China sells U.S. trashuries

China keeps selling bonds. 

China Is Selling U.S. Trashuries

No end in sight. 

Peter Schiff Talks About Tapering

By law, the Fed cannot have more than 5% profits per year. Excess earnings are remitted to the Treasury. What happens when the Fed tapers and bond yields spike? The Fed will have losses on its bond holdings. These losses will have to be reimbursed by the Treasury with tax payer money. However, Yellen's wallet is empty right now... That's why tapering is out of the question.

 

Treasury General Account Vs. U.S. Dollar

Whenever the U.S. Treasury is out of cash in the Treasury General Account (TGA), additional cash will need to be borrowed by raising the debt limit and monetized by the Federal Reserve. This puts pressure on the U.S. dollar currency.  

Treasury Cash Depleted By August

Danielle Dimartino Booth says the TGA account will be depleted in a few months and this is without the reverse repo problems accounted for. A lot of debt will need to be issued.

 

U.S. Treasury Maturity Schedule

We know the Fed won't let these mature, because then they would have losses at rising bond yields. These will need to be rolled over at higher bond yields. Or they need to print more money to buy them up.

For more info read my article. 

Treasury runs out of money in September

Latest data shows the Treasury is at only $131 billion cash.

Running out of money in September.

We are clearly in the pessimistic scenario as tax revenues are collapsing due to the slowing economy. August is also a month with no tax income.

While already having issued debt of $300 billion to get to $22.3 trillion to pay off the extraordinary measures debt.

So I expect that interest rates will go up a bit from the debt issuance.

Interest payments on excess reserves at the Federal Reserve

Very nice article on the Federal Reserve and its interest payments to the banks.

http://www.businessinsider.com/fed-paid-banks-30-billion-on-excess-reserves-for-2017-2018-1?international=true&r=US&IR=T

One wonders what will happen when yields go up and the FRB unwinds its balance sheet in this environment. Will it have enough revenue to pay these interests on excess reserves, especially with higher fed funds rates. Will it have enough money left to remit to the treasury? We already see these remittances to the treasury going down since 2015. More debt will be issued once the treasury is empty again.

The Fed started to pay interest on reserve balances at the Fed since 2008, to address conditions in credit markets.

https://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves/ 

Once the Fed becomes insolvent (because interest rates rise), it will have to monetize and create even more money. It won't be able to execute remittances anymore to the treasury. It won't be able to pay interest on excess reserves to the banks. This paper explains it perfectly.

https://minneapolisfed.org/research/wp/wp747.pdf 

And by the way, the central bank is on its way to becoming insolvent as unrealized losses are growing.

https://www.federalreserve.gov/releases/h8/current/

You can see here that when bond yields go up, the unrealized losses will go up.

And each time, these losses worsened, the Federal Reserve started another round of QE.

One of my favourite tools to see if the Fed is in deep trouble is the cash balance at the U.S. treasury.

http://katchum.blogspot.be/2017/04/us-treasury-cash-balance.html

U.S. Treasury Cash Balance

Following the debt ceiling deadline of March 2017, cash in the U.S. treasury plunged to almost zero to push up bank reserves and that subsequently pushed up the stock market.

This is also seen in the increase in the monetary base.

So while we haven't heard anything on QE4, we actually had an increase in monetary base due to the depletion of cash at the U.S. treasury to prop up the stock market one last time before the debt ceiling holiday expired in March 2017. Now that that cash is fully used, there is nothing that will stop the stock market from declining.

U.S. Treasury Yields

This page is created to monitor the U.S. treasury yields. Recessions can be predicted clearly as they coincide with narrowing yield spreads.

As you can see, the yield spread narrowed in 2000 and 2007, which were the omens of two recessionary events: NASDAQ bubble and 2008 crisis.

The following dynamic yield curve chart shows how the top of the stock market can be predicted by the flattening yield curve.

On the following chart we can also see that the yield curve is a predictor of the economy (coincident indicator).

A comparison of other countries: