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A Classic Stop And Squeeze: The Fed-PD-Fed Free Money Arbitrage
From Nic Lenoir of ICAP
A classic stop and squeeze...
Well at least the only trade left in town is working! In a classic old school alley-oop clinic that could make us forget Magic to Kareem, the Fed to dealers to Fed (remember the Fed runs the auctions) switcharoo was in full force today. Add to that the fact we have a mid-week bond holiday before the start of QE 2.0 on Friday, and really the set-up was perfect. A nice tail at the auction stopped out the day traders and the weak longs into the hands of the dealers who turned around and bought, even more so in the 5y to 10Y sector, so they can deliver to the Fed on Friday. We happily tried to help our clients collect on the round trip as this kind of day is clearly a sign of what's to come in the Fixed Income space.
The Fed can claim all it wants it is making money on its portfolio, when the Treasury sells 30Y bonds at 92-16 and they settle at 93-24 before the Fed starts buying (Fed buys shorter maturities which actually outperformed the bond on the rally), the government is not really making money on that trade. Today was a nice $170mm handout to the market. Hopefully that money is spent and leveraged into millions of subprime mortgage loans that revive the housing market... NOT!
Good luck trading,
Nic
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If I was a total cynic who had lost all faith in the markets, I'd say the Fed were colluding with BofA to front run the market so that they have enough cash to keep the lights on....
Friends of Angelo?
.
Reminds me of "Friends of Enron" - 5% investment + 95% interest free loan from the company gave a 10% dividend each year, so that the subsidiaries could hit the 3% outside ownership limit and not have to consolidate. They had more than half of Congress in the club, so when TSHTF, the politicians didn't dare probe how fraudulent the system was. I am sure different people had events that made them realize how corrupt the game was - this was the gig that did it for me.
Alley oop.. I like that. Cisco is down after hours, But this Alley OOP method will most likely guarantee Csco see 50 by next Thursday. Dig in boys, Its all goood.
It's called the "fixed" income market for a reason.
Sorry to be dumb but can someone explain this. The primary dealers buy bonds at auction. Flick same items a week later to Fed (via POMO). Apart from the capital gain (assumed) how has money been created here? Dollars were spent buying the bonds and monies received on selling. Where is the monetisation of debt?
Thanks in advance for elucidation.
The bonds themselves are considered reserves for capital ratio requirements, so as long as the bond churn remains steadily high, the capital ratios remain steadily as well, freeing up leverage. The problem is that the primary dealers pants are down for the majority of the time during the churn process (ie., the amount of time they actually hold the bonds is signficantly less than they're officially allowed to report), so if either the Fed stops buying or the Treasury stops selling, you'll see a pretty epic crash in a relatively short amount of time due to an implosion of liquidity.
Note that if the debt ceiling holds steady, the "Treasury stops selling", at least at the levels needed to hold everything up, is effectively dead pretty shortly here. The Fed will have to get way the fuck more creative in a hurry here if they plan on keeping the zombie animated.
Do you mean the primary dealers are obligated to dispose of bonds they buy within a certain amount of time?
If so, why would there be an epic crash if the treasury starts selling?
Just to clarify: do you mean the bonds will crash, the dealers, or stocks in general, etc?
Because the money the Fed uses to buy back the bonds is created from thin air, just like the big bang.
Bukkake!!! Damn you Ben Shalom Bukkake!!!
so on POMO days, the PDs convert reserves for printed cash (also comprising reserves) and then hoover the equities. But Apple, Amazon Netflix etc etc holdings do not comprise reserves do they?. So Treasury has to issue bonds to replenish PD's reserves...which they sell to Fed...wash, rinse, repeat...is this the 600 bio QE2 Ponzi? (unless some sucker real money buys the hyper overpriced stocks from the PDs).
Thanks again for help in my understanding this
I wanna play! But I'm poor so I guess I just get to be the waterboy.
is this post gonna change the world?
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EURO daily chart bearish warnings continue.
US Dollar daily chart bullish warnings continue.
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