At the current rate of UST buying (~$50bln/mth), G-SIBs will find LCR limiting in 1Q 2020. Meanwhile @federalreserve has started buying up T-bills, seemingly missing out on the fact that intermediate to longer coupon USTs are the real problem. 12/x

Economically speaking, the risk is that BHC aggregate balance sheet holdings of USTs crowd out BHCs' ability to lend to private credit markets. That includes PDs providing liquidity to bond/loan transactions and banks providing net lending at the margin. 13/x

Why? The easiest way to improve LCR ratios in the face of growing coupon UST holdings is to eliminate non-HQLA assets which require funding, such as corporate bond or loan holdings. Recent big underperformance of lev loans and CCC credit may be a piec of that trend. 14/x

If that theme continues, @federalreserve views LCR tightness --> credit contraction not as a technical problem of excess UST supply on BHCs, but as evidence of deteriorating financial conditions...and we get more insurance based rate cuts as soon as 1Q 2020. 15/x

Funnily enough, these cuts also solve underlying prob of foreigners not funding $1.1tln budget deficit, as lower front end & steeper curve reduces FX-hedging costs AND incentivizes real money buyers to leave o/n repo mkts and come back into coupon USTs. 16/x

The path to that point might be volatile for risk assets, but there's no reason the Fed can't save the day again. Fin.

PS: I hope these comments clarify recent threads in which I've been unclear. CC:
@Barton_options
@kimgits1
@deepwatrcreatur
@dandolfa
@kimdriver11
@mattwaters
@an10nev
@MonetaryWonk