How The Fed Sourced 83.4% Of Treasury Cash Needs Since The Start Of QE2

Tyler Durden's picture

It is no secret that since the start of QE2 in November, the US Treasury has issued a gross $890 billion in debt in the form of various Bond, Bill and TIPS. This is cash that the US received in exchange for promises to pay interest and principal at maturity on various series of bonds. At the same time, over the past 5 months, there was $291 billion in debt maturity paydowns, or cash leaving the Treasury and going to those who are lucky enough to receive principal on US debt at maturity. That leaves a net of $589 billion in debt that was issued between November 1 and March 31: money used to fund the ongoing operations of the United States. This is all perfectly public and well-known. After all, every single auction is loudly announced by CNBC at 1 pm Eastern on auction days, with a breakdown between Direct, Indirect and Primary Dealer takedowns. Note that the Fed does not feature in this list of primary issuance bidders as that would be illegal, and would be monetization beyond even any semantic argument that the Fed does not, in fact, monetize. What is less known is that the true action in US Treasurys occurs in the secondary market, or that dominated by the Federal Reserve. Here is where the daily POMO takes place, where as we have noted on many, many, many occasions Primary Dealers promptly flip bonds purchased during a primary auction right back to the Fed. This is where the real source of Treasury funding comes from. And what many may not be aware of is that since the start of QE2, the Federal Reserve has purchased $491 billion of Treasurys in the Open Market (and $556 billion since the start of QE Lite). This $491 billion in indirect monetizations ultimately ended up funding government cash needs. In other words out of $589 billion in net issuance, the Fed has been responsible for 83.4% of the money needed to fund government transfer payments (among many other uses of funds) and keep the US consumer "strong", not to mention funding US defense, education, healthcare and every other aspect of US day to day cash needs. QE2 is supposed to end in precisely three months. During that time the Fed will fund another $400 or so billion in US cash needs. What happens after, nobody knows. 

The same story in chart form.

First, we present the official story of who buys Treasurys at auction. This chart shows the monthly take down of all auctions since November, broken down by Primary Dealer, Indirect (foreign) and Direct (everyone else) investors (as well as token non-competitive purchases). Note: no Fed here.

On the chart above note that in March we had the smallest absolute Indirect interest in US Treasurys (a delta filled by the return of the mysterious Direct Bidder).

The next chart shows the same story but broken down by new bond issue maturity. The two bonds sought after the most are 2 and 5 Years, of which $175 billion has been auctioned off each.

Next, we refine the issuance data, by going from gross issuance to net: namely removing contractually require cash outflows in the form of Pay Downs, showing what the true New Net Cash inflow is (black line).

Which brings us to the key chart: the only question remains how much of this net cash need comes from the Fed. The answer: 83.4% of the total cash over the last 5 months. And the only reason this number has declined is due to the increasingly lower amount of MBS that are prepaid to the Fed, resulting in a lower QE Lite component of Treasury funding.  What is amusing is that in January the Fed indirectly funded $122.1 billion of total Net cash needs of $113.2 billion, or a 108% overfunding.

And so now everyone knows just who is reponsible for the ongoing funding of the US government. Amusingly, Congress squabbles over a government shutdown due to a $30 billion discrepancy which is the amount the Fed monetizes in one week. A far bigger question for the government's ongoing operation, is just who will step in to provide this 83.4% of ongoing cash needs when the Fed supposedly ends monetizing debt on June 30.

Which incidentally brings us to one tangential point. As Stone McCarthy demonstrates, the average maturity of the Fed's $1.33 trillion in Treasury holdings (and $1.7+ trillion by the time just QE2 is over) has declined consistently since 8 months ago, dropping from over 80 months to just 66.7 months.

We expect by the time QE2 is done that the average maturity of Fed holdings will be under 5 years. In other words, should the Fed go ahead and actually reverse its buying patterns, which means at some point it will be forced to flood the market with Treasurys of increasingly shorter maturity, the UST curve will pancake overnight, as the market panics, discounting such a move by the Fed. This means that the 2s10s will go from 264 bps currently to sub 100 bps, or possibly invert, as the curve of such stalwart countries as Ireland and Portugal is doing recently. This is tantamount to the immediate execution of all financial institutions in the US that rely on borrowing near and lending far (read all of the hedge funds formerly known as banks). So before anyone tells us that the Fed is preparing to tighten, be it by ending monetization, ending ZIRP, or even hiking rates, can they please explain to us just what will prevent the outright second insolvency of the US banking system?


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asteroids's picture

You folks had better check your money market funds!

euclidean's picture

Classic Keynesian debt structuring is all this amounts to. Place all your debt in the lowest yields - the US Treasury are the genius so far.

Since people have been/still are calling for an end to the Fed Res - what is to say this isn't the Fed winding itself down to a zero balance sheet? Thus leaving the US taxpayer with a lump of low yield worthless paper when they close the doors once the SDR is shoved down your throats.

The Fed Res does not have to sell it's bond holdings. It might simply hang onto them until maturity. You know their is no gold inside - that's funded the dividend payments of the Class A shareholders.

What happened to audit the Fed program? Bernanke will hand the Fed over when it's worth nothing ... oops, too late. Maybe his successor will turn it all around.

disabledvet's picture

like i called it:  "the fireman who's a pyro" problem.  "then he comes to the rescue!"

metastar's picture

Yes, the SDR will save us. We yield our sovereignty (like we still actually have it) in return for fresh fiat trash to enslave us.

A country which does not control its currency does not control its destiny.

slow_roast's picture

Why doesn't the Fed just start printing Euros?  Swiss Francs? 

Sudden Debt's picture

because they first want to use up those stocks on green ink.


disabledvet's picture

btw--where's the phucking thank you you mighty Belgium Ale you?  Who knew secret doses of Chimay could cause American Bankers to give you so much money!  Those clever monks!

eddiebe's picture

They do via the oil in dollars scam.

duncecap rack's picture

They will tighten for a month or so to flush the speculative longs down the toilet. Then they will start a new period of devaluation with the big banks reaping the last of the fruits of the nations past.

Sudden Debt's picture

And now that the 2012 election roadconshows will start, new promises will need to be made that will cost trillions more.




knukles's picture

Paying all my bills'd be nice, but 1 job'd be enough, thank you.  I'm not supposed to be the last guy supporting all the government employees.  Insidious, he is, heh?.

Long-John-Silver's picture

We'll need 200K jobs when bread costs $100.

Turd Ferguson's picture

How it is that virtually no one seems to grasp this?

Let me state this very clearly:



Sudden Debt's picture

I really don't think people understand what kind of shit America and Europe are in (we're pretty much connected to the FED to so it seems).

There is no way out. In the near future, our economies will crash, burn and evaporate.

Unless the find a way to turn crap into gold.


Mr Anderson's picture

Every time a dairy cow craps. It is spread back on the field to feed said dairy cow-

You drink the milk of the cow. Dairy owner trades your 4 dollar gall of milk for 1/360th oz of gold.

So as you can see crap does become gold.

Mr Anderson's picture

Did I mention that the State Govt requires the crap to be spread on the field. Further if the spread crap gets into the river the Govt fines Mr. Dairyman.

So crap becomes gold and crap becomes Govt gold.

RockyRacoon's picture

I believe you are correct Massah Turd.  It won't be called QEIII or anything else.  It won't be announced nor touted.  The Tea Party folks will need cover in this project.  It must go on, so it will.  The methods will be uncovered here on the pages of ZH but the lumpen proletariat and the MSM will be clueless.

Mr Anderson's picture

Which is why we the people have to ensure the FED's printing is known the day it loans money rather than 2 years later. A simple choice- keep your accounts open and available, or we revoke your charter!

JonTurk's picture

even pausing for a month will take silver down at least %30

Bastiat's picture

Physical supply disappears before you get halfway there.

Snidley Whipsnae's picture

Correct. China, Mid East, India, SE Asia, all big buyers at 30% off PMs.

Printing to continue and stand by for massive inflation, crash in equties, more crashing in CRE and Res RE. A shit storm, iows.

Long-John-Silver's picture

Only crumbs of physical Silver remains.

Today's spike is tomorrows dip.

unky's picture

what i really dont understand is that they have 1000 ways of funneling money arround. the fed could give it to private banks or other countires banks/institutions who in turn could buy treasuries. why do they make this ponzi scheme so obvious, why not more hidden?

NOTaREALmerican's picture

Why hide something if the marks aren't smart enough to notice what is going on?     The smart people that are participating in the scam need it to be an open one.    They are ripping off the dumbass peasants, they'll never figure out who screwed them.  

RockyRacoon's picture

Yup.   It's 3 card monty -- done right under your own nose.

Only another crook knows the trick.  The mark remains clueless.

Snidley Whipsnae's picture

Keynes put it best... 'Not one man in a million understands...'

Reese Bobby's picture

I agree with Turd, (four words I never expected to string together).

However, this analysis is great.  I'm sure Zimbabwe Ben will use these charts in his King's Speech this week...

deez nutz's picture

QE can't end? wanna bet?  .................WAR!!   Those islamic sons o bitcheZ are gonna pay dearly!!  WATCH!!

zaknick's picture

Yeah but if it really comes down to war or collapse I think they'll need something truly major to distract the sheeple.

Like a nukular false flag in ur backyard, biotch!

deez nutz's picture

luv the "nukular" reference ...reminds of a mission accomplished moron with a daddy full of money

knukles's picture

Well, thank God they're not monetizing the debt!  If they were just think of the world of shit we'd be in....


saulysw's picture

Turd : I tell my kids that "forever" is mighty long time. See further ZH motto. Still, I take your point, and agree..z

DUNTHAT's picture

How could they continue with QE without calling it QE??

These bastards are up to something, because like you said, it can't end.

rocker's picture

'How could they continue with QE without calling it QE??'

The FED has NO Money. But they can print it.  The name applied does not matter. It all equals "Printing". Which equals devaluation of your purchasing dollar. The hidden tax on teabaggers. How else can they fund all that debt. Pay for their bloated defense budget for wars. And bailout the scumbag thieving banksters.

Someone said China will buy PM's if we get the correction, I only hope, I surely will join them with great joy for the opportunity. 

It was interesting to here the CEO from Honeywell on Bloomberg this weekend. He said the cost of industrial metals are going to go up. Such as Zinc and Aluminum.  Hello. Buy them all, including silver. It is your only way to level the playing field against the FED. Otherwise, you completely loose.

eddiebe's picture

They'll 'just' have to pay way higher rates to attract funding. If that doesn't work anymore they will have to link to gold.

dark pools of soros's picture

from drug money..  after the CIA gains control of the weed in Mexico to go with all the opium in Afghany they can print a little less dollars



TwoShortPlanks's picture

Sorry Turd, you are totally wrong. QE cannot go on forever, infact, the Fed has decided enough is enough and has let-go of the reigns. The Fed is more than aware that this path of QE will lead to both the inevitable collpase of the US economy AND Hyperinflation. What giving-up now means, is that they can focus soley on Inflation and let that inevitable collpase happen sooner rather than later...that's right, the Fed policy now is to "Purge the rottenness out of the system".

Everyone that touts that QE will not end are both in denial and extremely short sighted. Short sighted in that inevitable really does mean i-n-e-v-i-t-a-b-l-e!

This is what will happen:

1. The Fed will stop QE programs

2. The US Gov will default, become insolvent, ratings will be lowered and infrastructure will crumble

3. Interest Rates will climb over 18% within 1 year of QE2 ending

3. Nobody will buy US assets so there will be no foreign income

4. Stock Markets will adjust accordingly, expect Commodities to plunge except for a panic run on PMs

5. The US way of living will match that of Mexico or possibly Cuba with 2-3 years


Boston's picture

You're exactly right.

They can scare the shit out of everyone....and then they'll come right back with QE3.

TwoShortPlanks's picture

That's true, and I am 100% convinced that will happen however, eventually, the printing will end and the pain will have to be taken.

I also believe that there is no avoiding Civil War in the US either.

rufusbird's picture

Just wait. There will be a new presidential order stating that all Federal Reserve activities can only be commented upon by Federal Reserve Officials...

cossack55's picture

I know, I know, I know. Pixie dust and Hopium. TaDa!!!!

What do I win?

knukles's picture

Alex:  That's right, cossack!
You win a past due retroactive unconstitutional tax bill for $14,398.99, a letter will be sent to you shortly by the IRS inviting you for a free audit, and due to your effervescent smart-ass humor, an entirely unfriendly visit from a bevy of federal officers to at a minimum harass your punk ass for daring to think let alone expond un-American thoughts.

PragmaticIdealist's picture

FRB members have made is clear what will happen after QE2... They will simply maintain the size of the Fed's balance sheet by rolling over Treasurys (i.e. QE lite 2.0).  That's all you need to continue to monetize sufficiently; you don't need another QE.

Charles Mackay's picture

Don't get that.  Sure they can use the money from expiring notes/bonds to buy more notes/bonds, but the Treasury will also have to rollover everything.

The problem comes with how to finance the additional new debt - $1.4 trillion per year.

So while it is correct that the Fed can keep buying new notes/bonds with expiring notes/bonds, someone still has to buy all the incremental new debt.  Unless the Fed has a new plan, there is a huge financing hole.  Rolling over existing mortgage backed securities to Treasuries will help some, but not much.



Mr Anderson's picture

Yields go up to say around 10% much like Ireland or Brazil. Grandma decides golly thats a good investment. Takes that CD getting .8% for 10% treasury bill.

Thus grandma funds the govt.

Question- what happens to the bank when grandma and soroptimist friends all remove their savings to buy T-bills?


DUNTHAT's picture


Like Gross asks "Who is gonna buy the DebT???"

A Man without Qualities's picture

This is not true, mainly because of the holdings are largely around 5 yr tenor.  QE lite was rolling over mortgage assets when cash received was through redemptions/refis.  

The interest paid on Treasuries is remitted back to the Treasury, so it's going to be years before they get the principal repayments do this.