Yellen’s steeper yield curve lets banks finance the huge US budget deficit

Posted By : Telegraf
5 Min Read

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An off-hand comment by Treasury Secretary Janet Yellen that “issuing longer-term securities certainly seems to make some sense” Feb. 22 aggravated the sharp sell-off in long-term Treasury securities and widened the differential between shorter and longer maturity bonds. That’s a man-bites-dog story, because central banks engaged in monetary stimulus usually want to keep long rates down. That helps households and corporations take on cheaper long-term debt to buy houses and capital equipment. 

But Secretary Yellen, a former Fed chair, has another problem on her agenda: Financing a government deficit swollen to an astonishing 16% of GDP. Yellen needs the commercial banks to keep buying trillions of dollars of Treasury securities a year, and the banks need a steeper yield curve to make money buying Treasuries. 

Put another way, the United States now resembles Italy, Europe’s basket case, where the main function of commercial banks is to finance the state deficit, while the state hands out subsidies to various political constituencies.

The bond market’s rush out of longer maturities might seem an overreaction to the Treasury Secretary’s passing remark, except for the context: Central banks engaged in monetary stimulus usually do their utmost to keep long rates down, usually by buying longer maturities. In fact, most of the Treasury’s massive issuance of debt this year came in shorter maturities. That reduced the average maturity of outstanding US government debt sharply, as shown in the following chart from the US Treasury website:

Since the beginning of 2020, US commercial banks have added nearly $2 trillion in government securities to their books, while business loans have fallen. The last time a shift of this magnitude occurred was the depth of the 2008-2009 Global Financial Crisis. 

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