Hacker News Reader

Comment by kuczmama | Hacker News Reader

They sell bonds. When they sell bonds, USD is converted into bonds. This has the effect of removing cash from a bank account and replacing it with an IOU from the government.

The actual account balance stays the same, but where before you had cash, now you have government backed bonds.

This is what they call "quantitative tightening".

View on HN

I've never bought a bond in my life (I didn't even know what they were) until someone told me they are currently offering 9.62% risk free returns! There's a very low limit on how much you can buy per year but this seems like a no brainer to me.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds...

That rate is only for 6 months:

"That rate is applied to the 6 months after the purchase is made. For example, if you buy an I bond on July 1, 2022, the 9.62% would be applied through December 31, 2022."

And here[1]:

"What's the interest rate on an I bond you sell today?

For the first six months you own it, the Series I bond we sell from May 2022 through October 2022 earns interest at an annual rate of 9.62 percent. A new rate will be set every six months based on this bond's fixed rate (0.00 percent) and on inflation."

I'm not sure what the next return is - either way given the current mark that's excellent, just important to know that there is a definite time limit on that interest rate.

[1] https://www.treasurydirect.gov/indiv/research/indepth/ibonds...

Yep, and if you cash it in less than 5 years, you lose the last 3 months of interests.

Might not shock you to learn that the treasury has less than stellar customer service. I signed up to buy some I bonds and was told they couldn't verify my information (??? -- I gave them my SSN) and I would have to mail them a letter to proceed with signup.

For sure, but I wouldn't recommend someone ignore things like Treasury I Bonds on account of the shitty website/customer service - especially at current rate above 9 percent. I had similar issues, they do resolve them if you get in touch, albeit it took a few weeks to authorize my account.

With an inflation at 8%, that's ... I'll let you do the math.

That is the point of these bonds. They're indexed to inflation. Which is great when inflation is high.

that's ... a lot better than investing in the S&P right now.

Whats a better alternative? Every other investment seems negative right now..

No such thing as a risk-free investment, especially not high-interest government bonds.

Just ask Greece, ca. 2010.

Greece does not print its own currency, the US does. Greece uses the Euro, which is printed by the ECB, which is not controlled by the Greek government. The US government can always pay its debts. Doing so may cause inflation, so the real return on that investment may not be great, but the nominal return is essentially risk-free.

Greece's relationship to the Euro is more akin to an individual US state's relationship to the Dollar. No US state has Greek levels of debt. Greece's debt-to-GDP ratio was up to 180%. Most US states run at a ratio closer to 5-15%.

A inflation linked government bond is pretty much by definition risk free.

> They sell bonds.

To be clear, they are not selling bonds. They are simply not buying new bonds to replenish those that reach maturity.

> They sell bonds.

Yes. Or they let the bonds mature and don't buy replacement treasury and agency-sponsored bonds. Meanwhile, the US treasury has to issue new bonds to be able to repay the bonds that mature every month.

Others (meaning the private sector) will have to buy all those bonds.

Correct. The higher the interest rate the bonds offer the more likely someone will buy them.

To add, they sell mortgage backed securities too.

but those get turned back into cash at maturity?

Yeah they do. Actually they get turned into cash after each coupon payment and at maturity. But it takes time (as long as 30 years for some bonds) to turn the bonds back into cash. So this has the effect of taking liquidity out of the economy, while not making anyone any poorer.

When you take out liquidity, people's money are now locked in bonds and they can't buy anything else with that money unless they sell the bond. So this has the effect of reducing demand for other financial assets like stocks, real estates, cryptocurrency, etc in the short term.

The hope is that in the long run, the economy will grow enough to be able to support the eventual increase in the money as the bonds mature.

Reply on news.ycombinator.com