Frontrunning Today's POMO

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Mon, 02/07/2011 - 11:55 | 940561 topcallingtroll
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Gold 36000! Booyah!

Mon, 02/07/2011 - 12:09 | 940606 Miss America
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Over the last few weeks I’ve asked the ZH community if someone could calculate what the 2 scenarios of buybacks look like for a $6billion sample of 2 differing cusips? (I often argue that the laundering is clearly wrong, but wonder how much of a cash difference we are talking about with regards to specific cusips)

Sample 1, showing the POMO of one of the listed cusips that should be bought back.

Sample 2, showing the POMO of whichever cusip was bought back.

So everyone could see what the Net vs Net for the brokers and the taxpayers/Gov't.

I would do the work myself, but I genuinely don't know how the calculations work.  (I can assume, and do my own math, but I'd hate to work with incorrect figures)

I guess the way I see it is this: 

It still just amounts to a term Repo.  (as opposed to overnight repo, TD, CD, MMKT)

The Primary Dealers who are borrowing at 0-ish rates, are just cashing in on the interest float they get...  and this float is the profit.  As to whether they profit/rape us on the higher or lower yielding T's seems minor in comparison to the overall process of keeping the liquidy machine running. 

The buyback just funds the next auction?  Doesn't it?  (ya see...  my lack of knowing the official numbers and needing to see a sample of the 2 scenarios is why I keep thinking that I am missing something.)

What I also said last week was this:  (which scares me, because the cusip I reference is PC8 which has had amazing volume, and will result in high volume!!!)

“I get the fact that the Fed should actually pull the worst performing bond off the market, but then that would be the Fed absolutely tipping their hand.  If they just pulled the worst 10 performers, market participants would actually demand them more, thus jacking up an already poor price to have to pay for them.  I suspect, volume/action on bonds might actually be what drives things?  Cusip # 912828pc8 has been for the last 2 weeks the hottest treasury bond I've ever seen.  It's every other trade, it every other piece of collateral.  If they pulled that right now, there would be SOOOOOOOO many other thins that had to be unwound!)

I possibly suspect that the volume on PC8 had been hot for the past few weeks on the knowledge that it was being repurchased???

….so with that said, if someone can simply flesh out the2 sample so we can see the differences, then maybe the collective whole of the blog community could know just how irate they should be over the gain we're talking about over other cusips???

All the best,


Mon, 02/07/2011 - 17:18 | 941439 X. Kurt OSis
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I think there are two parts to this.

The cheap bonds in this sample are cheap to the spline by about 1.5 basis points and the bonds that are rich, are rich to the spline by about 1.5 basis points (call it a 3 basis point difference).  On an $8 billion operation in 7-10 year treasuries, I reckon that adds to about $20 million over the life of the bond.  If the Fed was acting in the interest of tax payers, they would buy bonds producing the highest return.  The fed funds its purchases with its own balance sheet but remits interest on treasuries back to the taxpayer.  If the Fed consistently got shorted 3 bps over the life of QE2, that would add up to $100 to $200 million, or thereabouts.

The PD's get paid on the flip in either case, in the form of the Bid/Ask spread.  The fact that they are putting overpriced bonds to the Fed suggests they could be generating a profit over the bid/ask spread, but no way to calculate that exactly. 

It primarily just proves that PD's are getting enriched and adding no value at all (along with the Fed) to the taxpayer.  Everyone knows that PD's are in the business of ripping everyone's face off.  Given the Fed's buying power, they should be able to work this trade appropriately.  Instead, they are content to get their faces ripped off and we all know this just amounts to a backdoor bailout to the banks, one that gets right past Congress and the media since the sheep are too stupid to appreciate what's going on here.

It's not just the PD's though... The price movements on the bonds that are likely to get monetized suggest that everyone is frontrunning the Fed.  The Fed's mandate is to be the sucker of last resort in the ponzi scheme.  Given that they can expand their balance sheet to infinity, this game can go on forever.

Seriously, the dooms-day stuff discussed on here will never happen.  Evah.  Just capitulate and don't forget to take your soma.

Now get out there buy the fucking dip.

Mon, 02/07/2011 - 17:26 | 941468 ThirdCoastSurfer
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Miss America, most of the work on this is done by John Lohman and while short on the actual calculations,  in the time I had to search, the following is hopefully a thread to the search for your answer:

Mon, 02/07/2011 - 11:57 | 940565 hedgeless_horseman
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The funding rounds (POMO) are coming to a close.  The interesting question, now, is what is the use of proceeds? 

A) Stocks

B) Commodities

C) Muni/State Debt

D) Foreign Currency

E) Other

Mon, 02/07/2011 - 12:06 | 940595 SheepDog-One
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Muni/State debt will NEVER be bought by the central banksters! Does them no good at all to ensure 80 year old pensioners get a check.

I vote B), commodities...yes they will take proceeds from flipping their bonds to mash down silver and gold commodities I believe.

Mon, 02/07/2011 - 11:56 | 940568 slow_roast
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In the last few years Bloomberg has gone from an early whistleblower of the impending Real Estate bubble to complete tools of the toolshed. 


I think the Bloomberg article painted the Fed's activity in a rosy light. 

Mon, 02/07/2011 - 11:59 | 940578 Thomas
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Ben Bernanke = Rudolf Havenstein

Mon, 02/07/2011 - 11:59 | 940579 Sudden Debt
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Mon, 02/07/2011 - 11:59 | 940581 Hero Protagonist
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Is there a way to calculate the "profit" to the PDs on each CUSIP?

Mon, 02/07/2011 - 12:00 | 940582 hugovanderbubble
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Im the worst trader ever existed....

damn please some one, press the Fire button....


Mon, 02/07/2011 - 12:00 | 940583 The Axe
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bonds up copper and cotton up equities up, especially high beta,  everyday--up Fed is getting it done,,,rape taxpayer...move the Dow up..

Mon, 02/07/2011 - 12:09 | 940605 rumblefish
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how exactly are you all playng/getting in front of pomo?


are you just buying stocks the day before?

Mon, 02/07/2011 - 12:17 | 940625 HelluvaEngineer
HelluvaEngineer's picture

Yes, just buy stocks every day.

Mon, 02/07/2011 - 12:27 | 940647 I Am The Unknow...
I Am The Unknown Comic's picture

Usually there's a nice dip in the morning before 10:30.  Then, the Plunge Protection Team comes in with fresh POMO cash (usually by 11:05 am because POMO ends at 11:00 am) and voila!  The markets gain!  Is it majic or is it criminal?  Inquiring minds want to know but would probably be incarcerated if ever found proof. 

If I sell going into the close, I typically make a nice little profit.  Get up tomorrow and do it again.   

Some days are unusual, such as today, whereby there was no dip.  However, I bought at 10:20 and am up anyway, so no matter.  I still plan on selling into the close. 

The hardest part of this trade is to divorce reality from "factual" data (charts, statistics, labor reports, etc).  Fundamentals mean nothing anymore as this is not a free market.  Heck, it's not even a "market" by definition.

Soooo....Buy The Fucking Dip   

Mon, 02/07/2011 - 12:30 | 940666 blunderdog
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In the immortal words of Broccoli-man: It's not a Ponzi scheme.  It's a buy-the-dip scheme.

Mon, 02/07/2011 - 12:33 | 940679 Scottj88
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POMOs create... fresh demand for silver and gold :)

50$ Silver by April 2011...

Mon, 02/07/2011 - 13:46 | 940878 twotraps
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So, I admit to having limited understanding of the inner workings of the bond mkts and POMO, but if the FED replaces China as the largest buyer...then we wait for the next round of rule changes!  We get an unprecedented situatiuon, and start to assess/qualify/make sense of whatever using conventional tools...when maybe they don't matter.  So the FED owns all the bonds, and the means to print money willy-nilly.  We know that its an untenable situation but it just does not matter any more!

  They can blow up their own game, or turn it to their advantage with rule changes and yet to be seen 'Special Risk Sharing Mechanisms' that enable their position to work, under the guise of the capital markets functioning bla bla bla of course of course.   A couple of senate hearings, another 60 mins visit, a little press here and there and the game keeps going.

After Enron, a very astute person said that accountants are not a creative gotta know the rules to go around them.

Mon, 02/07/2011 - 14:09 | 940938 mberry8870
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Does the fact that the Fed is now the largest purchaser of G debt mean we are moving into Japan mode because we are "internally" funding public debt only with debt?

Mon, 02/07/2011 - 15:06 | 941070 disabledvet
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starving people does have the effect of not having to pay for things. one of those things is oil.  we have never paid for it really.  we will not pay for it now.  move along.

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