Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
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  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, October 2, 2023

AI Summary. Shifts in consumer demand and in preferences for work and lifestyle during the pandemic created entrepreneurial opportunities, and applications to start businesses produced new firms and establishments that hired workers in large numbers. The authors argue these new businesses drew in quitting workers as founders or hires, implying economic restructuring across industry, geography, and firm size and age.

Ryan Decker and John Haltiwanger Brookings Papers On Economic Activity
Date Posted:

Ryan Decker and John Haltiwanger argue that the 30% increase in new business formation vs. 2019 implies “significant economic restructuring across industry, geography, and the firm size and age distribution.” @UpdatedPriors @JHaltiwanger_UM

Did the surge in new business formation drive economic restructuring?

Core argument: Pandemic-driven shifts in consumer demand and in preferences for work and lifestyle created entrepreneurial opportunities, prompting business applications that continued through mid-2023 and produced new firms and establishments that hired workers in large numbers.

The pandemic sparked rapid, dramatic changes to the composition of consumer demand and to preferences for work and lifestyle, and these patterns have continued to evolve through mid-2023. From the standpoint of potential entrepreneurs, these dramatic changes presented opportunities—both to meet newly formed consumer and business needs and to change the career trajectories of the entrepreneurs themselves. Entrepreneurs made plans and applied to start businesses both early on and through mid-2023; some of these plans have resulted in new firms and establishments that hired workers in large numbers. Entrepreneurial opportunities and the demand for employees at these new firms appear to have played an important role in the “Great Resignation,” as some quitting workers likely flowed toward new businesses (as either entrepreneurs or new hires). Taken together, these patterns imply significant economic restructuring across industry, geography, and the firm size and age distribution.

Takeaways by Macro Roundup® AI

  1. Pandemic-driven shifts in consumer demand and in preferences for work and lifestyle created entrepreneurial opportunities, prompting business applications that continued through mid-2023 and produced new firms and establishments that hired workers in large numbers.
  2. Entrepreneurial opportunities and hiring demand at newly formed firms appear to have played an important role in the "Great Resignation," with some quitting workers likely flowing toward new businesses as either entrepreneurs or new hires.
  3. The surge in business formation implies significant economic restructuring across industry, geography, and the distribution of firms by size and age.

Related Articles:

  • Surging Business Formation in the Pandemic: Causes and Consequences — US applications for new businesses dropped early in the COVID-19 pandemic and then rose to record levels, remaining historically elevated, including among applications with characteristics likely to result in hiring and growth. Business applications have historically tracked actual business formation closely.
  • Creative Destruction After the Pandemic — US establishment closures spiked and then returned to normal levels, while new establishment openings reached record highs—peaking at 379,000 in a single quarter—and have since cooled but remain far above any pre-2020 level. Much of this may be new businesses replacing those that closed, and it is unclear whether the new entrants are more productive than the firms they replaced.
  • Business Formation Boom — U.S. high-propensity business applications — those more likely to become employers — ran 40% above their 2019 average, according to Census Bureau data, with the elevated pace persisting after the pandemic. Business deaths also rose, but the net effect still points to strong growth in business formation.

AI Summary. Life insurers and pension funds invest monthly premium and contribution inflows across assets including Treasuries, amounting to Treasury purchases at an annual rate of roughly $100bn. That falls far short of the trillions in coupon-bearing Treasury debt to be issued annually, so these managers will not be the marginal buyer the market seeks.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 projects, “Real money managers will continue to increase the level of their Treasury holdings from asset inflows, but at a pace far slower than Treasury issuance.”

Can insurers and pension funds absorb rising Treasury issuance?

Core argument: Life insurers and pension funds have bought Treasuries at an annual rate of around $100bn in recent years, short of the trillions in coupon issuance expected each year for the foreseeable future.

Each month life insurers receive insurance premium payments and pension funds receive employee contributions that they invest. These inflows are then filtered through investment policies and then allocated into a range of assets, including Treasuries. Over the past few years, this has translated into Treasury purchases at an annual rate of around $100b. This does not come close to meeting the trillions in coupons that will be issued each year for the foreseeable future. Real money managers will not be the marginal buyer of Treasuries that the market is looking for.

Takeaways by Macro Roundup® AI

  1. Life insurers and pension funds have bought Treasuries at an annual rate of around $100bn in recent years, short of the trillions in coupon issuance expected each year for the foreseeable future.
  2. Monthly insurance premiums and employee pension contributions are filtered through investment policies and allocated across a range of assets, including Treasuries.
  3. Real money managers will not be the marginal buyer of Treasuries that the market is looking for.

Related Articles:

  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Maxing Out — Hedge funds became a major buyer of US Treasuries after the Federal Reserve and commercial banks stepped back, financing those purchases through dealer repurchase agreements that grew rapidly and then stalled. If these leveraged buyers are hitting financing limits set by dealer balance sheet costs, a new marginal buyer must emerge to absorb upcoming issuance.
  • Who Has Been Buying U.S. Treasury Debt? — Net purchases of U.S. Treasury securities by the "households and nonprofits" category have soared, more than offsetting sales and redemptions by money market funds, the Federal Reserve, and banks; much of this buying likely reflects hedge funds. The composition of Treasury financing has shifted dramatically as bond prices fell.

AI Summary. The rise in interest rates reflects higher real interest rates rather than inflation expectations, since breakeven rates—the gap between yields on ordinary bonds and inflation-indexed bonds—indicate markets expect inflation to stay under control. Real rates well above 2%, up from below 1% before the pandemic, may prove transitory.

Paul Krugman Krugman Wonks Out
Date Posted:

.@paulkrugman argues that the sharp rise in real interest rates likely represents a market overreaction, but he notes, “That’s what I’d like to believe, so maybe you shouldn’t trust me here.”

Are higher interest rates driven by real rates rather than inflation expectations?

Core argument: Real interest rates have risen well above 2%, up from yields usually below 1% before the pandemic, accounting for the rate spike rather than inflation fears.

What’s causing this interest rate spike? You might be tempted to see rising rates as a sign that investors are worried about inflation. But that’s not the story. We can infer market expectations of inflation from breakeven rates, the spread between interest rates on ordinary bonds and on bonds indexed for changes in consumer prices; these rates show that the market believes that inflation is under control. What we’re seeing instead is a sharp rise in real interest rates — interest rates minus expected inflation. At this point, real interest rates are well above 2%, up from yields usually below 1% before the pandemic. And if these higher rates are the new normal, they have huge and troubling implications. My instinct is to say that the bond market is overreacting to recent data and that high interest rates, like high inflation, will be transitory.

Takeaways by Macro Roundup® AI

  1. Real interest rates have risen well above 2%, up from yields usually below 1% before the pandemic, accounting for the rate spike rather than inflation fears.
  2. Breakeven rates, the spread between yields on ordinary bonds and bonds indexed to consumer prices, indicate that markets believe inflation is under control.
  3. Krugman's instinct is that the bond market is overreacting to recent data and that high interest rates, like high inflation, will prove transitory, while higher rates as the new normal would carry troubling implications.

Related Articles:

  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • Did the U.S. Really Grow Out of Its World War II Debt? — Decomposing U.S. debt-to-GDP movements, the authors find the post-World War II decline from 106% to a trough of 23% was explained mostly by primary budget surpluses and interest-rate distortions from surprise inflation and pegged nominal rates; absent those, the ratio would have fallen only to 74%.
  • American Gothic — US tax increases since 1950 of 2% of GDP or more occurred when overall tax receipts were a much smaller share of GDP than today. Restoring the ratio of entitlement to non-defense discretionary spending to its earlier level of 2.2x would require tax increases larger than those historical precedents.

AI Summary. Higher long-term US Treasury yields may reflect factors other than changed Federal Reserve rate expectations, including an unwind of leveraged bond trades, slower Chinese growth reducing purchases of Treasuries, the Federal Reserve shrinking its balance sheet, a US budget deficit of 6% of GDP, a US sovereign credit downgrade, rising Japanese yields, and larger planned Treasury auctions.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk notes that a 60/40 portfolio has lost 5% over the past two months, and argues that “with an outlook of high rates and slowing earnings, the outlook for the 60/40 portfolio remains negative.” @apolloglobal

Why are long-term Treasury yields rising without changed Fed expectations?

Core argument: A US budget deficit of 6% of GDP, requiring more Treasury issuance now and in the future, is one potential explanation offered for long rates moving higher independent of Fed expectations.

If the [rising term premium] is not driven by changing Fed expectations, what are then the reasons why long rates are moving higher? There are several potential explanations: 1) First, with declining repo it could be an unwind of the basis trade that is pushing long rates higher, somewhat similar to what happened in March 2020. This has been getting a lot of attention, and maybe conditions for getting repo are tightening. 2) Another potential explanation is the slowing growth in China, which means that China is recycling fewer dollars into Treasuries because of declining Chinese exports. 3) Rates may also be moving higher because of the Fed still doing QT. Remember, the entire goal with QT is to put upward pressure on government bond yields. 4) The US budget deficit remains big at 6% of GDP, which requires more Treasury issuance today and in the future, and investors may be reacting to that. 5) The US sovereign downgrade has likely had a negative impact. 6) Japan exiting YCC has put upward pressure on JGB yields, which, despite high hedging costs, makes US yields less attractive. 7) There is a large stock of T-bills outstanding, and the Treasury intends over the next six months to increase auction sizes across the Treasury curve.

Takeaways by Macro Roundup® AI

  1. A US budget deficit of 6% of GDP, requiring more Treasury issuance now and in the future, is one potential explanation offered for long rates moving higher independent of Fed expectations.
  2. Declining repo could be pushing long rates higher through an unwind of the basis trade, similar to March 2020, alongside the Fed's continuing quantitative tightening, whose goal is to put upward pressure on government bond yields.
  3. Slowing Chinese growth and declining exports mean China is recycling fewer dollars into Treasuries, while Japan's exit from yield curve control has put upward pressure on JGB yields, making US yields less attractive despite high hedging costs.

Related Articles:

  • Breaking Down the Sources of US Economic Resilience — The US government has funded essentially all of its increased deficit by issuing short-term Treasury bills and drawing down cash reserves rather than selling longer-dated debt, limiting the effect on market liquidity so far. The authors expect that pressure is delayed rather than eliminated, with issuance shifting toward longer maturities as the deficit stays elevated.
  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.

AI Summary. Large capital inflows into the US dollar and a negative term premium on US Treasuries both reflect a structural shortage of safe assets in global financial markets, according to the author, who argues this arrangement is beginning to unwind. Unless US authorities cap rising yields, the author warns the current duration crisis could become a credit crisis.

Michael Howell Capital Wars Blog
Date Posted:

Michael Howell argues that net inflows of $7.5T into US financial assets since 2009 have been a critical factor in US Treasury yields, and that declining inflows may require additional liquidity from the Fed. @crossbordercap

Does a safe asset shortage explain dollar inflows and Treasury yields?

Core argument: Two connected anomalies in world markets — huge capital inflows into the US dollar and a large negative term premium on US Treasuries — both reflect a structural shortage of 'safe' assets, and the early unwind stage has begun.

There are two connected anomalies, or ‘elephants’, in World markets (1) huge capital inflows into the US$ and (2) a large negative term premia on US Treasuries. Both reflect the structural shortage of ‘safe’ assets in global financial markets. We are now in the early unwind stage. China needs to unhook from the US dollar by further devaluing the Yuan. She is unlikely, as a result, to buy a lot more US Treasuries. Unless the US authorities do something to cap rising yields, the current duration crisis could turn into a more worrying credit crisis. China, for one, has already started to print money again. We expect others to follow.

Takeaways by Macro Roundup® AI

  1. Two connected anomalies in world markets — huge capital inflows into the US dollar and a large negative term premium on US Treasuries — both reflect a structural shortage of 'safe' assets, and the early unwind stage has begun.
  2. China needs to unhook from the US dollar by further devaluing the yuan and is therefore unlikely to buy many more US Treasuries.
  3. Unless US authorities act to cap rising yields, the current duration crisis could turn into a more worrying credit crisis; China has already resumed printing money, and others are expected to follow.

Related Articles:

  • The US Capital Glut and Other Myths — The US capital-output ratio remains close to its postwar average and the real return to capital has stayed roughly constant near 6%, at 5.84% in the 2000s and 6.42% in the 2010s. Market-based real returns averaged 5.52% from 1950-1989 versus 6.95% from 1990-2019, a rise rather than the decline a capital glut implies.
  • The Return of Quantitative Easing — The Congressional Budget Office projects the US government will need to sell an average of $2tn of Treasuries annually over the next decade, with Federal Reserve holdings of Treasuries rising to $7.5tn by 2033 from nearly $5tn. The author argues those spending projections are too low, implying holdings of at least $10tn.
  • Unstable Prosperity: How Globalization Made the World Economy More Volatile — The decline in the world real interest rate over roughly three decades suggests global demand for financial assets outpaced growth in their supply, driven by faster emerging-market growth, changes in financial structure, and shifts in advanced-economy public debt. Advanced economies' net foreign assets fell from near zero to about -20% of their combined GDP.

AI Summary. Equity risk premiums have fallen back to pre-pandemic levels, leaving less cushion for stocks as bond yields rise. Although US nominal and real bond yields have returned to pre-financial-crisis levels, price-to-earnings ratios remain much higher and earnings growth much lower, setting a higher bar for equities absent stronger corporate profit growth.

Peter Oppenheimer Goldman Sachs
Date Posted:

.@goldmansachs has a “neutral” view on equities. They write, “At 2.25% a risk-free and inflation-protected return makes equities look stretched unless there is significant growth.”

Do shrinking equity risk premiums leave stocks vulnerable to rising yields?

Core argument: Equity risk premia have fallen sharply back to pre-pandemic levels, leaving equities with much less buffer as rates rise.

[The] headwind from rising yields should not be a surprise given that equity risk premia have fallen sharply back to pre pandemic levels, providing much less buffer for equities as rates rise (Exhibit 5). Some argue that this makes sense; if the post-pandemic tail-risk of deflation has now eroded, then equity risk premia should fall as term premia rises. However, while nominal and real bond yields are back to pre financial crisis levels, at least in the US, the PE remains much higher, and earnings growth much lower. In the absence of much better growth in corporate profits, the significant increase in both nominal and real interest rates create a much higher bar for equities to beat.

Takeaways by Macro Roundup® AI

  1. Equity risk premia have fallen sharply back to pre-pandemic levels, leaving equities with much less buffer as rates rise.
  2. Nominal and real US bond yields have returned to pre-financial-crisis levels, while the PE remains much higher and earnings growth much lower.
  3. Without much better growth in corporate profits, the significant increase in both nominal and real interest rates creates a much higher bar for equities to beat.

Related Articles:

  • Breaking Down the Sources of US Economic Resilience — The US government has funded essentially all of its increased deficit by issuing short-term Treasury bills and drawing down cash reserves rather than selling longer-dated debt, limiting the effect on market liquidity so far. The authors expect that pressure is delayed rather than eliminated, with issuance shifting toward longer maturities as the deficit stays elevated.
  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • The Price of Risk: With Equity Risk Premiums, Caveat Emptor! — Historical correlations between equity risk premiums or earnings yields and future stock returns do not translate easily into profitable market timing, because market and economic structures can shift and undercut predictions based on past data. Even when such relationships hold, statistical noise in the estimates can disrupt portfolios before predictions play out.

AI Summary. New-home prices in Beijing, Shanghai, Guangzhou, and Shenzhen reached roughly 1.7x to 2x their 2014 levels, and China's housing market is valued at 4x GDP, versus 1.6x in the US and 2.1x in Japan. Housing accounts for more than a quarter of Chinese economic activity and two-thirds of household wealth, while the population, including the home-buying-age cohort, is shrinking.

Yi Fuxian Project Syndicate
Date Posted:

.@fuxianyi argues that the correction in Chinese real estate markets is only just getting underway. The value of China’s housing market is 4x GDP, relative to 1.6x in the US and 2.1x in Japan.

Is China's housing market overvalued relative to its shrinking population?

Core argument: By 2022, new-home prices in Beijing, Shanghai, Guangzhou, and Shenzhen stood at 1.73, 1.81, 1.80, and 1.97 times their 2014 levels, respectively.

By 2022, the prices of new homes sold in Beijing, Shanghai, Guangzhou, and Shenzhen were 1.73 times, 1.81 times, 1.80 times, and 1.97 times their 2014 levels, respectively. The value of China’s housing market is four times the country’s GDP, compared to 1.6 in the US and 2.1 in Japan. Accounting for more than one-quarter of all economic activity and two-thirds of household wealth. Now that China’s total population is shrinking, especially the home-buying-age cohort, the collapse of the property dam seems inevitable.

Takeaways by Macro Roundup® AI

  1. By 2022, new-home prices in Beijing, Shanghai, Guangzhou, and Shenzhen stood at 1.73, 1.81, 1.80, and 1.97 times their 2014 levels, respectively.
  2. China's housing market is valued at four times GDP, against 1.6 in the US and 2.1 in Japan, and accounts for more than one-quarter of all economic activity and two-thirds of household wealth.
  3. With China's total population shrinking, especially the home-buying-age cohort, the collapse of the property dam appears inevitable.

Related Articles:

  • How China Can Avoid the Japan Trap — China's high savings, concentrated among controllers of capital, now exceed what can be productively invested, so income needs to shift toward those who will spend it. The risk is chronically weak demand rather than a financial crisis, since China is a creditor country whose debts are in its own currency.
  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.

Tuesday, October 3, 2023

AI Summary. The US is running a primary deficit—excluding interest costs—much larger than its historical norm, at a point in the business cycle when deficits would normally be smaller than usual. The average interest rate on federal debt is projected to remain at or below the rate of nominal GDP growth over the next decade.

Tim Krupa and Alec Phillips Goldman Sachs
Date Posted:

A @GoldmanSachs analysis notes that the rise in real interest expense as a percentage of US GDP requires primary (ex-interest) deficit reduction comparable to the 1993 fiscal adjustment to stabilize the debt-to-GDP ratio.

Is the primary deficit, not interest costs, the bigger fiscal problem?

Core argument: The US primary (ex-interest) deficit is much larger than its historical norm, and it is occurring at a point in the business cycle when deficits would normally be smaller than usual.

The greater challenge facing US fiscal policy is not new: the US is running a primary (ex-interest) deficit much larger than has been the case historically, and it is happening at a point in the business cycle when the deficit would normally be smaller than usual. When interest expense rose sharply in the 1980s, fiscal policymakers reacted by shrinking the primary (ex-interest) deficit. The largest fiscal adjustment from that period, enacted in 1993, would be sufficient if enacted now to offset the additional interest expense we project (relative to 2021) after 5 years. The average interest rate on federal debt is likely to remain at or below the rate of nominal GDP growth for the next decade, and this relationship is likely to be more benign than the historical average over the next five years.

Takeaways by Macro Roundup® AI

  1. The US primary (ex-interest) deficit is much larger than its historical norm, and it is occurring at a point in the business cycle when deficits would normally be smaller than usual.
  2. When interest expense rose sharply in the 1980s, fiscal policymakers responded by shrinking the primary deficit, and the largest adjustment from that period, enacted in 1993, would be sufficient if enacted now to offset projected additional interest expense relative to 2021 after five years.
  3. The average interest rate on federal debt is likely to remain at or below the rate of nominal GDP growth for the next decade, with that relationship likely more benign than the historical average over the next five years.

Related Articles:

  • Maxing Out — Hedge funds became a major buyer of US Treasuries after the Federal Reserve and commercial banks stepped back, financing those purchases through dealer repurchase agreements that grew rapidly and then stalled. If these leveraged buyers are hitting financing limits set by dealer balance sheet costs, a new marginal buyer must emerge to absorb upcoming issuance.
  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.

AI Summary. China's slowing growth and weaker exports to the US leave it fewer dollars to recycle into Treasuries, and it has sold $300bn of Treasuries since 2021. The author argues this, alongside rising Treasury issuance and Federal Reserve balance-sheet runoff, will keep the cost of capital higher regardless of the business cycle.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk suggests that slowing growth in China might be the dominant cause of the recent weakness in Treasuries. @apolloglobal

Is reduced Chinese Treasury buying pushing US long rates higher?

Core argument: China has sold $300 billion in Treasuries since 2021, with the pace faster in recent months, as slowing growth and lower Chinese exports to the US leave China fewer dollars to recycle into Treasuries.

Maybe China is behind the rise in US long rates. Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower. As a result, China has fewer dollars to recycle into Treasuries. In fact, China has been selling $300 billion in Treasuries since 2021, and the pace of Chinese selling has been faster in recent months. If slowing growth in China is a source of higher US rates—together with the US sovereign downgrade, Fed QT, Japan YCC exit, and rising US Treasury issuance—then a bad US employment report on Friday may not result in dramatically lower rates. The bottom line is that the cost of capital will likely stay permanently higher for reasons that have little to do with the business cycle, and it was the period with essentially zero interest rates from 2008 to 2020 that was unusual.

Takeaways by Macro Roundup® AI

  1. China has sold $300 billion in Treasuries since 2021, with the pace faster in recent months, as slowing growth and lower Chinese exports to the US leave China fewer dollars to recycle into Treasuries.
  2. Slowing Chinese growth may be pushing US long rates higher alongside the US sovereign downgrade, Fed quantitative tightening, Japan's exit from yield curve control, and rising US Treasury issuance, so a weak US employment report may not bring dramatically lower rates.
  3. The cost of capital will likely stay permanently higher for reasons with little to do with the business cycle, making the 2008–2020 period of essentially zero interest rates the unusual episode.

Related Articles:

  • Setser On Chinese “De-Dollarizing” — There is no good evidence that China has reduced its dollar exposure; accounting for the higher dollar share of its hidden reserves, China's dollar holdings have likely increased. Rather than shifting out of dollars, China has moved from US-custodied Treasuries to offshore custodians and risk assets such as agency bonds and equities.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.
  • Sester On Sløk — Reported declines in foreign Treasury holdings reflect valuation changes and custody shifts rather than dramatic selling, with purchases across most of the prior year, sales in the first quarter, and moderating sales since. China's Treasury bid has not stopped; it has shifted toward agency bonds and offshore custodians.

AI Summary. Reported declines in foreign Treasury holdings reflect valuation changes and custody shifts rather than dramatic selling, with purchases across most of the prior year, sales in the first quarter, and moderating sales since. China's Treasury bid has not stopped; it has shifted toward agency bonds and offshore custodians.

Brad Setser @Brad_Setser
Date Posted:

.@Brad_Setser argues that Torsten Sløk’s analysis of Chinese sales of Treasuries is misleading as it excludes Chinese offshore custodians and rotation into agencies.

Are foreign holders selling Treasuries, or do valuation and custody explain declines?

Core argument: Setser argues Sløk's major foreign holdings table fails to adjust for valuation changes, Euroclear, and Agencies, and that the available data show purchases for most of last year, sales in Q1, and moderating sales in recent months.

Sløk's charts of the day are generally great but he forgot to adjust the major foreign holdings table for valuation changes, Euroclear, and Agencies. The available data shows purchases for most of last year, sales in Q1, and a moderation of those sales in the last few months. Nothing dramatic. The Chinese data doesn't suggest informal PBOC reserves sales to date -- all the action has been through the state banks, and the sums there have been modest/the state banks wouldn't need to use their bonds to fund intervention. Has the Chinese bid for Treasuries stopped? No. But China has shifted toward Agencies and holds more of its Treasuries in offshore custodians. This should be the definitive flow chart --not a chart changing the valuation of US custodied Treasuries!

Takeaways by Macro Roundup® AI

  1. Setser argues Sløk's major foreign holdings table fails to adjust for valuation changes, Euroclear, and Agencies, and that the available data show purchases for most of last year, sales in Q1, and moderating sales in recent months.
  2. Setser finds that the Chinese data do not suggest informal PBOC reserve sales to date, with the action running through the state banks in modest sums that would not require selling their bonds to fund intervention.
  3. Setser argues the Chinese bid for Treasuries has not stopped, but that China has shifted toward Agencies and holds more of its Treasuries with offshore custodians.

Related Articles:

  • Is China the Source of Higher US Long Rates? — China's slowing growth and weaker exports to the US leave it fewer dollars to recycle into Treasuries, and it has sold $300bn of Treasuries since 2021. The author argues this, alongside rising Treasury issuance and Federal Reserve balance-sheet runoff, will keep the cost of capital higher regardless of the business cycle.
  • Setser On Chinese “De-Dollarizing” — There is no good evidence that China has reduced its dollar exposure; accounting for the higher dollar share of its hidden reserves, China's dollar holdings have likely increased. Rather than shifting out of dollars, China has moved from US-custodied Treasuries to offshore custodians and risk assets such as agency bonds and equities.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.

AI Summary. The US dollar's strength has pushed the yen close to the 150 yen per dollar level at which Japanese authorities are widely expected to intervene to support the currency. Such intervention would likely push bond yields higher, undercutting bets that yields will soon fall.

John Authers Bloomberg
Date Posted:

The weakening of the yen relative to the dollar will likely force an intervention that will put additional upward pressure on yields. @johnauthers

Does currency intervention abroad push bond yields higher?

Core argument: The yen came within a whisker of falling below Y150/$, a level at which many assume Japanese authorities would feel obliged to intervene to prop up the currency, as they did when it briefly topped that level a year ago.

In currencies, the US dollar continued its recent rampaging strength, with the yen coming within a whisker of dropping below the level of Y150/$, at which many assume the Japanese authorities would feel obliged to step in to prop up the currency, as they did when it briefly topped that level a year ago. Any intervention by Japanese authorities would likely send yields further upward, so this is a reason for caution about betting on them to fall in short order. The logic is that the Federal Reserve will be happy for yields to rise until they “break something,” at which point bonds’ prices would rise as their yields fell. That makes sense, but if the first thing to break is the patience of the Ministry of Finance in Tokyo, then such a bet on buying bonds would lose money.

Takeaways by Macro Roundup® AI

  1. The yen came within a whisker of falling below Y150/$, a level at which many assume Japanese authorities would feel obliged to intervene to prop up the currency, as they did when it briefly topped that level a year ago.
  2. Intervention by Japanese authorities would likely push yields further upward, a reason for caution about betting on yields to fall in short order.
  3. The argument that the Federal Reserve will welcome rising yields until they "break something," at which point bond prices would rise and yields fall, would lose money as a trade if the first thing to break is the patience of Tokyo's Ministry of Finance.

Related Articles:

  • BOJ Shock Has Wall Street Gaming Out the Global Spillovers — The Bank of Japan has signaled it will allow yields to trade toward 1% from roughly 0.5%, though its intervention in the market suggests that shift is not imminent. With Japanese domestic investors holding around $2.5tn of US stocks, bonds and credit, Wall Street is weighing volatile spillovers that could reinforce higher-for-longer interest rates.
  • Why Are Long Rates Going Up? — The rise in long-term interest rates is attributed less to shifting Federal Reserve expectations than to the US sovereign credit downgrade, Japan's exit from yield curve control, the Federal Reserve shrinking its balance sheet, fewer dollars for China to recycle as exports fall, the US budget deficit, and larger Treasury auctions.
  • Raising Anchor — The Bank of Japan's low interest rate policy anchors global bond yields, and that anchor is set to move higher, making U.S. Treasury bonds less attractive to Japanese investors. With this marginal source of demand fading as Treasury supply is set to increase, U.S. yields are likely to drift higher.

AI Summary. U.S. petroleum product exports reached nearly 6.0m barrels per day in the first half of the year, 2% above the same period a year earlier and the highest first-half total in records dating to 1981. The rise over the 2000s and 2010s reflects factors including greater competitiveness and efficiency at U.S. Gulf Coast refineries and increasing hydrocarbon gas liquids production.

Kevin Hack Energy Information Administration
Date Posted:

US petroleum product exports hit a new record of nearly 6 million barrels per day in the first half of this year, 2% up vs. 2022. @EIAgov

Are U.S. petroleum product exports reaching record highs?

Core argument: U.S. petroleum product exports averaged nearly 6.0 million barrels per day in the first half of 2023, 2% more than in the same period of 2022.

U.S. petroleum product exports totaled nearly 6.0 million barrels per day (b/d) in the first half of 2023, 2% more than during the same period in 2022. The first half of 2023 saw the most U.S. petroleum product exports during the first six months of any year in our Petroleum Supply Monthly data, which date back to 1981. U.S. petroleum product exports increased significantly in the 2000s and 2010s because of a number of factors, including the increasing competitiveness and efficiency of production at U.S. refineries along the U.S. Gulf Coast and increasing hydrocarbon gas liquids (HGLs) production associated with rising U.S. upstream oil and natural gas production.

Takeaways by Macro Roundup® AI

  1. U.S. petroleum product exports averaged nearly 6.0 million barrels per day in the first half of 2023, 2% more than in the same period of 2022.
  2. The first half of 2023 marked the highest U.S. petroleum product exports for any January–June period in Petroleum Supply Monthly data dating back to 1981.
  3. U.S. petroleum product exports rose significantly in the 2000s and 2010s because of factors including greater competitiveness and efficiency at U.S. Gulf Coast refineries and rising hydrocarbon gas liquids production associated with increasing upstream oil and natural gas output.

Related Articles:

  • The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications — The shale boom turned the United States into a net exporter of natural gas and of oil, altering how commodity prices relate to US trade. Where higher oil prices were historically associated with a deterioration in US terms of trade, they now correspond to an improvement.
  • U.S. Oil Boom Blunts OPEC’s Pricing Power — U.S. shale drilling and fracking costs have fallen 36% since 2014 even as recovered oil volumes have risen, according to J.P. Morgan. One major producer can now earn as much from $42-a-barrel oil as it once did at $86, while Saudi Arabia's budget is estimated to require $81 a barrel.
  • Portfolio Nuclear — The US is in its fifth year of net energy independence, with domestic oil and gas production at all-time highs across four consecutive administrations. Wind and solar now supply 15% of the grid, allowing more coal and liquefied natural gas to be exported.

AI Summary. New Bureau of Labor Statistics estimates show hybrid remote work is substantially less common than other surveys indicated, while fully remote work matches other estimates at about one in ten workers, making fully remote slightly more common than hybrid. Nearly one in five college-educated workers are fully remote, and nearly 40% of advanced-degree holders work hybrid or fully remote.

Adam Ozimek and Eric Carlson Economic Innovation Group
Date Posted:

According to new BLS numbers, 19.5% of American workers worked remotely during August 2023 with the majority of those workers, 53%, being fully remote. Among college graduates, nearly 20% are fully remote. @ModeledBehavior and Eric Carlson

Is hybrid remote work less common than other surveys suggest?

Core argument: New BLS data show hybrid remote work to be substantially lower than other surveys estimated, while fully remote work sits near other surveys' figure of about one in ten workers, leaving fully remote slightly more common than hybrid.

A new estimate of remote work from the Bureau of Labor Statistics (BLS) suggests that remote work is less common than previously thought. While the new BLS data reveals hybrid remote work to be substantially lower than other surveys estimated, fully remote work is close to where other surveys show, at around one out of ten workers. As a result, fully remote work appears slightly more common than hybrid remote work. Looking at the college-educated, nearly one in five are fully remote. Among advanced degree holders, nearly 40% are hybrid or fully remote. Among skilled workers, remote working is now a substantial share of the labor force, including fully remote.

Takeaways by Macro Roundup® AI

  1. New BLS data show hybrid remote work to be substantially lower than other surveys estimated, while fully remote work sits near other surveys' figure of about one in ten workers, leaving fully remote slightly more common than hybrid.
  2. Nearly one in five college-educated workers are fully remote, and nearly 40% of advanced degree holders work hybrid or fully remote, according to the BLS estimate.
  3. Remote work, including fully remote arrangements, accounts for a substantial share of the skilled labor force.

Related Articles:

  • Working Remotely? Selection, Treatment, and the Market for Remote Work — Using data from a Fortune 500 firm that hired both remote and on-site workers, the authors estimate that shifting on-site workers to remote lowered their hourly calls by 4% relative to already-remote workers, accounting for one third of the productivity gap; worker selection explained the other two thirds.
  • Remote Work, Three Years Later — Remote work has reduced office utilization but not yet office occupancy, because most firms are locked into long-duration leases. Baseline estimates suggest remote work will exert 0.8 percentage points of upward pressure on the office vacancy rate near-term, 2.3 more over the following five years, and 1.8 thereafter.
  • Central Business Districts: City Strugglers — Consumer spending in central business districts remains below pre-pandemic levels in northern and western US cities while southern city centers show strong growth, a gap attributed largely to migration patterns rather than differences in working from home. Cities with population gains show spending roughly 20% above pre-pandemic levels, while those with population losses are down about 20%.