I was curious to note an article in the FT late last week that said ‘Treasury volumes raise liquidity concerns’. The article referred to a shortage of US Treasury bonds to trade and the mentioned the similar shortage in German bonds.
Now, of course both issues are prompted at least in part by quantitative easing programmes but the simple fact is that net of necessary government repurchases of bonds needed to keep other markets liquid there so seem to just not be enough government bonds in issue right now to meet demand.
Could it be that markets are signalling something politicians just do not want to hear, which is that the real economy really does think we need bigger deficits and more bonds? I think that’s exactly what is being said.
So why is the message falling on such deaf ears?
Answers on the back of postcard please to:
Rt Hon George Osborne MP
11 Downing Street
London SW1A 2AA
What excellent logic, eh?
So, the purpose of QE is to artificially raise the price of the risk free asset, gilts. This tempts people out along the risk curve in search of yield. This increases the price/reduces the yield on riskier assets like corporate bonds etc.
This is the point and purpose of what is being done.
So, Ritchie looks at that induced higher price for gilts and assumes that we should be issuing more. Because a high price caused by that deliberately induced shortage is a signal that we should be issuing more bonds to lower the price we’ve just engineered.