Why Are Countries Inverting Their Own Yield Curves?

In the last week, news broke that the US Treasury intends to “buy back” US Treasuries and the UK Treasury is covering the Bank of England’s losses on their recent pension system bailout. The net result of these actions is that Central Banks and Treasuries in two of the world’s largest economies are intentionally steepening the inversion of their own yield curves. Just what the heck are these people up to?

The central banks and the treasury departments in the united states and the uk are intentionally flipping their own yield curves right now and i can’t figure out just what the heck they’re up to what’s up guys i’m nobody special and last week the story broke that the u.s treasury was considering a buyback of treasury bonds and then yesterday the story broke that

The uk treasury was sending 11 billion pounds to the bank of england in order to offset losses from its recent guilt buying binge that it went on in order to bail out the country’s pension system now both of these cases involve governments borrowing money taking out new debt in order to pay off old debt now typically when a person or a company takes out new debt

To pay off old debt they do it for one of two reasons number one they either get a lower interest rate on the new debt that they’re taking out so their net interest payments go down or number two to give themselves more time before they have to pay that debt back but in both cases here that’s not what’s happening what janet yellen is proposing at treasury is to take

Out new debt at a higher interest rate that matures even sooner in order to pay off long-term debt at a lower interest rate and what the uk just did with their 11 billion pound transfer to the boe is they did the same thing they’re borrowing short term at a higher interest rate in order to pay off long-term debt at a lower interest rate so it’s left me sitting here

Scratching my head just what on earth are these people thinking now first a little refresher on what the yield curve is and what an inverted yield curve means i’ve included chapters down below if you want to skip this part you won’t hurt my feelings now the yield curve is a graph that shows you the interest rate on a debt instrument versus the duration of maturity

Of that instrument for example a three-month bond will yield this much interest a six-month bond this much a 10-year bond even more now a healthy yield curve looks something like this the further out you go the longer term that debt instrument is the higher the interest rate and that makes sense right you would typically want a higher interest rate in exchange for

Locking up your money for a longer period of time so the further out on the yield curve you get the longer the duration of that bond the higher interest you should earn that’s what a healthy yield curve looks like but it doesn’t always work that way sometimes for whatever reason the market sees there might be some risk in the short term they might say hey something

Bad is on the horizon there’s an economic storm brewing and so i think there’s more risk in the short-term stuff and when that happens the interest rate on the short-term debt actually goes higher than the long-term debt that’s known as an inversion of the yield curve in every major economic catastrophe going back as far as the eye can see has been preceded by an

Inversion in the yield curve an inversion in the yield curve as far as economic indicators go that’s like jim cantore showing up in your backyard to talk about how bad the hurricane might be something really bad is about to happen now right now the yield curve in the united states looks like this now forget the ultra short-term stuff because that’s being held down

By the fed funds rate but if you look the three month the six month the one year the two-year all paying higher interest rates than the longer duration bonds are and over in the uk we have something similar with the short dated debt is paying a higher interest rate than the long-term stuff so the last thing any treasury secretary or any finance minister or any

Central banker ever wants to see is an inverted yield curve that means bad things are coming with that we are going to shrink my big melon of ahead and here we go in reuters this is dated six days ago u.s treasury asks major banks if it should buy back bonds the u.s treasury department is asking primary dealers of u.s treasuries i.e banks whether the government

Should buy back some of its bonds to improve liquidity in the 24 trillion dollar market liquidity in the world’s largest bond market has deteriorated this year partly because of rising volatility as the federal reserve rapidly raises rates to bring down inflation so we’re all familiar with what the federal reserve has been doing they’ve been raising interest rates

And they’ve been engaged in quantitative tightening i.e the destruction of money this has resulted in way more sellers of long-term u.s treasury bonds than there are buyers so what the treasury is talking about doing here janet yellen wants to come in and she wants to buy some of those long-term treasuries which is the polar opposite of what the fed is trying to do

To fight inflation that’s a whole other story but it’s the way yellen is going to get her hands on that money to begin with that’s what i don’t get see the government is operating at a loss here so we’re not talking about tax revenues being spent to buy back this debt we’re talking about the treasury borrowing even more money to buy back these long-term treasuries

Now let’s assume for a minute that they’re not going to be selling the same treasuries they’re trying to buy back that would be counterproductive so by process of elimination they could only be selling the short-term treasuries in order to buy the long-term treasuries and when you factor in the relationship between bond prices and bond yields what that means is

They’ll be driving down the interest rates on the long end and they’ll be driving up the interest rates on the short end in other words they’ll be making the inversion in the yield curve even worse and i can’t imagine any scenario where a central banker or a treasury secretary would intentionally flip their own yield curve or make the existing inversion in that

Yield curve even worse that is inviting economic disaster and that’s exactly what janet yellen is proposing right now and over in the uk they’re doing something very similar you may recall back on september 28th the uk pension system was just hours away from collapse and so the bank of england had to step in they printed money and started buying the uk’s 10-year

Guilt they were doing exactly what janet yellen was proposing buying the long end of the yield curve in order to suppress interest rates and then yesterday this story broke here in bloomberg uk treasury to transfer 11 billion pounds to the bank of england to cover qe losses the uk treasury is set to transfer more than 11 billion pounds or 12.4 billion dollars to

The bank of england this fiscal year to cover projected losses in its bond buying program according to a person familiar with the situation so the uk’s central bank is losing money on this bailout of the pension system and in order to pay for those losses the uk treasury is sending 11 billion pounds to the bank of england the question is where is the treasury

Getting that money and just like here in the states the uk is operating at a deficit so once again we’re going to make the assumption that the uk treasury isn’t going around and just selling the same 10-year guilt that the boe is buying so by process of elimination they must be selling the short end of the curve and when you sell short-term bonds you drive down

The price of those bonds and you drive up the interest rate so the net result of these combined actions from the bank of england and now the uk treasury is interest rates on the long end of the curve are going lower and interest rates on the short end of the curve are going higher in other words they have further flipped or further inverted their own yield curve

And once again i am just left here scratching my head why would would anybody do this on purpose well according to the core principle of modern monetary theory a government with a fiat currency can and should print as much money as they need to listen we’re not doing this right now okay you said inflation would be transitory and it wasn’t i apologize for my canes

And evil twin folks he’s just been unbearable since ben bernanke won the nobel prize so the reason why the u.s wants to do this buyback and the reason why the bank of england started buying their 10-year guilts all had to do with liquidity there’s just way more sellers of these long-term bonds right now than there are buyers when that happens it drives down the

Price of the bonds and it drives up the interest rates in other words the long end of the yield curve is starved for liquidity and when you’re starved for liquidity in the bond market very bad things happen to your economy so i understand what the governments are trying to do here on the long end of the curve they’re trying to provide more liquidity they’re trying

To suppress those interest rates but to finance those operations by selling the short end of the curve by borrowing short duration debt just doesn’t make any sense to me actually governments don’t need to sell bonds or even borrow money at all they could just create as much money out of nothing as they need to okay if you don’t let the grown-ups talk i swear i’m

Cutting your allowance i’m throwing soup on your star wars poster he’s getting worse every day so long story short these actions that are being taken in the bank of england in the uk treasury and then here in the states with what janet yellen is proposing what these governments are doing is attempting to provide some short-term liquidity in their long-duration

Government bonds but they’re doing it at the expense of further inverting their own yield curves is this reckless is this stupid is it short-sighted i honestly don’t know what their end game is here i cannot imagine any scenario where this benefits anyone so i have two reasons for making this video first i wanted to explain to you what’s going on and the second

Reason is this is an open invitation to anybody out there anybody on fintwit anybody in financial youtube can you please explain to me what the end game is for these treasuries for these central banks right now what are they trying to do by further inverting their own yield curve anybody out there george gammon greg manorino ninja financial prepper heresy financial

Any of you guys let me know in the comments do a reaction video or come on the channel and explain it to all of us and you folks watching at home run this video by some of your favorite financial youtubers and see what they come up with at this point i’m at a loss for words and i’m open to suggestions on what you guys think is going on and the only thing i can think

Of is they are just desperately trying to buy themselves a couple of more days before something really bad happens in markets and if you want to know just how bad things could get you can check out this video i did a couple of weeks ago about how this coming financial crisis is unlike anything the world has ever seen until next time live small and dream big

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Why Are Countries Inverting Their Own Yield Curves? By Nobody Special FinanceliveBroadcastDetails{isLiveNowfalsestartTimestamp2022-10-20T203009+0000endTimestamp2022-10-20T204104+0000}