This page has been archived and commenting is disabled.

The Fed Does Not Need QE3 And Can Fund Debt Monetization Merely From Rolling Debt And MBS Prepayments? Wrong

Tyler Durden's picture


Recently there has been a meme spreading in the internet that the Fed does not really need to do QE3 as the central bank can maintain bid interest at sufficiently high levels by merely rolling and extending maturing debt, a form of QE Lite Version 2, where the Fed's balance sheet is kept constant even as MBS are prepaid and Treasuries mature. The argument goes that based on some "logic" and lots of estimates it is "reasonable" to assume that $750 billion in MBS prepays and Treasury maturities will depart the Fed's balance sheet and need to be repurchased in the open market in keeping with a pro forma QE Lite V2.0 mandate. This is false. Here's why.

First: one does not need to engage in complex calculations of what the maturity profile of the Fed's holdings are - it is there available for anyone with an internet connection to see for themselves. In each and every H.4.1 update (go ahead, click) the Fed lists the maturity portfolio of its assets. The most interesting for the purposes of this analysis is the securities due in under one year. This includes in addition to Treasurys, MBS and Agencies, also the following items completely irrelevant for this exercise: Reverse Repos , Term Deposits, Liquidity Swaps and Other loans. As the chart below shows, and as anyone with a calculator can estimate, there is $141 billion in Treasury, Agency and MBS maturities in under one year (and just $108 billion in purely Treasury holdings). This number is one tenth of the ongoing monetization of $900 billion in USTs and MBSs in the November-June period, or $1,350 billion annualized. In other words: simply rolling MBS and Treasuries will have one tenth the impact of the ongoing quantitative easing program. Period. End of Story.

So what about MBS prepays? Well, as we had thought we had made abundantly clear, the level of Fed MBS prepays is directly correlated with prevailing mortgage rates: the lower the mortgage rate, the more willing the end consumer is to "put" an existing mortgage to the Fed and open a cheaper one. And vice versa: the higher rates go, the less prepays the Fed experiences. Lo and behold: actually looking at the data, confirms precisely this. As the chart below shows, while in H2 2010, when 10 Year, and thus Mortgage rates, were dropping fast, prepays to the Fed, and thus the rate of QE Lite activity was very high: peaking at $45 billion in December. Alas, since then, due to surging rates, the prepay rates has plunged, and the February and March total of $40 billion is less than all of December. Should rates continue to rise, which they will if fears of no QE3 accelerate, and Bill Gross ends up being right, this number will plummet and could potentially hit zero as nobody has an incentive to prepay a mortgage when the existing one is far more economic.

So putting it all together: assuming no QE3, and just continued rolling and transforming MBS in UST purchases, means that the Fed will have about $12 billion in average UST purchases per month from maturity extension, and about $20 billion from MBS prepays. This is at best one quarter of the amount the Fed monetizes per month currently and is largely inadequate to continue funding the US deficit. Also, should the 10 Year rate jump to over 5%, QE Lite will halt indefinitely, meaning the only source of dry powder for future monetization will be rolling maturity extensions, which are about one tenth of current monthly funding needs.

Lastly, and people tend to forget this, the primary reason why the Treasury needs the Fed to be the buyer of only resort is that no matter what happens to interest rates, and cash outlay to the Fed ends up being a revenue item for the Treasury! In fact, the higher the rate, the greater the purported revenue from Ben Bernanke, even though in reality it ends up being a wash transaction. For Tim Geithner the ideal situation would be one where the Fed owned all US interest paying instruments, as interest expense would be shortly reclassified as Treasury revenue. Should the Fed not be a key player in monetization, this is money that would ultimately leave the US. And if rates were to jump the annual interest outlays would actually be quite dramatic.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 04/11/2011 - 14:05 | 1158378 Alcoholic Nativ...
Alcoholic Native American's picture

QE 1 never stopped. stop bullshittin.

Mon, 04/11/2011 - 14:19 | 1158429 jus_lite_reading
jus_lite_reading's picture


AND they are saying NOW THAT RADIATION HAS BEEN LEAKING AT HUGE AMOUNTS! 10,000 terabecquerels of radioactive materials per hour!!! WHOA!

Lets see them throw a few trillion yen at this problem!



Mon, 04/11/2011 - 14:44 | 1158489 SheepDog-One
SheepDog-One's picture

No one cares anymore, Japan has been deemed 'priced in' and old news....nevermind nothing has been priced in and Toyota shutdown, along with Nissan surely, Honda, and others not to mention that which shall not be spoken....Apple computer parts shutdown, has not been priced in at all and is a disaster looming! The nuclear poisoning of everything hasnt even been looked at yet, really true evil.

Mon, 04/11/2011 - 14:52 | 1158527 jus_lite_reading
jus_lite_reading's picture

MFers only care about money and GDP!!!!!!!!!!! This shits gotta end

Mon, 04/11/2011 - 14:43 | 1158492 tiger7905
tiger7905's picture

Great clip from Arnie at Fairwinde Associates on an experiment of the fuel rods and how brittle they got.

Mon, 04/11/2011 - 14:53 | 1158522 jus_lite_reading
jus_lite_reading's picture

I know! I saw that too on fiatfire! Thanks! Did you see the video from Mises? HOLY MOLY!

Mon, 04/11/2011 - 14:48 | 1158511 spiral_eyes
spiral_eyes's picture

oh it's okay japanese central bankers can print clean air, clean water, and an alternative energy structure. john maynard keynes said so.

Mon, 04/25/2011 - 12:19 | 1203799 Cleanclog
Cleanclog's picture

If only . . . .

Mon, 04/11/2011 - 15:02 | 1158550 mdwagner
mdwagner's picture

For those that would rather see a non-alarmist looking blog source,

Mon, 04/11/2011 - 19:12 | 1159552 Bendromeda Strain
Bendromeda Strain's picture

I'm not sure ZH and the Fight Club theme is right for you, Nancy.

Mon, 04/11/2011 - 15:28 | 1158663 LudwigVon
LudwigVon's picture

QE 1 never stopped. stop bullshittin.


The monthly round number I came up with was 50 Billion, I like TD's details as well and no matter the number we all can agree that it is a far cry from POMO, rates will rise as no one is there to step into the gap. I say QE3 is leaked before fall semester starts.

Mon, 04/11/2011 - 14:04 | 1158388 NOTW777
NOTW777's picture

ponzi eventually fails

Mon, 04/11/2011 - 14:07 | 1158395 Hugh G Rection
Hugh G Rection's picture

It DOESN"T need QE3...


They will just pull out the Keynesian thesaurus and change the name again.

Mon, 04/11/2011 - 14:51 | 1158518 spiral_eyes
spiral_eyes's picture

this is likelier than some might admit.

Mon, 04/11/2011 - 16:32 | 1158983 dumpster
dumpster's picture

a big pile of bull crap by any other name is still a big pile of bull crap

Mon, 04/11/2011 - 14:10 | 1158399 Robot Traders Mom
Robot Traders Mom's picture

Great analysis Tyler, this is why ZH is the best.

Mon, 04/11/2011 - 14:39 | 1158469 Bad Lieutenant
Bad Lieutenant's picture

Tyler et al,

It's awesome that zh has engaged Rickards' "Stock and Flow" analysis and put it into the debate.  That said, I have a lot of respect for Rickards and his first-hand experience with the Fed, yet as this zh story details, his thesis has major problems that he never outlined on KWN a few weeks ago when he initially unveiled it.  

So I think you'd do the zh community a huge service if you two worked together rather than get agressive with fingering who's wrong.

So how about zh interview Rickards privately and transcribe it into a zh piece. It'd be great for Rickards and the minds at zh to put their heads together and figure June out! Or perhaps, get Rickards to to a guest post for zh?

Mon, 04/11/2011 - 14:40 | 1158485 bania
bania's picture


Mon, 04/11/2011 - 14:58 | 1158539 Bob
Bob's picture

It was a very impressive interview, but I recall very clearly that he took pains to note that his firgures were "typical" based upon his previous work at the Fed.  IIRC, he was using an average 3 year maturity "rule of thumb" to estimate the maturity profile of the Fed's holdings.

Mon, 04/11/2011 - 15:06 | 1158567 narapoiddyslexia
narapoiddyslexia's picture

+1 agreed. He was working BOTE

Mon, 04/11/2011 - 15:34 | 1158681 LudwigVon
LudwigVon's picture

you'd do the zh community a huge service if you two worked together rather than get agressive with fingering who's wrong.

WOW, pay attention, TD agreed with Rickards as one factor in the simple algebra.

Now TD is getting aggressive? Wait OK, read this again:

you'd do the zh community a huge service

As if this is not already the case? 


Tue, 04/12/2011 - 16:52 | 1158856 Bad Lieutenant
Bad Lieutenant's picture

Oh jeez, I'm not trying to rain on anyone's parade...  I'm basically just commenting on the fact that the piece's title bluntly ends with "Wrong" comes off as a bit hostile.  Anyway, I'm still not sure what your point is because this zh piece is directly at odds with Rickards' thesis on why he thinks the Fed has the abilty to take a hiatus from QE for some time. Personally, this zh piece makes a very convincing case, further puzzling me on how Rickards can be confident about his view.

In Rickards' second interview, he does clarify his position to say that the Fed will use their "stock" buying power to gun US paper prices up. So maybe the debate should shift to: is the Fed's buying power from runoff enough to keep US paper prices out of the danger zone that would ignite panic (in which case most of us here would be the cue for QE3).. 

And finally:


WOW, pay attention, TD agreed with Rickards as one factor in the simple algebra.

Now TD is getting aggressive? Wait OK, read this again:

you'd do the zh community a huge service

As if this is not already the case? 


Oh cmon...  I said they'd be doing us a service for that one thing, not that they're NOT already also awesome!  Ease up guy -- we're on the same team.

Mon, 04/11/2011 - 16:08 | 1158858 Bad Lieutenant
Bad Lieutenant's picture


Mon, 04/11/2011 - 15:34 | 1158690 mraptor
mraptor's picture

thirded !

Mon, 04/25/2011 - 12:45 | 1203908 narnia
narnia's picture

Rickards didn't say the Fed would be able to monetize the debt with roll overs from a $3T balance sheet.  He said they would have adequate liquidity to keep interests rates low (shaping the yield curve). He also said that they never put a maximum on QE2, so further expansion did not have to be in the form of QE3.

If China or Japan dumps securities or inflation comes in hot, obviously they won't be able to keep a lid on rates.  But, if it's just existing Treasury issuances + 2011 deficit, the Fed probably does have enough to purchase on the margin to temporarily keep interest rates down at the peril of the $.

This isn't a matter of ZH being correct or Richards being correct.  Both can be correct.  If we are still staring at this same scripted yield curve next year at this time (without a major Fed balance sheet expansion), that will tell the tale.  Seems to me that they'll be too many forces pushing rates up, but I would have said that this time last year as well.

Mon, 04/11/2011 - 14:10 | 1158402 ivars
ivars's picture

Japan may rise nuke accident severity level to higest 7 from 5!

Took them some time to count the radioactive releases.



Mon, 04/11/2011 - 14:13 | 1158406 SheepDog-One
SheepDog-One's picture

'Damned if you do, damned if you dont' time.

Mon, 04/11/2011 - 14:56 | 1158529 jus_lite_reading
jus_lite_reading's picture

Yup! That is why this ends badly for them banksters!

Mon, 04/11/2011 - 14:17 | 1158407 strannick
strannick's picture

In this corner..Tyler 'ZH' Derdan. And in this corner...Jim 'Roll-over' Richards. And refereeing, with the bulbous red nose, and striped blooperpants, The Bernanke! Oops, Durdan just grabbed the clown and piledrove him into the mat, while Richards flies in with an elbow to the head from the top rope. The clown's seeing stars and looks confused, but continues to formulate monetary policy nonetheless

Mon, 04/11/2011 - 15:36 | 1158702 dalkrin
dalkrin's picture

Stick-boy Timmeh enters the ring, repeating "Dear Mr. Leader", as he assists Bernanke back to his corpulent eminence.  The Bernank, with quivering lower lip, claims that according to his PhD thesis, Keynesian theory implies both contenders are disqualified, and to be sent to the silver mines under Blythe.

Mon, 04/11/2011 - 14:14 | 1158408 truont
truont's picture

and cash outlay [from] the Fed ends up being a revenue item for the Treasury!

Isn't Enron accounting the best!

Mon, 04/11/2011 - 14:17 | 1158419 Cone of Uncertainty
Cone of Uncertainty's picture

We have a winner--yeahhhhhh chicken dinner.

Treasury sells to PD's, PD's get digital dollars from Fed, Fed gets interest pmt's from Treasury, Fed remits back to Treasury, what it got from Treasury.

Fucking priceless.

Mon, 04/11/2011 - 15:05 | 1158563 Commander Cody
Commander Cody's picture


Mon, 04/11/2011 - 14:13 | 1158409 LawsofPhysics
LawsofPhysics's picture

Assuming no QE3.  Hhhmm.  The name will change, the QE3 (really QE4 now) will come.

Mon, 04/11/2011 - 14:15 | 1158411 Cone of Uncertainty
Cone of Uncertainty's picture

It puts the QE3 lotion in the basket.

It does this whenever it is told.

Mon, 04/11/2011 - 14:16 | 1158416 Hot Shakedown
Hot Shakedown's picture

I believe Jim Rickards started this meme that QE3 was not essential in his most recent discussion on King World News. I am not capable of offering an opinion on either side of the argument. Did you hear Rickard's case?

Mon, 04/11/2011 - 14:19 | 1158424 DonutBoy
DonutBoy's picture

Is this in response to Rickards?  Why are the other loans irrelevant - would their proceeds not be used to buy treasuries?

Either way - I don't think QE can be closed out.  The second chart in this article is pretty dramatic:


Mon, 04/11/2011 - 14:23 | 1158435 Tyler Durden
Tyler Durden's picture

Two reasons: i) there is a total of $18 billion on the Fed's BS of "other loans", and ii) the Fed does not have a mandate to monetize these loans. On the other hand, the latter never stopped the Fed before...

Mon, 04/11/2011 - 14:39 | 1158478 Monetary Lapse ...
Monetary Lapse of Reason's picture

Tyler,  Unless I am missing something, you are still not addressing one of the points
Rickards made in his second KingWorldnews interview, namely that the FED can sell something on it's balance sheet that is not maturing soon, buy back something maturing in a month or two.. then have that (increased) amount available for QE rolls.  I realize this could not go on forever.. but he seems to have a point there.  Just looking at the current maturity schedule could be misleading, no?    

Mon, 04/11/2011 - 14:43 | 1158494 SheepDog-One
SheepDog-One's picture

They can sell it to who? You?

Mon, 04/11/2011 - 14:57 | 1158538 Monetary Lapse ...
Monetary Lapse of Reason's picture

In to the "market".  When you don't care about making a profit.. you can sell anything.  

Mon, 04/11/2011 - 15:08 | 1158580 Double down
Double down's picture

I guess they could sell or swap but fuck, who would want to be the counter party to that shit.  It screams "party over boys, time to carry some real risk".  In fact it would be counter productive as putting out the fire in one spot will light another up further down the curve.

And then, so what, 1.6 trillion or so is coming down the pipe.  Were I a PD I would charge the fuck out of them to hold that bag.  PDs do not do social service and the currency risk alone seems nuclear. 

Mon, 04/11/2011 - 15:24 | 1158655 Tyler Durden
Tyler Durden's picture

The Treasury sells debt. For the Fed to "sell" debt means it would need to start unwinding the asset side of its balance sheet. All $2.9 trillion of it once QE2 is over. That's $2.9 trillion (and probably more due to near record margin debt again) that will come out of the S&P.

That won't happen.

Correction: it won't happen unless oil is above $200.

Mon, 04/11/2011 - 16:55 | 1159058 tmosley
tmosley's picture

Why do you think it would happen at oil $200?

By that time, the MSM will be talking hyperinflation, and people will literally be starving in the streets.  If anything, they would increase the monetization at that point, and pump the money directly into food stamp benefits.

There is no stopping the monetization train once it has started.  By the time the "engineers" see the brick wall, they are far past the point where they could have thrown on the brakes.  Their only hope is to pile on more speed and hope to break through.

Sadly, this never works.

Mon, 04/11/2011 - 17:31 | 1159179 greased up deaf guy
greased up deaf guy's picture

"If anything, they would increase the monetization at that point, and pump the money directly into food stamp benefits."

all of the fed's measures to date have done nothing but hurt the bottom seventh of the population, so why would they start helping them now?

Mon, 04/11/2011 - 20:20 | 1159767 Clockwork Orange
Clockwork Orange's picture

They just increased the benefits to the states last week to cover the Snappies, a pseudo-admission that rising food prices cause people to be hungry. Unfortunately for the people just over the poverty line that do not qualify, they now pay an elevated portion of their income for food.  

Too bad, they lose I guess.  Along with every saver in the god-damn country.

When are Ben and his minions tried for treason?

Certainly, they at a minimum will not be allowed to leave the country they are destroying?

Mon, 04/11/2011 - 14:40 | 1158481 Eternal Student
Eternal Student's picture

As I recall from the interview on King World News, Rickards was throwing around a number in the range of $700-800 billion that the Fed had to play with here. It was never clear where he got that number from, and yes, it did seem excessive at the time. I have never heard how he justified this number; your article is the closest examination to date to date that I have seen. Thank you for it.

But note: even though the Fed doesn't have the money needed, it doesn't mean they won't try. Perhaps they are irrationally exhuberant about how well the stock market can stand on its own legs.

Mon, 04/11/2011 - 16:02 | 1158831 MarkS
MarkS's picture

I get slightly different numbers starting from the 2.8T at the end of QE2:

Source            Annual        Mnth

Maturities         $141B        $13B

Prepaid MBS     $240B        $20B Refi and maturity rate at 2xs historic average rising rate enviroment

Coupons           $100B        $ 9B  4% avg coupon on 2.5T which is likely high

Total                $480B        $40B  40% of current QE2 rate

I think that the biggest source is also the one that is the most questionable.  If we go back to the period between QE and QE2 when the FED said they would roll over maturities and coupon payments they were about $400B or so annually (if I recall) which also fits the $300B they added into QE2.

So add in the new purchases and the slowing level of refis and I think that the 480B is as good an estimate as any.  And still, we are only at 40% of QE2 over a 12 month period...

Mon, 04/11/2011 - 16:10 | 1158859 MarkS
MarkS's picture

double post, sorry

Mon, 04/11/2011 - 14:20 | 1158425 Milton Waddams
Milton Waddams's picture

What impact has the increase in crude oil prices had on the finances of oil producing nations?  Probably just enough to cover a few quarters, and growing, of new debt I bet.

Mon, 04/11/2011 - 15:44 | 1158745 viahj
viahj's picture

not if the house of saud and kuwait have to keep bribing their people with cash bombs

Mon, 04/11/2011 - 14:21 | 1158438 weenus
weenus's picture

1.  Don't the primary dealers have to buy unsold T's at auction?

2.  Aren't the primary dealers sitting on record levels of reserves parked at the Fed?  Aren't those reserves going to be plowed into T's by law?

3.  They don't need QE3, then, seems to me, least not for a while.  MBS, etc irrelevant.   

Mon, 04/11/2011 - 15:54 | 1158791 viahj
viahj's picture

that's what I've been thinking.  after draining the excess reserves then they drain equities/commodities and then QE3.

Mon, 04/11/2011 - 14:21 | 1158439 GottaBKiddn
GottaBKiddn's picture

The government needs inflation like a butt needs toilet paper. And no matter what it takes, no matter what you call it, it will have it. Another name that is far more honest is "devaluation" of the currency, but who's being honest?

Would you rather pay back your debts and commitments with inflated dollars, or expensive dollars? No brainer.

Mon, 04/11/2011 - 14:22 | 1158442 garbled
garbled's picture

I'm not completely convinced of oncoming QE3.  Quite the opposite, I think the fed might raise rates.  If the general wisdom is that Gross and GS are in the Fed's inner circle, then all the moves make sense.  PIMCO bets the farm that rates will go up because QE2 ends and nobody else will buy.  GS knows that without a printer behind the commodity drive, they aren't going parabolic.  Even if the fed doesn't raise rates directly, they will go up just on ending the purchase.

Mon, 04/11/2011 - 19:20 | 1159570 Arkadaba
Arkadaba's picture

I'm not convinced of oncoming QE3 either. Reading of the events of the past days, they are hard to explain in a US-centric analysis.  A few commentators have suggested that the Fed will need to continue QE because that is the only way the US gov can continue to service its debt (which amounts to dollar deflation through monetization) or default outright by missing interest payments. Neither a good solution for Americans.

But who does the Fed serve? They are a non-government institution representing a cabal of transnational, global (not sure of the correct terminology) banks that are not beholden to any nation or national government unless it suits their purposes. Talk about conflict of interest.

Given that, the US economy is still the biggest in the world (still some money to be made), the puppets are in place (Repubs on the right of me, Dems on the left, stuck in the middle with you) and the populace still docile, I'm not sure the banksters would throw the US under a bus yet - but Pimpco shorting US debt .... I don't know.

Mon, 04/11/2011 - 14:22 | 1158448 eftian
eftian's picture

I think the point Rickards was making when he rebutted previously was that the fed could exchange some of the treasury's that have a maturity several years in the future, with one of the primary dealers, for treasury's with a closer maturity, and basically juggle the maturities to whatever monthly schedule they choose.

Mon, 04/11/2011 - 14:30 | 1158460 BKGuy
BKGuy's picture

That was my takeaway as well. The Fed can manipulate the term-structure of their portfolio essentially at-will.

Mon, 04/11/2011 - 14:30 | 1158461 Tyler Durden
Tyler Durden's picture

Not without secondary market transactions.

Mon, 04/11/2011 - 15:03 | 1158524 Howard_Beale
Howard_Beale's picture

POMO's are secondary market transactions. What's to stop the Fed from selling longer maturities and buying shorter maturities on the same day or even creating another QE acronym. Call them maturity open market swaps--MOMS.

Mon, 04/11/2011 - 15:21 | 1158640 Tyler Durden
Tyler Durden's picture

The Fed does not (and will not) sell Treasurys. At most it can unwind its holdings... sometime in 2020, as the $2.9 trillion in assets are an explicit support to the stock market, and would take out 30% of the S&P.

Mon, 04/11/2011 - 15:37 | 1158698 unununium
unununium's picture

Having demonstrated that it will engage in market manipulation to funnel money wherever it desires, the Fed will do exactly that at some point soon.

When conditions suit it best.  Such as when the debt ceiling needs to be raised, or QE3 needs to be slipped through.


Mon, 04/11/2011 - 14:38 | 1158462 Shameful
Shameful's picture

Ok, so the Fed rolls the maturing debt, and? Remember when the debt matures new debt must be issued to repay the maturing debt. So best case the Fed could change up the mix and roll the existing debt. So what about the other 1.6ish Trillion rolling down the pipe every year?

If there is no more QE then who will buy the newly issued debt (assuming we get a perfect roll situation)? 1.6 trillion is a lot of money. Japan looks busy, China is having buyers remorse, EU is sorta having their own problems.

Mon, 04/11/2011 - 17:56 | 1159272 linrom
linrom's picture

Exactly. The whole initial interview with Rickards on KWN was an example of outright manipulation of public opinion. What Rickards said would only make sense if the Treasury was running surpluses sufficient to pay off maturing debt.

Mon, 04/11/2011 - 19:45 | 1159582 Bendromeda Strain
Bendromeda Strain's picture

A KWN interview is now tantamount to outright manipulation of public opinion?

Goebbels' corpse just farted in your general direction.

Mon, 04/11/2011 - 14:26 | 1158451 narnia
narnia's picture

Both sides of this are correct.  The Fed does not have enough to purchase 100% of the revolving US debt (which is mostly in short term treasuries), but the Fed does have enough to substantially influence the market.  

If the Fed purchased all short term treasuries, where would money market funds & other "cash equivalent" positions go?  There's a ton of built in roll over financing capability in the market itself- especially since the dollar is the reserve currency.  The Fed just needs enough to "fill in the gap" that the system does not support. 

Mon, 04/11/2011 - 14:27 | 1158459 Tyler Durden
Tyler Durden's picture

The repo market is already pretty much halted courtesy of the FDIC assessment. More in a post shortly. And BTW most of the revolving US debt is not in short-term treasuries.

Mon, 04/11/2011 - 14:33 | 1158466 narnia
narnia's picture

most US debt that the Fed is not purchasing is in short term.

Mon, 04/11/2011 - 14:33 | 1158471 Tyler Durden
Tyler Durden's picture

5 Years is short term?

Mon, 04/11/2011 - 15:13 | 1158606 narnia
narnia's picture

of the $14 trillion of debt, $9 trillion is public.  of that $9 trillion, $1.7 is T-bill with an average interest rate of 0.2%, $6 trillion in notes with an average interest rate of 2.4%.  the components of that not held by the fed are largely short or intermediate term- held by foreign governments & financial institutions.  

i don't want to put words in his mouth, but i believe rickards made the point that Fed liquidity with a $3 trillion asset side would be able to substantially influence the roll-over of the national debt.  he also said the federal government put a minimum but not a maximum on QE2, which means it can act just like QE3 at their discretion should the placement of the Fed's internal liquidity not be able to shape the yield curve to its centrally planned long term growth strategy.  i think he's right on both points.

Mon, 04/11/2011 - 14:46 | 1158505 narapoiddyslexia
narapoiddyslexia's picture

It would be nice to see Rickard's response. I think his precise claim was that the FED can reinvest to monetize ~75% of the deficit that is funded in the intermediate term.

Mon, 04/11/2011 - 14:51 | 1158516 narapoiddyslexia
narapoiddyslexia's picture

In any event, though, isn't the dollar still toast? Even if Rickards is right, everyone will still see through it, and confidence in the dollar will still be a thing of the past.

Mon, 04/11/2011 - 15:34 | 1158680 Cleanclog
Cleanclog's picture

And by "crowding out" in Treasuries maybe try to direct some investing into short term muni notes, like the ancipations - BANs, RANs, TANs, and TRANs.  The munis need financing more than Treasuries, and need interest rates to remain steady or lower.

Mon, 04/11/2011 - 21:51 | 1160018 IQ 145
IQ 145's picture

 People in hell need ice water; or so I'm told.

Mon, 04/11/2011 - 14:32 | 1158463 poydras
poydras's picture

Some other factors -

China looks to be actively increasing imports against a large trade surplus with the US; leaving others to suport the US trade imbalance.  I speculate that the situation grows out of control once oil surpasses 160.

Japan is likely to reduce T purchases as rebuilding begins.

This leaves QE and shadow QE.  As suggested, $160 oil is likely to lead to some significant actions.

Mon, 04/11/2011 - 14:33 | 1158470 Bobportlandor
Bobportlandor's picture

Shucks I thought the feds came up with the first Perpetual Motion Machine

Tue, 04/12/2011 - 02:20 | 1160713 NewThor
NewThor's picture

No. That was God when He/She created the universe.

Mon, 04/11/2011 - 14:34 | 1158472 Village Smithy
Village Smithy's picture

I am confused about one statement "Should rates continue to rise, which they will if fears of no QE3 accelerate." My thinking was that the fear of more QE was what was causing rates to rise, help me out here.

Mon, 04/11/2011 - 22:16 | 1160080 IQ 145
IQ 145's picture

 What you say needs to be addressed. The market is not a machine. rising prices are a self-fulfilling prophecy; as are falling prices. Psycholocy is all; and the market is psychology. period. Interest rates, or in a more useful frame of reference, the price of the bond, have been affected by QE. But it is crucial to understand that the price of bond is too high; or less usefully, the interest rate is too low; it is negative; bonds are a guaranteed contract of confistication; thi s is a fact.  It is much easier for the "market" ie. people, to interpret events such that the price of the bond should go down, than that it should go up; under these circumstances. When QE3 is not anounced, this will be interepreted as a statement that the Fed sees Inflationary paradigm, inflation expectation; as pressing. This interpretation , combined with the correct professional knowledge that inflation has a latency and that it accellerates, will cause the bond traders to sell and buy bonds for a lesser price; ie. a higher interest rate; but the interest rate is not the issue; the issue is what is the bond worth? In these circumstances, the market will interpret almost anything to mean, the bond is worth less; this is the definition of a bear market. It's not a nice simple machine like process. I hope this is helpful.

Mon, 04/11/2011 - 14:38 | 1158477 Double down
Double down's picture


When QE2 was turned on the rates went up because the vendors of T bonds would price the bonds for sale below the "market".  The fed would subsidies the PDs by buying the worst priced securities in order to push down the "manufactured" yields.

Since POMO "insured" the bonds, money flowed into other assets.

Now, should POMO disappear or just revert to a "lite" version the primary dealers and others would have to buy and hold deficit financing bonds without incremental help from the fed.

Understanding that other assets will take a hit, could the deficit financing be accomplished between the primary dealers and the feds maturities?  Could we actually see rates go down again based on a fear premium?

Also, I have a feeling this is really dollar negative, but I am not sure, what do you guys think?

Also, does anyone know the frequency the revenue is recorded by the treasury from fed remittances?


Mon, 04/11/2011 - 22:20 | 1160088 IQ 145
IQ 145's picture

 It was a bull market in Bonds; now it's a bear market, shit happens, events transpire, people learn; even professional money managers learn; although it can be hard to discern. Will we see rates go down; no, or more correctly, very unlikely; not a good bet. Is it dollar negative; yes; but this is one of the underlying motives for the Fed. it;s supposed to improve the trade deficit; it won't, but they're happy in their dream.

Mon, 04/11/2011 - 14:40 | 1158486 poydras
poydras's picture

Of course this discussion assumes no material divestiture of Ts.

Mon, 04/11/2011 - 16:55 | 1159064 hambone
hambone's picture

That P-man is what I think people may be missing - the near $3T of T's getting rolled over on top of the $2T in new issuance.

Why are we assuming China, Japan, GB, HK, Carribean, etc. will continue to roll over their existing T's into new?  This seems a big assumption.  Given the need for more internal funding and shrinking trade surplus...the only region w/ growing surplus is MENA but seems they'll be more likely to be spending on new fighter jets and bribes to their own populace.

Add all that together w/ the fact US is shifting from SS surplus to a deficit and you reduce T purchases by a couple hundred billion more (along w/ end of POMO). 

None of it adds up to anything but a ratealanche, ratepocalypse, etc.  Given that, either we are in for the 2nd half of the 2008 collapse or big head fake w/ more QE coming...given Gross posture, seems the rate hit is coming absent QE3.

Mon, 04/11/2011 - 14:44 | 1158490 anynonmous
anynonmous's picture
The Most Dangerous Man in America: Jamie Dimon

By Simon Johnson

There are two kinds of bankers to fear.  The first is incompetent and runs a big bank.  This includes such people as Chuck Prince (formerly of Citigroup) and Ken Lewis (Bank of America).  These people run their banks onto the rocks – and end up costing the taxpayer a great deal of money.  But, on the other hand, you can see them coming and, if we ever get the politics of bank regulation straightened out again, work hard to contain the problems they present

Mon, 04/11/2011 - 15:04 | 1158565 AldousHuxley
AldousHuxley's picture

The danger lies not in a man, but in a group of men far hidden from the public.

Mon, 04/11/2011 - 22:24 | 1160093 IQ 145
IQ 145's picture

 Yeah, something like that. I love that Avatar; one of the great minds of the century.

Mon, 04/11/2011 - 14:46 | 1158495 bob_dabolina
bob_dabolina's picture

You need to diversify yo bonds nigga

-Man Behind The Curtain

Mon, 04/11/2011 - 22:25 | 1160099 IQ 145
IQ 145's picture

 Diversify dem unto silver, bitch; then whitey cain't say shit.

Mon, 04/11/2011 - 14:45 | 1158497 tmosley
tmosley's picture

Clearly we just need a "one time" injection of tenfold as much QE as we have had to date, then we won't need any more.  


Mon, 04/11/2011 - 14:51 | 1158515 Temporalist
Temporalist's picture

Were you having drinks with Krugman this weekend?

Mon, 04/11/2011 - 14:48 | 1158510 Temporalist
Temporalist's picture

I think the point of Rickard's analysis was that QE was not going to end but just be done surreptitiously.  Either way QE will continue.  The "markets" cannot be propped up on their own shaky legs.

Mon, 04/11/2011 - 22:28 | 1160112 IQ 145
IQ 145's picture

 I think they're going to try it; and we'll just have to wait and see. The thing is, these folks at the Fed. change the rules all the time; and they start doing what was illegal or not permitted last week, next week. And they gotta big problem; they know that.  They're gonna fight dirty. It's a huge plus for them if they can skate without the anouncing anything; so they'll try it. The Bond Market will tell us how that's going.

Mon, 04/11/2011 - 14:52 | 1158520 Fourth Horseman...
Fourth Horseman of the Apocalypse's picture

Bernanke claims that QE is not monetization of the debt because the Fed will not own the debt till maturity.  Here we are discussing how much debt will mature at the Fed and will the Fed re-invest the proceeds. The US is beyond monetizing the debt, even by Bernanke's definition.  

Mon, 04/11/2011 - 14:57 | 1158531 Temporalist
Temporalist's picture
Official: IMF To Cut Growth Forecasts For U.S., Japan

"Supposedly, the IMF’s latest GDP estimates will be lower than expected for the U.S. and Japan."

Mon, 04/11/2011 - 14:57 | 1158532 AldousHuxley
AldousHuxley's picture

Elites are NEVER wrong. They define what is right and what is not through manipulation.

The more times Fed appears in the media, the more they are trying to manipulate.

The game is exposed to be rigged to favor the house of Fed. It is time to play a different game not another round. Failure to police our system has led BRICs to gain advantage through state sponsored economic policy (aka. facism).


Mon, 04/11/2011 - 16:10 | 1158867 Temporalist
Temporalist's picture

Yes and the Fed hired a PR firm not long ago to "improve" their image.

Mon, 04/11/2011 - 14:56 | 1158533 web bot
web bot's picture

This is just the beginning of the closing of Act 1.

Get ready for the correction.

Mon, 04/11/2011 - 15:09 | 1158585 John Wilmot
John Wilmot's picture

It seems to me that the Fed could very well adopt the rollover plan without risking a funding crisis for the federal government. But, are they willing to risk a stock market crash ? If anything, the market is more ripe for a crash than it was in 08, if the punch bowl were to be taken away... What would the propoganda be then? Frankly, I don't know what the point of another crash would be at this time - with such low public participation. What, are the handful of tradings desks of the different branches of the cartel just going to shear each other? I can't picture it. I think QE3 or shadow QE3 is baked in the cake....barring 'austerity' from D.C., which is about as likely as Spain not needing a bailout IMHO.

Mon, 04/11/2011 - 15:34 | 1158692 Double down
Double down's picture

The fed wins either way.  If the stock market crashes their POMO is granted functional legitimacy, if it does not the Fed is granted credibility.

All BS to me  

Mon, 04/11/2011 - 15:11 | 1158587 gianakt
gianakt's picture

Holly shit Gold just made a inverted cup and handle pattern on the hourly chart, this market is going to crash!!!

Mon, 04/11/2011 - 15:09 | 1158590 blunderdog
blunderdog's picture

Huh.  It doesn't look like that big a disagreement, but this sure ain't my strength.

Rickards tosses around the number $700-800 billion, and using TDs estimate of $32 billion/month, you get $384 billion. 

Neither number was sufficient to cover all gummit deficit spending, but it seems like an unstated assumption in the second case is that the Fed has to monetize every dollar of deficit.

Is that really what's currently going on?  No one else is on the hook for this?  Or does this follow from the fact that the PDs are flipping everything weeks after the purchase?

Mon, 04/11/2011 - 15:57 | 1158793 Financial_Guard...
Financial_Guardian_Angel's picture

There are more than two outcomes of this scenario. Our boys at the FED are thinking three-dimensionally here. Their flaw is that they are banking that there are no outside forces that tip the scales and force them to do something outside of their plan.

If Benny says no to a public QE3, then equities could tank sending cash into the bond market. Then presto you have buyers for the auctions. Keep in mind the big picture--there is no replacement (yet) for the USD as reserve currency and as many countries chase each other to print money the USD still looks the best.

What is the saying? In the land of the blind, the one eyed man is king. There is one eye on the dollar...

Mon, 04/11/2011 - 15:11 | 1158595 ivars
ivars's picture

Silver is correcting as predicted. TODAY it begins.

Already 5% drop in one day from level 41,98.


Mon, 04/11/2011 - 22:35 | 1160144 IQ 145
IQ 145's picture

 Hey, don't let me stop you; jump in there and short the snort out of it. You can be a hero. There are a lot of dead heroes; but don't let that stop you.

Mon, 04/11/2011 - 15:21 | 1158635 ebworthen
ebworthen's picture


When do I get to write my own paychecks?

Can I create an infinite loop from "add zeros to paycheck" to "deduct zeros from bills"?

Why not?

I guess, after all, the money does need to come from somewhere, eh?


Mon, 04/11/2011 - 15:29 | 1158664 unununium
unununium's picture

> interest expense would be shortly reclassified as Treasury revenue

Sloppy.  Actually the two would net to zero.  At EOY. Subject to the Fed's expenses.  Which nobody audits.


Mon, 04/11/2011 - 15:38 | 1158701 Tyler Durden
Tyler Durden's picture

"even though in reality it ends up being a wash transaction"

Mon, 04/11/2011 - 17:01 | 1159076 Financial_Guard...
Financial_Guardian_Angel's picture

Not exactly, if the Fed shareholders are taking 6% off the top, not to mention their take upfront on the POMO activity. Legalized theft.

Mon, 04/11/2011 - 15:30 | 1158677 Strategery
Strategery's picture

I am not a tea partier, and so that is why I am inquiring as to their position on QE2. Does the broader republican party have a position? In other words, I'm just wondering if Paul can realistically find enough support to take a run at the Fed with something a lot stronger than an audit.

Mon, 04/11/2011 - 16:57 | 1159067 narnia
narnia's picture

I'm really not sure what the tea party movement is.  It's been co-opted so many times by so many people, it's hard to tell.

Paul is from the Austrian school.  He's opposed to the Fed on ideological grounds.  It would be unfair to even say most Democrats & Republicans have thought about economics enough to even have an opinion of the subject.  So, fighting it on ideological grounds is very tough, and he has some pretty tough opposition from both parties on that.

Paul is winning the Constitutional & practical arguments against the Fed.  That's why the PR war has heated up big time.  People understand inflation, moral hazard & corporatism.  On these grounds, I'd say the Fed is pretty ripe to be taken down or kept down upon a major failure.

Mon, 04/11/2011 - 17:05 | 1159098 NotApplicable
NotApplicable's picture

Collectives have no position other than the individual positions of its members, especially a wide-spread collective like the Tea Party. While the individuals within may have quite a bit of common ground, there is never anything close to a complete consensus.

Now to answer your question, no, Dr. Paul has not a chance to realistically take on the Fed. As much as I respect him, he is but tilting at the windmills.

Mon, 04/11/2011 - 17:14 | 1159125 blunderdog
blunderdog's picture

Well now pardner, that's a real good question, and we're gonna get right on that with some real good common sense math, and we're gonna come up with a real good answer right quick.

Don't you worry.

Mon, 04/11/2011 - 15:49 | 1158764 William Wallace
William Wallace's picture

I would love to be corrected if I'm wrong, but in a fractional reserve banking system, all banks create money whenever they make a new loan.

In order to keep Treasury rates low, a lot of money must be created to buy the treasuries.  But the Fed does not have to create it.  Money can be created in other U.S. banks and become part of the "Household" category.  Money can be created offshore in Britain.

To monetize the debt, any bank can loan money to some entity that will use that money to buy Treasuries.   Presto!  Newly-created fiat is there to do the monetizing job.

My impression is that the only reason the Fed did QE1 and QE2 out in the open is that they wanted to publicly fight deflation.  Now that the deflation threat has receded, they will monetize surreptitiously, which is their normal modus operandi. 

Any bank anywhere can play a role in monetizing the debt.  Where am I wrong?

Mon, 04/11/2011 - 16:09 | 1158876 tom
tom's picture

Actually, the Fed rolls over its maturing Treasuries in non-market transactions directly with Treasury. The usual rule that bars the Fed from buying directly from Treasury does not apply to rollovers.

Anyway, Fed rollovers of Treasuries have nothing to do with absorbing any of Treasury's net issuance. Only if the Fed chose not to roll over its maturing Treasuries would that matter - that would increase Treasury's total net issuance to the market. As a matter of real practice, the Fed always rolls over its maturing Treasuries, I believe always like-for-like in terms of maturities, unless it's reducing its Treasury holdings, which would be in a tightening cycle ie a long way off.

As for maturing MBS Tyler has it right.

Mon, 04/11/2011 - 17:11 | 1159106 narnia
narnia's picture

how something has been done by the Fed in the past is not a predictor of how things will be done in the future.  

smart people out to manipulate markets exist in the Fed.  smart people out to manipulate markets exist in the Treasury. there's a pretty good chance these two groups talk to one another.  hence, you get issuances of debt where you think the market can most easily absorb them- or where some foreign institution says they want them.  

they have more than enough tools to game the yield curve with $3 trillion balance sheet & QE2 expanded cocked & loaded.  of course, in the process of gaming the system, we will all ultimately pay with inflation & credit risk adjusted treasuries.

Mon, 04/11/2011 - 16:46 | 1159025 Hot Cumontitties
Hot Cumontitties's picture

Marc Faber says there will be QE3

Mon, 04/11/2011 - 16:53 | 1159059 Clint
Clint's picture

Holy Shit!

Tyler just bitch slapped Jim Rickards.

I've been waiting for a reply to Rickards' slight of Zerohedge.

Mon, 04/11/2011 - 17:05 | 1159095 delivered
delivered's picture

The math just isn't making sense as I'm calculating that the Fed would only have about $150 billion per year available from the current balance sheet to fund new, government incremental debt. I'm assuming about $1 trillion +/- of MBS which between refinances, home sales (and loan repayments), and normal principal reductions (supported by some smaller/select portfolio sales to unsuspecting parties) would be paid basically in full in ten years (assuming all of the MBS has value, a big assumption). So this averages to about $100 billion per year. Add another $50 billion a year in other stealth Fed strategies (e.g., liquidating other assets) and this adds to $150 billion a year or roughly 10% of the annual federal government deficit of $1.5 trillion.

What I'm not getting is how the rollover of US treasuries from the current Fed balance sheet is going to help. That is, if the natural maturity of the Fed balance sheet is going to free up $150+/- billion per year from treasuries, sure this can be used to purchase new government debt but some other party has to step in and buy the maturing debt which is being rolled over.

So in total, the federal governments annual debt needs represent the new incremental debt (receipts less disbursements which equals the deficit currently running at about $1.5 trillion per year) required plus the roll over of the existing debt which now stands at $14.2+/- trillion. Assuming 10% of this needs to be refinanced each year (which may be too low given how heavily financed the government is with short-term debt), that amounts to $1.4 trillion so in total, I'm calculating $3+/- trillion of annual debt financing requirements by the government.

Doing the quick math, the Fed may have $150 billion from its MBS/other portfolio and another $150 billion from maturing US debt giving it $300 billion to work with against $3 trillion of debt requirements, or 10%. This leaves $2.7 trillion of which we can assume rollover financing will take 50% leaving $1.3+/- trillion of new debt to be absorbed by the market (an extremely ugly number).

Am I missing something here as to me, the math just doesn't add up in terms of the Fed having much of a balance sheet to really support further debt monetization. This is why, and as I've stated in the past, that the Fed is going to use the banks as a front/proxy to purchase $700+ billion a year in government debt via tapping the reserves the banks currently hold. So the Fed doesn't have to directly undertake QE3 (a short-term political win for the USD) but will undertaken it in an indirect method by encouraging the banks to recycle excess reserves into US debt.

Mon, 04/11/2011 - 17:39 | 1159168 hambone
hambone's picture

Math seems utterly FUBAR...maybe even a little worse than you think.  However, the Fed is surely more clever than I bout how to keep this game going long beyond my pea brain can imagine.

My understanding is T's have about a 5yr average maturity (1/5th rolled over annually) on it's $14.3T debt = approx. $2.8T annually in rollover T's (in reality due to the large amount of short term debt getting rolled every 30 day, 90 day, etc. the total amount of debt rolled is over $3T but much of the money is the same money remaining in short term debt).

If "buyers" simply determine not to what rate would real buyers emerge and at what expense to the equity market, other asset classes?

Mon, 04/11/2011 - 23:02 | 1160305 IQ 145
IQ 145's picture

 "indirect method encouraging banks to recycle--" agreed; also I believe the Bank of England, ECB, Russia, and China, will be helping out, via "dark" difficult to discern accounting;  why? because Uncle Ben is everybodies best friend when it comes to distributing world reserve currency notes, and b.) nobody is in a hurry to see the US having Big problems. They may even be willing to co-operate in a game of spin the bottle hide the sausage in order to prevent the need of the dreadful anouncement of QE3; this is some kind of a PR, or spin, line in the sand; it's very important to anounce that QE2 "worked" and everything is fine now; and I think they're going to take a run at it.

Mon, 04/11/2011 - 18:10 | 1159328 narnia
narnia's picture

Here's the exercise:

$4.5 trillion is in intergovernmental accounts.  some of that will need to be drawn down, but it won't be anywhere near 10%.  let's say $200 billion.

$1 trillion is held by people in LT debt.  that could go up or down, but not materially. 

$9 trillion is in public debt, of that $5 trillion is held by foreign countries.  that could go down, it could stay the same, it could go up by the trade deficit, but odds are it will go up because these countries do not want to sacrifice their currencies.  it will probably go up as much as the intergovernmental accounts go down.  so you've taken care of some there. the remaining $4 trillion is held mostly on a short term basis by financial institutions / money market accounts.  a lot of this really has no where else to go because of the way the system works.   

so, the question then becomes is the $300 billion of liquidity + the interest on the government debt enough to manipulate the yield on the debt that revolves + $1.5 of additional debt.  it's not an exercise to locate 100% of the funding.  

how much of a % of the total debt issued by the US over the past 9 months was covered by QE2 + these accruals?  it was no where near 100%.  was it effective in manipulating the market?  i would say the reality of negative interest rates & a depreciating currency is pretty compelling evidence.

Mon, 04/11/2011 - 18:11 | 1159335 MiguelitoRaton
MiguelitoRaton's picture

That meme never made any sense; it was discounted by simple logic. The debt is not declining, it is growing by the deficit. And the deficit exceeds the interest. Therefore, even if the Fed owned 100% of the debt (it doesn't) and you applied the matured debt + interest, you wouldn't cover the rolled-over debt + new debt (deficit). Simple 6th grade math. Now since the Fed doesn't own 100% the argument falls apart even faster.

Mon, 04/11/2011 - 19:53 | 1159678 blunderdog
blunderdog's picture

Yeah, Mickey, that's what I was asking about above, though.

Is all of this supposed to mean the Fed is monetizing 100% of the deficit? 

It seems like a simple question, and if it's so fucking stupid, feel free to call me names, but I'm still wondering.

Mon, 04/11/2011 - 19:50 | 1159664 gwar5
gwar5's picture

A mind is a terrible thing to change.

After the Rickards interview on KWN I plead guilty to putting the meme out there several times @ ZH precisely hoping it might get further analysis and feedback. Thanks for the Analysis TD.

I agree with others who recommend a Jim Rickards periodic guest post spot. There's no better place for such things to get scrutiny than ZH. Both are cutting edge. It's all good.

Mon, 04/11/2011 - 22:38 | 1160193 luckly123
luckly123's picture

It is enough designer shoes to make a grown shoes online woman cry.Top European designer shoes on sale, worth thousands high heels of dollars; remain in christian louboutin boxes and just out christian louboutin pumps of reach up a christian louboutin sandals quake ravaged christian louboutin mary janes retail store.3 News christian louboutin very prive was warned some christian louboutin platform pump women are already christian louboutin slingback talking of using christian louboutin men ladders to get christian louboutin heels at them.It christian louboutin boot would take more ysl than the highest yves saint laurent pumps stiletto heel yves saint laurent boot to reach them yves saint laurent shoes .Box after box,gianmarco lorenzi pumps containing top gianmarco lorenzi designer shoes from giuseppe zanotti boot Italy, Spain giuseppe zanotti platform and France have been given red stickers.

Mon, 04/11/2011 - 23:20 | 1160356 MOAB
MOAB's picture

Love it. Nice return of serve to Rickards - think he's great by the way.

I'm with Tyler, but not from an analytic perspective cause I have neither the ability nor desire to get my head around Fed fantasies. Just know that the dam has broken, so it will only accelerate. There will be no surreptitious QE, just peddle to the metal from here on out with more and more excuses/justification.

Man I am on edge watching the USD. pwoh! Gravity defying.


Tue, 04/12/2011 - 00:59 | 1160608 FlyPaper
FlyPaper's picture

This is a great thread.

I look at the Fed buying treasuries as an accounting or bookkeeping entry to account for Fed monetization.  Treasury spends $ from Fed account; Fed puts money in the account; Fed then buys Treasuries in the amount of the transferred funds; and the banks make a commission off of the transaction.  New money is 'created' for the Treasury to spend in this process...

Given the lack of political will to control spending, and huge amounts of refinancing required to keep a Fed budget (42% which runs on borrowed funds) I have to agree with TD that the funds are not sufficient given the magnitude of the borrowing required to keep the beast afloat.  What foreign investor wants to commit suicide to take a lower yield on US paper when inflation is on the rise, the dollar is on the decline --  unless you are really worried about loss of principal?    It seems clear that the dollar of late is not attracting 'safe haven' status of late.

So if QE stops, and there are bond 'failures' with lack of buyers, rates will go up.  And if they do more QE and investors look at this as inflationary (and investors continue to pound down USD$) then the rates will go up. 

With no QE, the stock market may go down, and $ may pour into US debt for a place to 'wait it out in cash' but with higher interest rates elsewhere will the money stay in Treasury debt?

It seems increasingly that the Fed's gig is up.  Damned if they do; damned if they don't - yields are going up.

This is a very similar setup to the Latin American debt crisis of the 80s; lots of liquidity for bonds; the money dried up; the government started to print to repay, and the latin currencies tanked.

I'm with Gross - shorting Treasuries makes sense to me; but I'd be interested in contrary opinions...

Tue, 04/12/2011 - 16:28 | 1162907 Temporalist
Temporalist's picture

Max Keiser just interviewed Jim Rickards and he said people misunderstood his position.  He believes the Fed has enough to keep interest rates low in the intermediates but was not saying they had enough to continue monetizing the debt.

Do NOT follow this link or you will be banned from the site!