, it's really more the threat of this happening at some point that is having the biggest impact.
Well, that's what I'm curious about too, is that would you even need to tap that? Because, I mean, I think back to when the ECB did something similar and they never actually made good on it because they didn't have to. It was just the idea that they said they would do it if necessary, was enough to scare the market into sort of toeing the line.
That's exactly right. So that's why it really ultimate is very similar to currency intervention from a central bank. If you say as a central bank that we may step in and do something, we may stay and buy or sell our own currency, then that on its own could also be a very important factor. When they think about the risk that this as a hip line could potentially begin to weigh in this case on rates and potentially suddenly create a drop in yields because of the Treasury deciding to do something. So that is probably was shaking out some of the people who are now betting on rates moving higher.
But it gets to this idea, though. I mean, if we do get to a general account situation where they're either threatening to use it or actually use it, this goes far beyond debt management. I mean, and now we're, um, you know, I don't know what we call it. Is it? I mean, I don't want to I don't use the word or the, uh, maybe it's just yield curve control. I mean, how would you characterize that if we do get to that stage?
Yeah. So the underlying dynamics are, of course, that rates are going higher because inflation has been higher. And the fiscal situation unfortunately is also putting upward pressure on rates. So therefore those fundamental forces are still in place at the moment. So for that reason these are certainly more you could call spot interventions that are trying at certain points to limit how much rates are going up. But that being said, it's still a cloud hanging over the market that this could. Now, the third item coming along with the Cheshire General account also now suddenly being in play. That also means that suddenly these things could suddenly jerk rates much lower. And because of that, that still is something that likely will begin to put some limit on how much rates can go up, because you can suddenly be jolted down to a lower level.
Does it matter that at least as of right now, this is the Treasury Department going alone? And the fed, at least based on what we know, is not actually involved in any of this? Do you think that will change?
Yeah, that does matter, because at the moment the Treasury, of course, is living under the condition that there is a budget deficit which in round numbers is like five 6% of GDP. That's not going to change. And if that's not changing, that means that there's still a need to finance the government deficit. And as a result of that, government debt levels are still going up. So in that sense, these things are all smaller things that are happening on the fringes, because on their own, they are not changing the fundamental forces that are driving rates higher, namely that at the moment higher inflation and also the fiscal situation.
