Frontrunning Today's POMO

Tyler Durden's picture

We were glad to see that for the first time someone besides Zero Hedge took offense at the Fed's now ceaseless monetization of just auctioned off, more often than not 'on the run' bonds, as an indication that not all is well in Sack Frost Kansasville. Bloomberg writes: "Fed spends 40% on newer, cheaper benchmark Treasuries" and clarifies: "More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009. “They’re getting all the bang for their buck that they can” by purchasing so-called on-the-run bonds, said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, which oversees $22 billion. “When you’re the largest buyer out there, when you replace China in terms of the size of your holdings of Treasury securities, that will happen.”" It is great that more and more are starting to pay attention to what has been a ZH peeve ever since the beginning of QE2: namely relentless taxpayer rape. We do have one problem however: when Bloomberg says "cheaper" to qualify the "newer" Treasurys, it is, unfortunately, very much wrong. Take today's POMO for example. In 15 minutes the FRBNY will announce the completion of today's $7-9 billion monetization of bonds between 2017-2020. The most recently auctioned off CUSIP in the roster of 19 bonds is the 912828PC8 CUSIP also known as the 2.625%s of 11/15/20. This is the 10 Year bond acquired by PDs during the December auction (the January is structurally excluded as it matures in 2021). Now if Bloomberg is correct, not one single PC8 will be monetized today, since, as Morgan Stanley once again confirms, this is among the richest (as in, the opposite of cheapest) bonds to put to the US taxpayer, and the result of such a monetization would be yet another implicit impairment of Fed fiduciary interests. We will advise readers as soon as we know what the final outcome of today's POMO is as to how much PC8 was put back to Sack Frost.

All cheapest bonds during today's POMO: note the 2.625% of 11/15/20 is not even on the list...

So where is it? It is, in fact, one of the least cheap bonds available to the Fed.

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Miss America's picture

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,


X. Kurt OSis's picture

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.

ThirdCoastSurfer's picture

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:

hedgeless_horseman's picture

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

SheepDog-One's picture

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.

slow_roast's picture

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. 

Thomas's picture

Ben Bernanke = Rudolf Havenstein

Sudden Debt's picture


Hero Protagonist's picture

Is there a way to calculate the "profit" to the PDs on each CUSIP?

hugovanderbubble's picture

Im the worst trader ever existed....

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


The Axe's picture

bonds up copper and cotton up equities up, especially high beta,  everyday--up Fed is getting it done,,,rape taxpayer...move the Dow up..

rumblefish's picture

how exactly are you all playng/getting in front of pomo?


are you just buying stocks the day before?

HelluvaEngineer's picture

Yes, just buy stocks every day.

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   

blunderdog's picture

In the immortal words of Broccoli-man: It's not a Ponzi scheme.  It's a buy-the-dip scheme.

Scottj88's picture

POMOs create... fresh demand for silver and gold :)

50$ Silver by April 2011...

twotraps's picture

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.

mberry8870's picture

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?

disabledvet's picture

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.