Dealers Scramble To Cut Treasury Exposure Ahead Of QE2 End, Flip Record 75% Of Just Issued 7 Year Allocation To The Fed

Tyler Durden's picture

For those who care what is happening behind the scenes even as everyone continues to predict there will be no snags associated with the transition from a QE2 to a non-QE2 world, should look at this brief analysis. On May 26 the Treasury issued $29 billion in 7 Year bonds (Cusip QQ6)- the auction was considered a smashing success by all with the Bid To Cover coming at a record high 3.24 Bid To Cover, and pricing 2 bps inside of the When Issued: an indication of massive demand. Dealers were allocated $11.4 billion and as Stone McCarthy reported: "The $62.3 billion Dealer bid was up from $54.7 billion last month and it was the largest Dealer bid since February 2010." So far so good right? Here is what happened next. On June 1, barely a day after the bonds had settled, Dealers shipped $5.393 billion right back to the Fed (making who knows how much in "fees" in the process) in that day's POMO. And today, just a week after the last 7 year targeting POMO, Dealers sold another $3.168 billion to Brian Sack. Total tally: $8.561 billion monetized by the New York Fed in less than two weeks following the auction. Simply stated: the Dealers' unprecedented interest  in the auction... was transitory. Just two weeks later, the Dealers have flipped back 75% of their entire position in the latest 7 Year On The Run bond. And this is the kind of sleight of hand that allows the Treasury to represent success after success in bond auctions, only to allow the Fed to do the backdoor switcheroo literally hours later, and compensate the conning Dealers for fooling the marks: in this case US taxpayers, naive believers that there is actual interest in US Paper, and of course China and other foreign investors who bought $13.8 billion of the same auction. What happens when Dealers are unable to flip up to 75% of any given bond back to the Fed in under two weeks: stay tuned and find out in precisely 3 weeks.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
camaro68ss's picture

O fuck, Shits getting real

CPL's picture

So very glad I'm all cash, land, silver and gold right now.

nope-1004's picture

Yes, PM's are the only protection the people have.

Ponzinomics at work, with Benocide and Timmay steering the ship toward a cliff.



John Self's picture

It's kind of reminiscent of the energy trading frauds that took place in California about 10 years ago, isn't it?  (Everyone associates it with Enron, but in truth, every major energy company was doing it -- and the California legislature had mucked up the law so badly, it wasn't even clear that it was illegal.)  Shit that's so simple, it's idiotic -- but also clearly wrong.  "OK, I'll send you $100.  Then you send it back to me, and I'll charge you a $50 fee.  Deal?"  Nobody takes that deal unless they're backed into a corner.  The California utilities were backed into a corner, and now so too is the Fed.

mkkby's picture

I'm not convinced they'll stop the QE in 3 weeks.  They may STOP TALKING ABOUT IT and posting details on their web site. But they know they can't stop monetizing until congress and our Kenyan citizen cut up the credit cards.

Everything else is a lie.  Why won't uncle Ben just buy back from the primary dealers and shut up about it?  Since the fed isn't being audited and the TPTF banks can hide anything they like off the books... easy to hide.

espirit's picture

Need to keep this topic alive,  aka frontrun the crooks.

Thanks Tyler for the updates.

wombats's picture

This is good for investors?  Right?  Stocks should rally too shouldn't they?

plocequ1's picture

Damn those guys are slick. Transitory a Go-Go bitchezz

SheepDog-One's picture

7 and 10 year bonds only for flipping back within days for fees. How fake can this crap be?

I am a Man I am Forty's picture


carbonmutant's picture

They're partying at the Suvretta House hotel in Switzerland....

Village Smithy's picture

I like the way you got the word "transitory" in.

rcintc's picture

That gave me a chuckle too.

Cdad's picture

What happens when Dealers are unable to flip up to 75% of any given bond back to the Fed in under two weeks:

I'll take a shot:  When that happens, ZIRP "unexpectedly" becomes very transitory?

GeneMarchbanks's picture

And the ass bleeding starts.

TruthInSunshine's picture

Monetization will continue in one way or another, unless yields on UST spike to a normal level, which by my SWAG, would be about 300 basis points higher on the 30 and nearly as much on the 20 year tnotes.

The real question is what effect continued hum-drum monetization will have on risk assets, and for those assuming the same as when this process was launched, when it was novel, fresh and exciting, at this time, when it's no longer "fresh & exciting," and against a backdrop of genuinely pathetic and eroding economic fundamentals, the Zen Master would only tell me that "[W]e'll see."

Then, of course, there are about a dozen or so crises of significant magnitude unfolding around the globe that weren't in play 30 months ago, also.


SheepDog-One's picture

We'll see how hum drum everything is soon with gas at $6 and items for a modest dinner cost about $40 at the store.

Boston's picture

It's pretty clear to me that---after QE ends---the Fed will be forced to choose: 

Support the Treasury market, or

Support the Russell, S&P, etc.

Because the only way to find capital to buy the monthly issuance, at today's low yields, will be to have money flow OUT of risk and INTO Treasuries.

I'm betting that the the Fed will "sacrifice" equities; letting the 10-year shoot up to 4%-5% would hurt more than a 20% correction in equities. 


fuu's picture

Do the directs and indirects flip there chunks?  If so how?

NotApplicable's picture

Some of them are likely proxies for The Bernank (no flipping required), while the others (CBs) probably have an "I'll buy your junk if you buy mine" agreement.

writingsonthewall's picture

Isn't this like when the sofa shops claim "last few days of sale" - when the sale continues all year?


It's free money isn't it? - who's going to pass up an offer like that?

Monedas's picture

"Holy Hamburger Flippers, Robin !"....Batman's filthy mouth lashes out at those he cares about most wnen he discovers a run in his Spandex leotards ! Monedas 2011 Oh, the humanity ! Bernanke is a Neotard !

kito's picture

so tyler, whats the surprise? that the fed, who cant buy directly from the treasury, is still buying lots of paper through the dealers? thats the basic premise behind qe2.  hasnt the fed been buying most of the paper since the onset of this program? it doesnt automatically mean there will be a void after the fed is done buying. in fact, since you are calling for a fall in stocks that will ignite qe3, that equity dive will only strenghen our bond market going forward.

zaknick's picture

Fukko over here knows more than Pimco, Faber, Rogers and common sense.

It is obvious to the world that the banksters are looting the last drops of blood out if the Amerikan corpse.

I'm so grateful to be able to live through your comeuppance, bitch!!!

Amerika, Amerika the KKK & the banksters shat on thee!

kito's picture

fukko--the pinnacle of your descriptive prowess... 

kito's picture

all those junkers must be waiting to move their bonding buying dollars into zimbabwe gold backed 30 year notes.

blunderdog's picture

The suspense has been too much.  3 weeks?  Thank goodness we've got a date to look forward to.  It's been like a slow moving soap opera for the past year.

Shameful's picture

Yeah when QE3 ends I expect a masked man, El Bernakeo, to arise with a mighty Caribbean based fund and have both an insatiable appetite for US and ECB debt as well as unlimited funds.  the world will wonder "Who is this masked trillionaire?"

Monedas's picture

Yeah ! "El Neotardo" ! Sexy Latin Bond Lover !

cainhoy's picture

this is why one has to wonder if they really will allow QE to expire. does anyone with half a brain think that the inner circle will get stuck with the trash they are "buying" without being allowed to re-cycle it back to the taxpayers at a nice profit? QE3 will surely send the dollar deeper into the sewer but TPTB must be protected until the spaceship is ready for loading in the desert.

Conceptwizard's picture

"Our problems are man-made, therefore they may be solved by man. And man can be as big as he wants. No problem of human destiny is beyond human beings 

John F. Kennedy

NotApplicable's picture

Like Grandpappy always said, "flip 'em if ya got 'em."

web bot's picture


This is why I read Zero Hedge.

RobotTrader's picture

Sheesh, 5-yr. yield could rally 300 b.p. and it would still be near 20-yr. lows.

Mr Rogers's picture

Do we have a list of these "primary dealers"?  This is fucking insane.  Pardon my ignorance, I'm fairly new here, but can one assume that once these primary dealers buy whatever paper the Fed is floating in a particular day that the Fed has some sort of tacit agreement that they will buy most or all of the paper that these dealers haven't been able to flip the paper to?  Then they have the cover to say that "see, we bought this on the open market".

Hubbs's picture

Wait just a gosh-darn pickin' minute!

So there is an acceleration in the rate of turnover of the treasuries by the PD to the NY Fed, or is there  an increase in the amount? Or both? Are the PDs suddenly starved for cash and therefore can't wait to cash in their fresh-as-a-baby's-bottom Treasury purchases  to get their greedy hands on that FED money that they know is soon to turn into worthless rags? (Hurry up and get it so that it can be spent or sent on/to some tropical paradise)

Or is it that Bernanke is trying to inject more $ into the markets, counter to the assumption that he wants the markets to fall so that he has an excuse to launch the stealth QE3?


Or, are "profits" becoming so hard to come by that the PDs have become flat out unabashed streetwalking whores and walk right up to Bernanke and Sacks open car window?

user2011's picture

So, could it be all a predetermined show ?   Could it be fed asking certain bidder to bid on the auction,  making the demand for the notes.    Then when fewer people are watching, they buy them back. 

Just another scam to project a "highly sought after US treasury notes" ?


TruthInSunshine's picture

Whisper rumor that TEPCO will replace Bernankstain as 70% aggregate buyer of all U.S. Treasuries upon expiration of QE2.

Just whisper rumor on bond trading desks at this time -- will post more when/if I get it.

buchesky's picture

Time to start averaging into TBT.  It's not going to get much lower than this even when the equities markets crash.

XRAYD's picture

Do they really need middlemen dealers?

AldoHux_IV's picture

Sneaky lil scamps-- schemes only work for so long before they blow up.

youngandhealthy's picture


they are dealers...and they are doing what they are supposed to do...make deals. US taxpayers are not paying for this excess in printing is the rest of the world. Caught in between a rock and a hard place. The reserve status of the US serves the US well now. But is it like peeing in the bed...warm and nice to start but wet and cold later.

Thalamus's picture

The Fed must have one heck of a balance sheet--must be nice to be a private entity that can print money.  Does the Fed have an agreement with the Treasury to burn the bonds and bills its purchasing so they don't have to reenter the market or be repurchased?  It's not like the Fed has any investment in the assets so there would be no loss to them.  The loss is to the American taxpayer via inflation so in a sense we've already paid the debt.

What would happen if the Fed purchased 100% of the US Government outstanding debt, plus purchased all new issuances (even pay off the State deficits)?  We could pull back all the cans we kicked down the road and take our beating and get it over with?  Of course we'd have our unbalanced fed and state budgets that would require further money printing but if we agree to balance those maybe in 5 years we could rise from the ashes and have a chance....just a constructive thought.