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A Granular Look At Primary Dealers' Holdings Of Treasuries; Visualizing The Curve Trade
One of the key observations of 2009 has been that Primary Dealers, courtesy of their access to the Primary Dealer Credit Facility, and, of course, to the Discount Window, are the critical cog in the Fed's plan to push markets ever higher. In a fashion, the banks that make up the PD community are the designated proxies of the Federal Reserve, allowing it to execute its trading strategy when its own traders at 33 Liberty are having a Starbucks break. As the PDs can pledge any worthless asset to the Fed, for which they get a dollar equivalent of 100 cents on the dollar, the PDs can leverage whatever toxic residuals they have on their balance sheet massively without even using explicit leverage, merely thanks to the Fed's lax standards in accepting practically any collateral. We have had occasional glimpses into what "assets" make up the tri-party repo system that is the backbone of the US financial system, but absent a full blown evaluation and transparency of the Federal Reserve, only the Fed (and specifically its New York branch) and Jamie Dimon really know the state of affairs when it comes to pledge collateral. However, there is some information that we can glean on the broader sense of risk within the Primary Dealer community, which is possible courtesy of the NY Fed's disclosure of the PD's transactions and net holdings by various asset classes. Our focus in this post are the Primary Dealers' transactions and holdings in US Treasuries.
The first chart below summarizes the weekly volume of all treasury transactions. After peaking at about $600 billion weekly, the 6 month transaction Moving Average declined by nearly $200 billion after the collapse of Lehman Brothers. And even as the market has gradually revived, the 6MMA is still about $100 billion below the past 3 year's average. Note the spike in Treasury transactions in the September 15, 2008 week: the $811 billion traded that week was the third highest weekly total ever. In the year since then, the peak has been far lower at $550 billion. It appears that the reduced volume in stock transactions is being mirrored by Primary Dealers in their bond purchases and sales.
A more granular read of the data, with a stratification by various Treasury maturities, indicates that there has been a material shift in the trading of Treasuries with a 3 - 6 year maturity interval in favor of T-Bills, where trading has nearly doubled from the long-term average.
When one looks at net holdings of US Treasuries within the Primary Dealer Community one can notice that since the market peak in 2007, when PDs held a net short position of almost ($200) billion, dealers have built up an almost $200 billion buffer, with the most recent net holdings standing at just over $10 billion. In early June, this number stood at almost $100 billion, and has since declined by about $90 billion.
Digging deeper, one can see that PDs have been accumulating the biggest positions in Bills (essentially as a cash replacement) and also in Coupons with a 6-11 year maturity. Could this be the preferred sweet spot for the PD community, or their clients? The one Bond class that is least desirable is anything with a maturity under 3 years.
Indeed, the Net holding differential between the Sub-3 year Maturity and the 6-11 Year Maturity has recently blown out to a record high. Can you spell steep yield curve? This is how the Primary Dealers are taking advantage of free money graphically. The chart below subtracts the net (lately mostly short) position in sub 3 PD holdings from 6-11 Year Net holdings. The steepness of the holdings curve is only matched by the steepness of the actual bond yield curve.
PD T-Bill holdings indicate that this security class is still seen as a simple cash replacement. Oddly, the fact that PDs still have such historically high Bill holdings indicates that all is far from clear, at least at seen by the PD community. An odd observation: T-Bills hit a record on June 3, when over $90 billion in Net T-Bills was being held on bank balance sheets. Since then this amount dropped to flat by November and has since surged again. Whether this is merely end of year window dressing we should know in a few weeks when the January 1st results come out.
The most obvious observation is that PDs are doing nothing unexpected: they are loading up on the curve, by shorting the near-end and purchasing the far-end. The only question is whether and to what degree they do this for themselves as opposed their clients. And a read of PD T-Bill holdings, especially in the context of TIC data, highlights that there is still either some major liquidity concerns permeating both the International and Primary Dealer community, or just a very rampant case of window dressing as asset managers at both banks and funds get risky-asset buyer's remorse and try to make it seem that they are actually somewhat prudent. Of course, should the Fed be unable to find the much needed $2 trillion in buyers for various US fixed income securities, the "window dressing" approach will seem sadly ironic, as numerous hedge funds implode if indeed there is a massive rush from risky to "risk-free" assets.
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http://www.businessinsider.com/heres-the-secret-justification-for-liftin...
FT's Person of the Year: Lloyd BlankfeinMaster of risk who did God’s work for Goldman Sachs but won it little love
A logical next leg down. The QE technique of buying the "garbage out" side of the GSE equation is ending, so now it will just be "garbage in" and "garbage recycled" inside a couple of rapidly bloating ticks. I guess they have to figure out some sort of convoluted IOU to give to the banks seeking cash for the mortgages. Perhaps it will have something to do with all those unloaned reserves that "exist" as accounting entries and which earn .25% - force them to buy FNMAs and other GSE debt.
Ben's trash man used to come, but he said he don't come no more, so we have to build a bigger shed to hold all the trash. A much bigger shed.
Federal Reserve and GSEs = off balance sheet financing vehicles
Forget the larger trash recepticle--
WE NEED TO TAKE THE TRASH OUT--A bonfire the size of Texas should git her done.
This is becoming frightening. Like financial terrorism happening from within right before our eyes, and our elected leaders are completely powerless and worthless.
Perhaps the real reason is that when the dollar goes hyperinflation and the USA defaults on debt, the USA gov will then use Fred/Fann RE as the Germans did when they defaulted decades ago. See http://en.wikipedia.org/wiki/Rentenmark
a 21 century assignat, backed by the houses securitized by FNM, FRE, etc. Our real estate ends up being owned by the Chinese. Brilliant.
not china amigo, more like the IMF and/or world bank.
damn good soap, MT. signs do point that way, i agree.
Still dreaming my friend, no one is more stoopid than the american taxpayers; it would not be the foreigners buying the hypertox waste you generate, you excrete, they repackage, you ingest again, that is your fate as american.
Interesting...
I would bet the opposite. The Fed is getting ready to shore up the dollar via higher interests rate, and the lifting of the fred/fann loss cap is in preparation for the rising defaults that are sure to follow.
This is maddening! Nothing is being fixed by raising the debt limits! The only true fix would be to force F&F to shrink and liguidate the debt traps-(houses) on their balance sheet at whatever price the market will bear.
Does everyone get what is glaringly obvious?!
All of the FED and government efforts with housing do NOTHING but keep house prices artificially jacked up so their banking buddies do not have to pay for their own mistakes.
The bad banks should FAIL. Bring back the law of consequence!
The US budget for 2010-2020 is at whitehouse.gov. A document called "Summary Tables 2.pdf" is quite illuminating. Suffice it to say the spending goes haywire, especially Social Security, Medicare and Medicaid which double within the next 10 years. Nowhere do you see spending going down. This document also assumes a limitless appetite of the public for US debt. Item "Debt held by the public" doubles in the next 10 years. There's a deficit of $1.1trillion in 2010, $912billion in 2011 and then annual deficits of $570billion to $712billion between 2012 and 2019. This is a document from Planet Alternate Reality.
http://www.whitehouse.gov/omb/budget/Overview/
The bond market signals deflation, the stock market signals inflation. Which is the smarter crowd?
the one thing for certain is we are going to get 'flation
Speaking of which, I have resisted watching this 3.5 hour video produced by Bill Still. I just watched it and I HIGHLY recommend it to everyone:
The Money Masters:
http://video.google.com/videoplay?docid=-515319560256183936&ei=oo0GSaOxEJLAqAKEnLmRDQ&q=The+Money+Masters#
I clicked the link and told myself "Saturday afternoon... just watch for 5-10 minutes."
I can't turn the damn thing off. Fascinating history.
@RatherBFlying
LOL. Glad you liked it. I found it fascinating as well. You may also enjoy this from Bill Still, too:
http://www.secretofoz.com/
I bought that based on Nate's (Economic Edge) review. Some good information there, and the historical quotes uncovered from the banking industry show how far back the tentacles of capture reach. Really, we never had a chance, as the Founders emphatically warned us to be vilgilant, and we failed. With Stradivarian skill, Bankers™ have crafted and tuned a crisis fiddle, and play it with virtuosity.
Very good video, Cursive! Thanks for the link)
I didn't stay tuned for 3.5 hours. After a bit, I felt that Murray Rothbard's "Origins of the Federal Reserve" at http://mises.org/daily/3823 says the same thing more succinctly, with all the advantages of reading rather than viewing.
Only a master of evil Darth.
"The bond market signals deflation, the stock market signals inflation. Which is the smarter crowd?"
BOTH markets are being manipulated by the Federal Reserve and PD's. That is what makes it difficult. The only people who know whats really going on is the Federal Reserve and it's banking henchmen
hmmm, I think you are being too optimistic; no one knows wtf is going on, not even God's henchman Goldfein; they just pump and hope Mr Market continues to live by the saying "Never fight the Fed". I am also not sure the bond market is signaling deflation, as the long end of the curve seems uncomfortable the last 2 weeks - you should update your view of the world in the new year. Franddie just whispered 6% rates mortgage rates in the new year, so I am not sure whethervthe Fed and PDs are starting to lose their "control" of the bond and stock markets.
The Australian economist, Steve Keen, says that Bernanke would have to increase the monetary base 25 times to overwhelm the deflationary effects of deleveraging. He has managed to increase it by only two times so far. As long as the M1 money multiplier is below 1 times, more debt is being destroyed than money being created. The latest M1 multiplier as reported by the Fed is .80. This is deflationary despite what you hear and read from the "official" government statistics and main media spinsters. Bernanke mistakingly believes that we are in a "fiat based" monetary system when in fact we are in a "credit based" system. Therfore, his attempts to blow up the "monetary base" and increase "monetary" inflation will fail because he has his eyes on the wrong target.
.
bonds ftw!
The Primary dealers net T-Bill holding chart is interesting. Perhaps I am reading this wrong, but it looks like the FED $300B T buy program was the majority contributor from the end of March, 2009 to November, 2009, when it looks like all of the FED buys would have filtered through the system. See link;
http://www.newyorkfed.org/markets/pomo_faq.html
The weekly report can be found here:
http://www.newyorkfed.org/markets/primarydealers.html
Does some one know the total fees charged the FED (FRBNY) by the primary dealers for all the stuff the FED buys?
Lets say its 5%, on $2T of total FED purchases in 2009 = $100B, for just being a middle man, with no risks. Its easy to make money if your GS.
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Okay, so lets continue.
What is happening after November, 2009 to increase primary dealer holding in Treasuries? Perhaps Primary Dealers moving to Treasuries from equities? But without the FED, like in 2008 during the crash, it looks like the real capacity for the Primary Dealers is around $40B. If so, then there is not much slack left in the PD pipeline. They have stepped in after the FED program ended. But, there is a limit to their capacity to tie up money in US debt, even short term 1 to 3 years.
Mark Beck
Who is right, the bond market or the stock market?
My thought is that the bond market is the ultimate "winner" simply because it exerts the more powerful force. The government can't really control all interest rates. We see the Fed choosing to hold short rates down but the big picture shows a very steep yield curve. I think the hope has been that the low rates would be the catalyst for a recovery before the bad effects of the low rates became intolerable. However, the Fed has been pushing on a wet noodle and time is running out. The bond market forces are proving to be ungovernable.
Why has the transaction volume of the primary dealers not gone up more over the last months? I thought issuance has gone up and the Fed is not buying directly from the Treasury.
more on “the state of affairs when it comes to pledge collateral”… from the latest of Richard Benson’s rare posts | Benson’s Economic & Market Trends | 12/22/09 (edited down)
Jingle Mail, Jingle Mail
Jingle All The Way; Oh what fun it is today, to just walk away!
Jingle Mail (also known as strategic mortgage default) is the happy-sounding phrase used by banks and mortgage servicers to describe homeowners who simply walk away from their homes and mail the keys back to the bank…
Here’s why Jingle Mail makes so much more sense than continuing to pay an inflated mortgage. Think about your average high-end homeowner. Let’s call him Joe. A few years ago, Joe listened to Alan Greenspan and took a huge amount of money out of his house with an adjustable rate or option ARM mortgage. If he bought that house for $900,000 with an option ARM mortgage of $850,000, since most of his interest has been accrued, his mortgage balance has now risen to $1,000,000, while his house has fallen in value to $600,000, leaving it worth $400,000 less than his mortgage balance. Ouch! His situation is crystal clear: He can pay forever, and never own the house!
If he walks away, he makes a quick $400,000 of principal he will never have to pay! Then, if his million dollar mortgage adjusts to a current 6 percent interest payment, he saves the $5,000 a month in interest charges (or $60,000 a year) until foreclosure. Finally, Joe saves the $15,000 in property taxes by not paying them. (Now that the bank owns the house, they can pay the taxes.) Next, he notices a house just like his down the block can be rented for $3,000 (a savings of $2,000 a month), but he decides there’s no rush to move out and rent. This translates into a first year gain of $475,000 with $75,000 of that amount in real cash that Joe didn’t need to spend. Between principal forgiveness and cash savings, he can pocket a small fortune and for the cost of a single postage stamp, mailing back the keys is one heck of a self-help economic stimulus program.
Because it can take an inordinate amount of time for a bank or mortgage lender to foreclose, for accounting purposes the bank will almost always favor delaying foreclosure, as they pretend the homeowner will eventually honor the loan. But if a bank takes too many losses, the FDIC will take them over and the banker will lose his cushy job. Over the next year, you can count on the banks to become complicit in extending their loans, giving Joe a lot of time before he gets booted out of the house. Indeed, it’s common for a homeowner who stops paying the mortgage to live rent free for up to a year or more!
Sure, Joe’s credit rating may suffer for a year or two, and in some states the bank might chase him for the deficiency balance on the mortgage. But in the real world, if Joe pockets the money or pays down his credit cards in a short period of time, his credit rating will eventually go back up. If Joe wants to be a home owner again, in two or three years he can save up enough for a 20 percent cash down payment! (Think about how much you could save if you didn’t have a mortgage and could cut your monthly housing costs in half by not paying interest and taxes.) If the bank chases Joe, he’ll soon discover that his bad mortgage debt will be sold to debt collectors, and he’ll eventually be able to settle for pennies on the dollar…
How expensive will Jingle Mail be? Well, rumblings out of the US Treasury suggest that taxpayer support for Fannie & Freddie may have to be raised from a potential $400 billion to $800 billion in losses. The extra $400 billion in estimated losses on government-sponsored prime mortgages is a combination of lingering unemployment and Jingle Mail! Next in line will be jumbo mortgages that are beginning to look catastrophic because the bigger the house the bigger the mortgage, and the higher the taxes. In 2009, mortgage foreclosures will total about four million. In 2010, the total could easily be 4.5 million, with 1.5 million or more Jingle Mail-style defaults. The banks will be rocked by several extra hundred billions of credit losses from people who can afford to make their payments. These additional losses will catch the banks by surprise. Meanwhile, the FDIC and US taxpayer will suffer big time as bank failures reach new levels. When the dust settles, the US taxpayer will once again get stuck with the gigantic bill.
When it comes to stiffing creditors, Joe can clearly see that business is in the vanguard of strategic default. GM, Chrysler, Merrill Lynch, Fannie Mae, Freddie Mac, and AIG stuck it to the American taxpayer big time long before a strategic mortgage default ever crossed Joe’s mind. Then, there is Wall Street, where the taxpayers get the losses and the speculating bankers get the mega bonuses. What a den of thieves!…
For 2010, the populist song running in my head has the same haunting refrain and amoral lyrics as the 1975 Paul Simon classic song:
"50 Ways to Stiff Your Banker"
You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just listen to me
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
And get yourself free!
http://www.sfgroup.org/articles.htm
Before taking action please consult your lawyer.
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Well the deed is still in the buyers name. You need to sign the deed back over to the bank with a witness, or better yet in the presence of your lawyer, at the bank. If you hold the deed you will have to pay taxes, and are liable for up keep. So sign the deed over and then hand over the keys. On the way out of town, give a copy of the transfer of deed to the city treasurers office, along with the bankers name and bank address, so they have some where to send the tax bill. Also, get proof that your tax payments are up to date before the transfer. You will probably have to pay some property tax prorated per the transfer date.
Mark Beck
A copy of the quit-claim ought to be mailed to the utilities supplier as well.
This crosses my mind every damn month but I always end up eating my own shit.
Let suppose that you haven't fallen on hard times or lost your job, could there still be legal grounds to discontinue payment? What if a judge ordered you to pay citing breach of contract without sufficient cause? Has anyone ever been sent to jail for contempt of court for not paying their mortgage?
PS in the example above, the home owner has still lost his downpayment (20%=$180k) but i get the point. In the early days, some took out massive HELOC's before dumping the load to walk out on top.
I'll throw in some observations under Pennsylvania law. Ideally, you would sign a special warranty deed, record it at the county recorder of deeds office, pay the transfer tax (might be exempt, I forget) and transfer the property back to the lender. However, in order to "clean off" any subordinate liens you may have gathered in your consumerist travels, say a second HELOC mortgage to a different bank, or maybe a judgment entered at a magistrate court level for a strategically defaulted credit card, the bank still might want to foreclose, since foreclosing on the senior (1st or "highest priority" lien") has the effect of removing all subordinate liens. Also, foreclosure sales are important because that is when the junior mortgagees can "buy" the property (in effect, pay off the first and/or other prior liens) in order to preserve its own position (might make sense if after buying out the higher positions, there is still value in the property.) Not likely in a declining market, but it is out there. Also foreclosing does not wipe out the property taxes which must be paid.
I would say no judge would order you to "pay your taxes," or hold you in contempt of an order to do so.
If it were me, and default were inevitable, I would stop paying the mortgage, strategically manuever, delay the day of reckoning (credit counseling, pay one month, skip the next, etc.), hire a lawyer to hassle the bank, and stay in the house as long as possible (offer to rent post foreclosure) while building up a cash balance and keeping the rest of my obligations current. It would be unlikely you'd be able to get another mortgage for some time, so pre-default it might make sense to figure out your local buy vs. rent situation, and maybe buy something far cheaper so you have a place. But rentals are hurting and you might be better off starting the 7 year clock on getting better credit sooner rather than later.
Where will all these foreclosed people go?
Responding to Goldman Sachs
Goldman said it suffered losses due to the deterioration of the housing market and disclosed $1.7 billion in residential mortgage exposure write-downs in 2008. These losses would have been substantially higher had it not hedged. Goldman describes its activities as prudent risk management. Many Wall Street firms wound up taking losses. The question is, however, how did they manage to get through a couple of bonus cycles without taking accounting losses while showing "profits?"
The answer is that they sold a lot of "hot air" disguised as valuable securities. Goldman claims this was prudent risk management. In reality, Goldman created products that it knew or should have known were overrated and overpriced.
Earlier, Goldman denied it could have known this was a problem, yet acknowledged I had warned about the grave risks at the time. If Goldman wants to stick to its story that it didn't know the gun was loaded, then it is not in the public interest to rely on Goldman's opinion about the greater risk it now poses to the global markets.
The public is an unwilling majority owner in AIG, and public money was funneled directly to Goldman Sachs as a result of suspect activity. The circumstances of AIG's crisis were extraordinary and without precedent. I maintain that the public is owed reparations, and it would be fair to make all of AIG's counterparties buy back the CDOs at full price, and they can keep the discounted value themselves.
http://tinyurl.com/y878pvq
"Digging deeper, one can see that PDs have been accumulating the biggest positions in Bills (essentially as a cash replacement)"
Ohhhhh, you guys are all finally accepting T-Bills as a cash replacement!!!!!!!!!!!!
Wow, I have had an effect :)
Since you guys understand that, it seems like the time has become ripe for me to produce something with my understanding on how the dollar is really constructed and what causes a stronger dollar..... get ready to shit yourself, because it's completely outside of what you'd expect it to be :)
@phased
What are you holding back? Tell us, already.
Giving information without a proof is useless :)
This is the internet. Proof and accountability are strictly optional.
I hope it is as a Contributor post where the discussion can stay focused.
Any ideas on why bank stocks peaked in mid-Oct and are falling slightly (while markets overall are stable/ rising)?
Plus with the yield curve steepening, shouldn't this help banks?
I'll take a crack at it. Most of the public can't short Citibank as it's under $5. So, if insiders, GS et al, have accumulated a large short position, as I strongly suspect they have, there's no incentive to push the prices up higher.
I'll take a crack at it. Most of the public can't short Citibank as it's under $5. So, if insiders, GS et al, have accumulated a large short position, as I strongly suspect they have, there's no incentive to push the prices up higher.
The Money Masters, lol, I'm half way thru it. I'd say I wish I had run across it several years ago, most of the stuff I knew but I learned it in bits and pieces on my own, and had to put it together myself. An aquantance has been on my ass too watch it, I started a few days ago watching it in pieces when I had time.
It's utterly fascinating as a documentary, as noted, I know the them and theory, yet, not all of the details.
I'm at the point, it's like a good thriller. lol
So, if you're not an economist, or have studied this subject forever, I'd say it is a great place too start.
When they say history does not repeat, it often rhymes, well, this is one rhymeing documentary.
i do not know much about the credit markets, but, these posts seem a lot more detailed than the ones bashing dark pools and HFT.
Thanks for this research Tyler. I can use it.
When monitoring T-bill trading always keep in mind that the CP market imploded. In 2007 CP issuance was nearly two trillion and it is only a few hundred billion now. There is still a shortage of T-bills as replacement.
Also, the Treasury curve is getting so steep now that well regarded banks can grow their balance sheets by purchasing Fed funds or not selling funds, or not depositing at the Fed-and buying ten-year Treasuries for about 3.6% interest margin and 0% risk weighted capital requirement.
The only analytic matrix they sacrifice in the trade is ROA if they are buying funds and this incremental margin is less than the status quo. Net of loan losses many banks are operating in this 3.5 to 4% margin range now.
While the risk of a tightening Fed may happen someday and blow up the trade, to the extent a bank has match funded its other assets and liabilities with variable rates or swaped equivalent, banks run a portion of their balance sheets that is always "liability sensitive". This portion which is typically equity plus sticky free and near free deposits- is considered free funding whose margin benefits from higher rates. Any bank that has not already matched these "free" liabilities with fixed rate assets can consider an expanding balance sheet "asset sensitive" trade like this as prudent balance sheet management.
There are many other ways to acheive these curve intermediating trades including other securities, repo book or interest rate swap.
The bond markets beat the equity markets, which is why these posts are more important than HFT and Dark Pools, why we need to know who are the "Other Investors" on the TIC data, and why we really need to know whether the trades are for clients or proprietary.
It is so easy folks: we hide everything in the derivatives market! Over 600 trillion of brilliantly hidden stuff.
Seeing as how the majority of them are interest rate swaps - are they really hidden?
Read Frank Partnoy's 'Infectious greed' and 'F.I.A.S.C.O.' and you know the truth about derivatives. All companies use them to hide losses in the future, pump earnings and hide debt.
Boycott the CORRUPT shell game that is the housing market.
REFUSE to purchase a home until prices have fallen another 50%.
Housing is simply a ridiculous, money-losing proposition as it stands right now, until our government demands that housing is MARKETED TO MARKET, not to fantasy 2006 prices!