Money flows into US treasury bonds, directly. People and corporations literally have direct accounts with the treasury.
The US has large fiscal deficits and needs to borrow dollars. The FED set a good interest rate. It's causing owners of dollars to lend money to US Govt in hopes of safe interest gains.
This large deficit happened because of large tax cuts in the first place. Which means, citizens have more dollars in their hands (at the expense of future interest payments). This is driving up spending and thus investment to satisfy that spending.
The yield curve is flattening because of this as more and more people think that long term, the interest payments on today's spending will weigh on economy. Thus, it will ultimately cause FED to lower interest rates. Get in on risk free money while you can.
All of the above is domestic US. Internationally, the dollars that could've helped other countries came back to US in the form of lending. So those countries don't have dollars to invest, causing drops in asset prices and deflation and debt overhang.
Tax cuts can't directly cause deficits, only spending can. Spending money you don't have offsetting revenue for causes the deficit. Cutting taxes without cutting spending is a problem. Tax revenue is not down, even with the tax cuts, but spending is growing much more quickly.
That's a political debate. Economically, an entity needs to have equal inflow and outflow of money to be balanced. The govt needs enough revenue to offset its expenses (a lot of which is interest on debt taken years before, military and entitlements.)
If you think about it, generations before partied hard on the credit card with low taxes && still getting social security, medicare etc. Today's generation gets to pick either low taxes or social security/medicare. Tomorrow's generation might not even have the choice.
This is a very tortured use of the word cause that the rest of the world disagrees with.
> Tax revenue is not down
We're only now doing taxes for 2018 which was the first year affected by the Tax Act, of course it hasn't changed tax revenue yet.
also the whole trope about 'China owning most of US T-bills' is actually false, there is apparently T-bills that are specifically sold to foreign nations, and then there are the real T-bills that not many countries own. The other one is an IOU and may not be honored, say during wartime.
> also the whole trope about 'China owning most of US T-bills' is actually false,
They are just the largest foreign holder, and it was noteworthy because of the rapid rise in the distribution of foreign debt holders.
Anyway, my thought process was that even if the US money supply drops, it should not influence T-bill auctions, because the whole world likes it (due to being the least risky investment). But it's very likely that the T-rate was low because banks and other investors exploited the low FFR. Now that's gone, the system settled in a higher equilibrium (as foreign and other investors had no real reason to change their behavior).
The single largest holder of government debt is the Social Security Trust Fund.
I mean okay, money flows into US "saving accounts", but due to higher interest rate a lot of investments will be put on hold, no?
The Fed raised the target federal funds rate, which is the rate of the interbank overnight repo market, which is basically the "back office" clearing house between the accounts of creditors and debtors. And all of this means that the NY Fed's trading desk does a lot of open market transactions to reach that goal. (It converts cash in banks' reserve accounts into US Treasury bonds, thus forcing banks to increase their reserves - to meet requirements, hence forcing banks to loan reserves from other banks, which pushes up the overnight repo rate.)
How does this effect the US Treasury bond auction rate? (In theory banks [and other primary dealers that participate in the auction] just use loans (excess reserve) to buy bonds, so if excess reserve is less, then fewer banks are able/willing to buy bonds, so yes, that pushes up rates, but the target-FFR increase only affected US banks, and US T-bills are bought by a lot of foreign entities.)