It is well known that the Federal Reserve in its three rounds of QE (and especially the first two) aggressively bought Treasury Notes and Bonds or collectively the ‘Long Bond’ of 10 Years and longer. But there has been relatively little discussion of what that means for such things as Federal Government Net Interest etc. So rather than advance my thoughts I figured we could start with the numbers in the following web tool:
System Open Market Accounts
The link should take you to the Summary Tab which shows that total holdings in these accounts are $4.221 trillion comprised of $1.738 trillion of MBS’s (Federal Mortgage Backed Securities) and $2.347 trillion in Treasury Notes and Bonds plus some smaller amounts in TIPS and Agency Securities that are more a rounding error in context. Of interest is that the Fed’s SOMA holds no T-Bills at all. That is the holdings are all Medium to Long (2 years and longer) and not Short (1 year or less).
If you click on the Notes and Bonds tab you will see a breakdown of Fed SOMA holdings of each issue. Now while Notes and Bonds are not individually labelled it is easy to distinguish 10 Year and shorter Notes and 30 Year Bonds simply by inspection of the relative coupon rates of different Treasuries maturing on the same date: rates above 6% being Bonds issued 15, 25, and 30 years ago and rates in the 1-3.5% range being mostly 10 Year Notes. If we then inspect Fed holdings of those higher yield Bonds we see that they comprise up to but never exceeding 70% of the total issue.
I’ll let you all inspect the Tables as you will but would like to ask a question. The numbers show that the Fed’s SOMA holds something like 2/3rds of ALL existing high yield Treasury Bonds. Which means that these accounts are also collecting that percentage of projected Net Interest going forward for that part of Federal Debt actually held in Bonds. Since the Fed has no need to ever sell those holdings against its will and can simply hold them to maturity and since it rebates ‘profits’ to Treasury this would seem to mean that simply examining Net Interest in either nominal terms or as a percentage of GDP will lead one to erroneous conclusions about the ability to the Government to service its debt. That is just examining the total for Public Debt and taking its average coupon doesn’t do much until or unless you segregate out both Intragovernmental Holdings AND the Fed’s SOMA holdings and THEN adjust for the fact that these holdings include up to 70% of the highest yielding instruments.
I have put up these numbers before but as usual had the comment threads hijacked into other channels (cough, cough **Social Security** cough). But I really really hope SOMEBODY will address these issues more directly in terms of macro finance.