Can someone explain to me what Simon meant by, “Long treasuries won’t stay at 4% forever, that’s a pretty sure bet… [...] I’d hate to wait 5 or more years for short bet on treasuries to come through.”

Is he suggesting that treasuries ought to come down? and short bet as in betting on it coming down?

Thanks

====================
The S&P 500 at Your Fingertips

Countless hours have been spent by stock market investors researching the historic performance of the S&P 500 stock market index but until now, they've had to slog through spreadsheets or go datamine other reams of data to be able to extract the data they're after, and that's before doing any number crunching! Now however, everything has changed because we here at Political Calculations are putting the entire encapsulated history of the S&P 500 at your fingertips!

We've taken the raw data from the sources linked above, and made it easily accessible by selecting a month and year in our tool below. The tool will provide the average index value of the S&P 500 for the given month and year, the associated dividends and earnings for that month and year, not to mention the dividend yield and the price to earnings ratio. For good measure, we threw in the value of the Consumer Price Index as well!

Link

====================

Ever since WWII, the consensus view has been that the Fed and the fiscal authority (Congress) should act in a contra-cyclical way to deal with recessions. Ever since 1980 or thereabout, the consensus view has been that the Fed should prevent inflation from getting out of hand, even if this means more frequent or deeper recessions. Starting 2008, a consensus is developing that the Fed should act preemptively to prevent bubbles. Starting somewhere between 2020 and 2030, a consensus will develop that the Fed must be given authority to raise/lower taxes, in addition to raising/lowering interest rates, because Congress is incapable of raising taxes on its own, and Congress is too slow about lowering them (due to political infighting).

Understanding the prevailing consensus view on proper economics policy is essential to predicting what the Fed and Congress will do, and that, in turn, will pretty much tell you what the macro world will look like down the road.

Long treasuries won't stay at 4% forever, that's a pretty sure bet. In fact, I don't know why they are there now. But then I didn't know why S&P500 was overpriced all the way from 1997 or so through Oct 10 (other than a brief approach to fair value territory late in 2002). Markets can stay irrational for a long time. I'd hate to wait 5 or more years for short bet on treasuries to come through. But yes, it will pay off eventually.

It’s the process of selling longer-dated assets in exchange for zero-maturity money. This locks money up for a time, effectively removing it from current circulation. Usually, this would be done by selling off some of the treasuries on the Fed’s own books for cash. The Fed will take the cash it receives and sit on it.

If the Fed doesn’t own enough treasuries, it might not be able to do this in large enough scale on its own. Now, the Treasury could just issue more treasuries and sell them to the Fed.

But as commentator JKH points out there, the new ability to pay arbitrary interest rates to banks on their deposits is quite similar and can be used for sterilization. The banks deposit their cash with the Fed, which locks it up, taking it out of circulation.

Steve’s response is that the big difference is maturity: these deposits are generally just overnight, while a Treasury has a much longer term, up to 30 years, but with whatever maturity the government wants. The Fed could start offering CD’s, essentially, to remove even this distinction, but they haven’t done this yet.

HTH…

They can’t sell the collateral they got because it is collateral (that is, unless the borrower defaults).

So how do they sterilize? If a smart guy like Waldman says they can’t do it, or can’t do it in remotely enough size, does that make sense? I recall reading that China’s inflation had risen because their US Treasury purchases had created monetary growth in excess of what they could sterilize, so clearly this does happen. I am just uncertain about the mechanics.

One thing I don’t understand about your view is why would the Fed want to sterilize at the long end. Wouldn’t the result be the same if the Fed were to sell the same T-bills that they bought?

That's it, amen and out!