Are Bank Purchases Of 10 And 30 Year Treasuries Indicative Of Trouble?

Tyler Durden's picture

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rawsienna's picture

They are selling Agency MBS against it and buying long treasuries (selling 20% risk weighting going into zero risk weighting) - mtgs are very tight to treasuries and on an after tax risk adjusted basis, treasuries much cheaper.

jm's picture

About point 6.  The big guys got their asses kicked in IRS trading at the tail end of last year.

I've wondered if those losses led to position closes. 


MsCreant's picture

What if the banks are insolvent and Ben needs the treasuries "bought" so he makes the banks "buy" them somehow? Blackmail, like, "pretend to buy these or we shut you down." Keep kiting the checks in a complicated circulatory system that keeps many balls up in the air and none landing long enough to catch an honest auditor's eye.

AccreditedEYE's picture

Indeed. any rise in rates destroys the mirage of recovery as the US/Fed created debt ponzi will implode. Trying to have cake and eat it too? It can only last for so long..

egdeh orez's picture

What if the banks are just doing this to keep the rates low, in order to appease the government / fed, so that they won't induce a stock market plunge to increase demand for their debt (i.e. flight to safety)?

Has anyone addressed the likelihood of that?

Ned Zeppelin's picture

The only source left of QE is the $1.2 trillion or so of "reserves" that were printed by the Fed and handed over to the banks. I've been waiting for this to show up. Order has been given to start using those reserves to buy Treasuries. The Fed is running out of offshore accounts to use to acquire them from the PDs with freshly printed money.  The ultimate counterfeiting operation. They can't use all of the reserves without drawing too much attention to it, so we 'll see how it unfolds. 

Implicit simplicit's picture

The banks and the fed are in an oligarchial duet. The tune is supported by various debt instruments and quant easing synthesizers. The song is complicated, fragile and dischordant because of the weakness of the sound system currency, the extended stock market musicians, and the dishonest goverment conductor. The song is actually a derivative of a real song that strikes a dischordant note to many. When will it stop? Only when the musicians refuse to play and the the indigent slaves  shout "I really don't mind if I sit this one out, because my words are but a whisper and your deafness a shout"

floydian slip's picture

I may make you feel but I can't make you think.


Great Song/Album!

Music keeps me alive.



snowball777's picture

So you ride yourselves over the fieldsand you make all your animal dealsand your wise BEN don't know how it feels to be thick as a BRIC.

lucky 81's picture

its all smoke and mirrors til when? what are they extending for? the world is broke with and money is drying up. both parties are in pocket  and obedient so mid terms don't matter to them, only the politicians. Are we headed for another planned 'great distraction'? 

maybe the new $100 bill will be the trigger for collapse and reissue. That would buy them another 3-4 months i guess. 2010 will be a year for the books.

Gromit's picture

Banks prefer to lend to Fed at 4 instead of customers at 10.

hedgeless_horseman's picture

All of this funny business in the markets should drive thoughtful investors to disintermediation:

1. In finance, withdrawal of funds from intermediary financial institutions, such as banks and savings and loan associations, in order to invest them directly.

2. Generally, removing the middleman or intermediary.

Of course, disintermediation is bad for governments selling debt and all financial firms, but often very good for small businesses needing capital. I am suprised to not read more about disintermediation here, and on similiar blogs, apart from advice to buy gold and take posession. Micro lending in your own community, angel investing, and even certain types of municipal debt offerings are good topics for consideration.

FreeStateYank's picture

I've been thinking about this very topic and wondering when people would start doing this. Difficult for traditional mortgages as deductiblity requires an annual document from an 'approved' lender. For Mom & Pop businesses, it makes perfect sense to hit up a bunch of friends and family and pay them an annual percentage. F/F who don't trust the borrower won't lend to them, reducing the risk, somewhat, of non-performing loans.

MsCreant's picture

We really are screwed. There are too many things that they are doing for the likes of a schmuckett like me to keep track of and protest. It's like they deliberately want us to fail. 


Meanwhile, if I am a business, I can see why it is easier, patriotic or not, to go elsewhere. Sickening.

FischerBlack's picture

Banks are in the business of lending money. And there's only one creditworthy borrower left who wants to lever up right now. And that's your Uncle Sam. Makes sense to me.

digilante's picture

Exactly. A Primary Dealer can borrow short term from Uncle Sam @ 0.25% and lend it back long at abt 4.63%. They can then use that TBond as collateral (96% worth) for another short term loan at 0.25%. Wash-Rinse-Repeat. Do this 5 times and you are making > 20%. Do it 10 times and you are probably close to 40% returns. Will it all come crashing down in a big festering pile someday? Quite likely. Just not tomorrow.

berlinjames02's picture

I encourage everyone to read the Economist article: "Banking on the Banks" from Oct 17th 2009.

The article doesn't provide any new information. Rather it discusses the symbiotic nature between banks and government whereby governments issue debt, and banks plow deposits into the bonds- "like two drunks leaning against each other to stay upright". It even mentions the possibility for governments to require banks holding more government bonds.

I believe this is already occurring now that the Fed has stopped purchases. The two drunks are tied together. Banks realize their loan portfolios are dependent on low interest rates. Thus, they won't shoot themselves in the foot by letting rates rise. If they need more money, Uncle Ben will print up some new, redesigned C-notes. Every one wins. (Except granny, who just filled out an application to be a greeter at Walmart. Who cares? With Obama-care, she probably won't last too long any way.)


cbaba's picture

Well the Fed and the big banks are same entities.

of course they will buy long term bonds to decrease short term rates.

see this to learn who are the owners of FED:

AccreditedEYE's picture

and who thought convergence was just for hedge funds and private equity? :)

magis00's picture

Interesting to note that "Mr. James Paul Warburg, whose family co-founded the Federal Reserve, testified before the Senate in 1950 that 'we shall have world government; the question is whether through conquest or consent.'"  Wasn't there some sort of social-political upheaval happening about then, too?  Something about red .... red states, blue states?  No, no, that wasn't it.  All feels vaguely familiar though.

bullandbearwise's picture

Classic "pushing on a string." With $4 needed to generate $1 of GDP, business is no longer worth investing in. Like parents feeding on their young, government debt just gets circulated back to hold up the government.

TimmyM's picture

If MS wanted to know why banks are buying Treasuries they should have asked some bankers. I talk to bankers so let me clue you in.

There is no loan demand. When government props up asset prices, loan customers avoid the capital formation process and do not borrow to invest above the market clearing price. Borrowers are also smart enough to see through the Keynesian folly and do not believe private traction has been achieved.

FDIC just extended the TAG (Treasury Asset Guarantee) program whereby deposit insurance on commercial accounts is unlimited. There is little incentive for commercial depositors to move to MMFs or repos in a ZIRP world. Heck, Citi is paying .65% on a presently TAG guaranteed MMA. I do believe the TAG extension caps the MMA rate at .25% in June. Also, retail customers have less faith in MMFs and still get the larger $250,000 FDIC limit. This liquidity needs to be invested.

Banks do not trust GSE paper like they used to. They are also growing weary of the deteriorating credit quality of municipal securities. They will not buy private label MBS and they believe the pricing on agency MBS remains skewed by QE and the buffer QE extension of GSE balance sheet caps being lifted.

Treasuries do not impact capital ratios with their 0% risk weighting. Capital ratios are important when you float along in FASB 157 wonderland. They are liquid, they are repoable and pledgeable to public deposits. But most importantly no CYA banker bureaucrat ever got fired for buying Treasuries.



Paladin en passant's picture

Thanks for some bits of real information.

Augustus's picture


Something other than a numb nuts conspiracy theory generated by rage music is very nice to read.

MsCreant's picture

Do you honestly believe the banking system is solvent? If you don't, then how is it being propped up? Careful. Any answer to that question takes you into conspiracy land. If you think everything is just fine, sorry to bother you.

TimmyM's picture

Only idealistically is bank solvency as simple as assets minus liabilities. In practice, solvency is a matter of appearance and liquidity. Even a bank that arguably has some decent capital can be insolvent practically if it is viewed as insolvent.

The guise of solvency is in of itself solvency. Bank solvency is akin to declaring the mystery of faith at mass. Institutional forces promoting stability will support the scam of solvency to its own end.

The most important question to me is what are the unintended consequences of propping up excess lending capacity in the name of promoting the appearance of solvency? Excess lending capacity compresses margins for the responsible operators and socializes the losses of the bad operators across the industry. Coupled with TBTF a system exists that promotes consolidation into large poorly managed banks. But it also inefficiently creates too much credit and makes borrowers operate with more than optimal leverage and with artificially high priced assets.

MsCreant's picture

Solvency is subjective, to a point. There is a point where the story won't wash anymore. Contracts, margin calls, are kickable, obdurate, realities. Just ask Greece. I agree with the spirit of your post and find myself stunned daily that things keep going on as they did the day before. The players got the mark to market rules suspended. That seemed to help tremendously with the solvency story line (appearances, as you say). But there is a point where the numbers don't work any more. The last paragraph of your post is about this idea. Getting the rules changed like that is a demonstration of the conspiracy of which I speak. Haphazard, perhaps, a bunch of lobbyists that meet at a congress critter's office and discover they have the same interests, by accident, and decide to team up, or somehting more sinister.

The point I am trying to make is "Yes, solvency is a social construction, until it isn't." The "propping up" has consequences in the real world that cascade through the sytem and trickle down into the living rooms of individual lives. Losing your job, going on foodstamps, getting displaced from your home, this is real.

Takingbets's picture

I second that thank you for posting this real time info. :-)

pooplagrande's picture


US Gov "We'll print a bunch of cash and give it to you for buy up a bunch of our debt to keep rates low and make everything look okay...take the leftovers and pump up every asset to the moon. Now don't say a thing about it and we'll all ride this bitch on outta here...otherwise, we'll both be fucked...thanks!"


Benthamite's picture

Who cares?  Dow 3.6E10!!!!!!!!!!!!!

Mark Beck's picture

"and nothing really matters, except for the actions of the Fed"

The actions of the FED are the recovery. Without the FED you have no way to pay for stimulus, or bailouts or entitlements. At this time our central bank exists for one reason only, fund government through QE.


Why would anyone buy a 10 Year Bond from the US? To move capital into long term sovereign debt at this time has got to be blind to current events.

The US does not have the investment in place to produce the amount of growth needed to dig out of our debt hole. The magnitude of waste and spending has impoverished the nation. Growth through real labor is finite, and in the end, the states will need every penny.


At this time, the effects of government inefficiencies, both fiscally and monetarily, when compared to the capacity of costs on labor, cannot generate a net gain. For debtor nation like the US, you cannot be irresponsible in the use of capital. Ultimately, you are not in control of your own fate, unless your plan is to default.

All that has to happen is the appetite for sovereign debt to wane and the FED would be forced to monetize our debt in order to fund government. The problem is one of market capacity, and not one of rates. Who are they, to think that there will always be buyers of US debt in the magnitudes needed for the next 10 months, let alone 10 years?


Investment in debt fundementally requires trust. The trust is all but ended for the current administration, our banking system and the FED. 

Mark Beck

Augustus's picture

+ + + + +


What is comming is a new version of Trust.

You will be able to Trust that the IRS will be there to confiscate everything.

whatsinaname's picture

I have as little reason to believe MS as I have to believe GS. I am trading TBt & TLT and its risk free (tongue in cheek).

whatsinaname's picture

and sometimes TBF as well.

Attitude_Check's picture

Perfectly reasonable investment -- if you think large-scale deflation is coming in the next 5 years or so.  Then any other loan will generally fail, assets will be worth MUCH LESS, and the assumption is the Government will honor their bonds at face.  Of course that past assumption may not be so good -- but maybe it's the best of what is available.

Ned Zeppelin's picture

I hear that theory and get it, but how would the government pay the coupons with a severely depressed tax base? I think deflation spells trouble for the government more than anything else.

floydian slip's picture
This is Important ... By: Marty Chenard | Thu, Apr 22, 2010

If is wasn't so important, I wouldn't mention it a second time. But it is very important, and could be a "game changer" if we break above this long term resistance in the next few weeks ... so, please keep an eye on it.

What is it?

It is the 30 year bond yields ... symbol: TYX. Our comments are below ...Bernanke and everyone in the White House will try to stop this from happening. If they can't, there will be real trouble ahead for the economy. Right now, the 30 year yields are at a MAJOR, 15 year testing 

Below is an updated chart (as of 8:40 AM this morning) showing a 17 year down trend on 30 year bond yields. Its resistance line has had 7 touch points.

We are now at number 7, and international investors want to be paid higher interest for what they perceive to be an environment with much higher risks. That pressure makes this current test a MAJOR testing point.

Bernanke is sweating right now, because if he can't be successful at keeping interest rates down, the housing market will take another turn for the worse and foreclosures will keep rising. (Bernanke is trying to be very proactive in driving rates down right now. There is a lot of international pressure for higher rates coming in, so it will not be as easy as he thinks.)

If we break above the resistance line shown, we can expect interest rates to rise to a level that would increase monthly mortgage costs by 20% to 25% this year.

This could be one of the most significant events seen during the past few years.

Kina's picture

Ben may well have gotten better results actually using a helicopter raining cash down on the consumers. Still would have found its way to the banks one way or another, trickle up.

Chartist's picture

I believe it is absolutely indicative of trouble ahead....The consumer is still deleveraging, Europe seems to be coming apart from the seams and China has a realestate bubble on its hands.....HMOs seem to be indicating that the worst of reform, for them, is still coming and GS seems to be on the precipice of a meltdown towards $40, by my estimation.....SPX 525 remains my two-year target.