When a seasoned banking analyst like Charlie Peabody of Portales Partners (and a incoming partner at Wall Street Beats) speaks, the inner circle listens – and everybody else should, too.
He’s speaking to us about the impact of yield curve control, which could be a short term fix for a longer term problem. Or as he puts it…
I really worry what’s going to happen in 2025…there will be a price to pay.
For more context, as he explained on his Beats Roundtable debut, he explains…
And if you missed that, this quick summary…
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First, Powell announced the tapering of Quantitative Tightening (QT),
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Secondly, the Treasury is continuing with its heavy T-bill issuance
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Third, Treasury announced the maturity structure (and mix) of its financing needs, with no increased issuance at the long end of the yield curve
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Fourth, Treasury announced the commencement of a Treasury buyback program
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Finally, Treasury is working with the Treasury Borrowing Advisory Committee (TBAC) to create new (deficit) financing products
The bottom line, Charlie says, is that between the tapering of QT, the financing of the growing deficit via the belly of the curve, the increased issuance of T-Bills, and the new buyback program, the Treasury and Fed are looking to have a greater influence on the longer end of the yield. In short, we believe that the U.S. government is embarking on a shadow form of yield curve control.
He adds…
Containing long term rates improves financial conditions, supports rate sensitive industries (such as housing) and aids PE expansion (or prevents PE contraction). In short, unless we get a blowout jobs number, or material wage inflation or much higher energy prices, the Treasury/Fed partnership may prove successful in limiting the upward pressure on long term rates.
He adds…
That bodes well for financial assets in the short run.
Key there, is “the short run.”
The key phrase below, in my opinion, is “in the short-run.” Interpret at will, because nothing is sealed in stone… yet, if ever!
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