Open Market Operations And Statistics

Tyler Durden's picture

Zero Hedge stirred up a hornet's nest recently by bringing to popular attention Chris Martenson's post highlighting the very rapid "uptake" via Permanent Open Market Operations of a Treasury CUSIP that had been auctioned off shortly prior. The article angered among others such bloggers as former employee of the NY Fed John Jansen who penned a post titled "Monetizing the Debt: Disinformation in the Blogosphere" whose conclusion was that despite the 5 day turnaround to monetization of the particular 7-year CUSIP which represented roughly 47% of the total purchased by primary dealers "there is absolutely nothing unique or special about today’s transaction by the Open Market Desk." Subsequently Jansen proceeds to nitpick semantics but we will let that slide as it is not relevant for the time being.

Yet what neither Jansen, nor Yves Smith, who picks up the baton and calls Zero Hedge's style "hyperventilatory" (we most certainly do not mind - our style such as it is, hyperventilating or otherwise, at least brings broad attention to topics which may or may not be of relevance to the general public, as opposed to a closed group of highly sophisticated economists and financiers who enjoy debating among each other and perpetuating their closed group relationship, with no informational leakage into the broad arena - a theme that has persisted for many years and is significantly counterproductive to the ambition of bloggers to be an alternative venue to mainstream media), focus on, and what was the primary argument of my, and Chris Martenson's post, is that Ben Bernanke is essentially monetizing debt, despite potentially perjurious claims to the contrary, all within the legal framework of primary deal intermediation and the disadvantaging of indirect dealers (who are very hard to be seen at the table these days as is). Neither Jansen nor Smith point out the fact that a primary dealer, whoever it may have been, would purchase CUSIP 91282LD0 on July 30, and then sell it at a loss less than a working week later (purchased at 99-26 and sold at 99-07). Absent a backstop from another entity it would seem a rather  imprudent thing to do from a fiduciary point of view, especially with such a brief turnaround timeframe: primary dealers have the balance sheets to be patient when they acquire Treasuries.

All that being said, Zero Hedge decided to perform a statistical analysis of time series variance between Treasury auctions conducted in 2009 and the subsequent Permanent Open Market Purchases, in which we analyzed the size of the OMO transaction, the number of days passed between a certain CUSIP being auctioned and becoming purchased by the Fed, the percentage of primary dealer purchases as a total of the entire Competitively Accepted amount, and the percentage of the Primary allocation that would end up being purchased subsequently by the Fed in the OMO-to-Auction timeframe. The results were surprising.

But first, I will present the data set that Zero Hedge created with the assistance of reader Phaesed. The chart below highlights all Bond (not Bill) Treasury Auctions conducted in 2009, segregated by auction date, and highlighted by tenor.

Some datapoints: there has been $1.1 trillion in Bonds offered YTD, of which $1,156 billion has been accepted. Of this total, $600 billion has gone to primary dealers. The primary allocation has represented a (simple) average of 55% of the total bonds allocated competitively. For readers who would like to play around with this data, it will be posted shortly to google spreadsheets for open source enjoyment.

Next, Zero Hedge compiled all the YTD Open Market Operations Data, and filtered it by Bond issues auctioned in 2009, and subsequently purchased by the POMO program.The raw data is presented below:

Some facts: the Fed has purchased roughly $240 billion in OMO since QE was announced in March: on par to purchase $300 billion as the program was initially intended to expire by the end of September: according to media reports as of now there will likely not be an extension due to the "improving economy." (We have not focused on agencies in this report: we will perform that analysis at a subsequent date, yet one can argue the vast majority of Fed buybacks has occurred in the MBS realm)

Of this $240 billion, almost half, or $112 billion has been targeted at treasury issues auctioned off in 2009. The chart below demonstrates the global universe of all OMO purchases of 2009 issues indexed by total purchase size, as well as number of days of OMO transaction since original auction (horizontal axis) - this is the key topic in question, which both John and Yves seem to take offense to. Of course, while a normal distribution would not show a significant preference to a lumped clustering, the vast majority of the treasuries purchased by the Fed has been within a few weeks at most of the original Treasury auction.

The size of the various circles is a relative indication of the percentage the OMO purchase representated as a function of the original primary dealer allocation: potentially an indication of how unwilling the primary dealer may have been to purchase a given issue absent a backstop guarantee from the Fed that shortly after the auction the issue would be acquired via OMO. 

As the chart is somewhat noisy on the tail end, we have cleaned it up once by removing any OMOs that were less than $1 billion in size. The data is as follows:

What becomes notable is the mentioned clustering around the proximal side of auction-to-OMO time, with greater amounts purchased by the FED for CUSIPs that had large primary dealer allocation.

Last we perform one final filtration of the data, to remove any issues that were repurchased by the Fed more than 30 days after the Treasury auction:

The startling conclusion: $32 billion of Treasury Bonds spread across 7 CUSIPs, were purchased by the FED within 10 days of their initial auction and allocation to primary dealers. The amount purchased by OMOs represents an average of 32.4% of the total allocated to primary dealers in the respective auctions. Furthermore, almost two thirds of total OMO Operations for bonds issued in 2009, or $62 billion, affects Bonds issued within 30 days of the OMO purchase. These purchases account for a total average of 29% of the total amount allocated to primary dealers. While one may make the argument that on the run bonds are preferred on average by the Fed for purchasing and by the primary dealer community for selling, the data presents a marked skew in the Fed's desire to monetize very recently issued Treasuries.

The key questions remain: allocations to primary dealers in 2009 Bond auctions is an undisputed majority (55%) of all auctions - this is troubling due to the the recent change in the definition of indirect purchasers as well as the markedly reduced interest of foreign buyers such as China and other indirects, for US Treasuries. Could a reason for the Chinese lack of appetite be due to the fact that while primary dealers represent not just a majority of all Treasury purchases, that these dealers may also have an implicit understanding that come hell or high water for auctions that lack indirect interest, the Fed could potentially make any dealers whole on purchases and subsequent sales at a loss such as the highlighted CUSIP 91282LD0 example (explicitly, at a loss for taxpayers who have to fund the primary dealers shortfall, in this case the difference between 99-26 and 99-07)? Would the Chinese be interested in playing in a rigged playing field when indirects are potentially impaired vis-a-vis direct purchasers? Furthermore, is Bernanke pulling a Clinton and while claiming under oath the he is not monetizing debt, he is effectively doing just that on well over $30 billion in Treasuries, which the Fed acquires within 10 days of issuance? And lastly, is the rapid uptake by the Fed a means to goose up auctions which have a potential likelihood of failure: the 7 Year in question came hot on the heels of a 5 Year that for all intents and purposes was quite close to a failed auction? Absent an implicit backstop, which everyone knows the Fed is very keen on making these days: as the SigTarp demonstrated, to the tune of tens of trillions of dollars, what is the likelihood the 7 Year would have fared as well as it did, had not the primary dealers really stepped up, for reasons known and unknown.

Zero Hedge is not making any claims, but merely asking questions. And while we appreciate the opinions of self-professed experts such as John Jansen, these answers should really come from the proper authorities - the US Treasury and the Federal Reserve of the US.

As time allows, Zero Hedge will next conduct a comparable study on Agency and MBS debt repurchases by the Federeal Reserve.

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Anonymous's picture

MMM, Tyler if you were a piece of bacon I'd dip you in chocolate and sell you at hillbilly carnivals.

D.O.D.'s picture

I was going to say something to that effect, but not nearly as amusing...

Anonymous's picture


D.O.D.'s picture

What are we not believing? That hillbillys would pay money for chocolate dipped anything?  For God's sake they pay money for a deep fried candy bar...think about it...there is your consumer driven icon....

Anonymous's picture

I don't think you can credit hillbillies for the deep-fried candy bar. The fried Mars bar was a British invention. We've just copied it, as we have with so many things British.

Anonymous's picture

Wow Tyler, a bunch of space monkeys! Ready to sacrifice themselves for the greater good. I'm impressed!

Listen up, maggots. You are not special. You are not a beautiful or unique snowflake. You're the same decaying organic matter as everything else.

lizzy36's picture

What part of the market isn't being propped up by the fed/and or treasury?

The end of QE should be interesting.

I would love to see what the Agency and MBS numbers look like. 

I hope you continue to hyperventilate in the manner to which i have become accustomed(and frankly adore). The type of research presented herein, is why you should have the following (and perhaps the ego) that you do. 



Anonymous's picture

well, it isn't going to be pretty, esp if, like thy reportd on bloomberg recently:

fed=10% tresury market
fed=25% mbs market

compared to the results posted in this post, I bet those mbs #'s are going to be interesting.

Anonymous's picture

25% 0f MBS market? try 95%. seriously.

Anonymous's picture

Does anyone have exact numbers on this - the fraction of GSE debt and treasury debt the fed is buying? It'd make for an interesting future post.

hbjork1's picture


If you still believe in Freud, you certainly got your compliment right even though might have ment to say superego. With the ego in control, what you get is; "..Just the facts ma'me, Just the facts."

It appears to me that the republic can be safely handed off to the next generation.

Anonymous's picture

I just read the Keynes-worshiping book Lords of Finance, which includes a profile of 1930s German central bank chief Hjalmer Schacht. After reading this post, I began to think of Bernanke as a Schacht-lite.

Cheeky Bastard's picture

yes but the main difference between Bernanke and Schact is that Schacht was capable in transforming Germany from basically a third world country to an industrial superpower in a time period of 10 yrs .... Bernanke is a moron, Schacht, on the other hand, was not ..

Anonymous's picture

how is bernanke a moron (in that respect)? or do you think he is going to transform us from an industrial superpower to a third world country in a matter of 10 yrs, if he is reappointed?

Cheeky Bastard's picture

your reasoning is false. I have not state that in my comment; that is your false premise drawn from my critical observation about Bernanke and Schacht. Bernanke is, with all due respect, a moron because he is following his dogmatic view on the causes of the Great Depression and it is implementing that view in his policies in present time. If you did more research about Schacht, you would see, how his monetary and economical polices strengthened Germany's power in post-Versailles era and derailed the long term effects of hyper inflation experienced because of the Treaty of Versailles .... Schacht was, a goddamn Nazi, but that does not mean that the he was not a brilliant banker.He understood the power of a strong banking system combined with powerful industrial output and industrial base. Bernanke on the other hand is not so brilliant, because if you took your time and red the things he wrote about the Great Depression, you would see that Bernanke is nothing more than neo-Keynesian banker, who carries a premise that monetization and QE +  government spending can short the duration of this Depression. He does not take into consideration the future ramifications of that kind of policy. It is like he doesn't even think about the taxes that would need to be raised just to finance the debt in the upcoming years, and as if he does not understand the difference between the effects of private and public spending ..

Anonymous's picture

You would consider Bernanke a moron if you thought he really beleived what he says. The guy is a charlatan, a wizard of sophistry. Do you really think he's that stupid? Do you really think that Bernanke beleives in QE? His work on the depression merely gives him the grounds to execute his handler's objective. That is to destroy the dollar and create the opportunity to construct a new world monetary system. Youre on point with the economics Cheeky Bastard....but have you considered the motive? Bernanke isnt a moron...he's just trying to kill the dollar and make it look like it wasnt intentional.

Cheeky Bastard's picture

im not going into hidden motives he and his masters have. i judge by what i see and what i know, and i know that Bernanke is doing it wrong. his goal may be the destruction of the dollar, but that is simply idiotic, because, he can establish a one currency global system without destroying the dollar, he can introduce new currency trough the IMF and the WB, which then, can make obligatory to use the new currency as a way to trade among nations and private entities. and he can also, trough the IMF and the WB set the obligation that all dollars be replaced for the new currency issue in some mechanism from which the US can profit ... if the destruction of the dollar is the real goal here, it can be done in a more elegant and profitable way then blowing the world economy into the upper atmosphere ...

Anonymous's picture

If his thesis proves false, can we at least revoke the Ph.D.? And if it is revoked, can we then get rid of him?

Cheeky Bastard's picture

lol ... check this out, someone edited the article on ben on wikipedia ... hahahha


Bernanke was educated at East Elementary, J. V. Martin Junior High,somalia, and pillon High School, where he was class valedictorian. At age 11, Bernanke won the state spelling bee competition but finished 26th overall at the national competition in Washington, tripping up on the word “edelweiss.” Bernanke also taught himself calculus, edited the school newspaper, and achieved a near-perfect

dnarby's picture

Cheeky, they clearly came for a knife fight.  Please, put away the shotgun.

Anonymous's picture

the problem with this argument is the debt remains. Destroy the dollar, close the banks and the debt is obliterated, Argentina style.

Anonymous's picture

I'm not sure Bernanke is neo-Keynesian. Certainly Keynes would not have given approval of Bernanke's behaviors or actions.

That said, I'm not sure what I'd define him as. Friedmanesque, possibly, believing the money supply is nearly be all to end all. Though I'm not sure where Friedman would ever have approved of the degree of actions he has taken.

I also doubt he is stupid. Stupid would mean he is incapable of pulling off even the most subtle of challenging events. He clearly has pulled this off quite nicely - and with little coverage (save ZH's). I'd say he is a "political tool seeking to retain his position in an administration which does not admire his talents", which means he's basically an Obama policy monkey, rather than a shaper of policy.

Anonymous's picture

germany was no more a 3d world country after
ww1 than hitler was a good jew....germany was
exhausted and prostrate but that is quite a
different state than being a 3d world country
from organic still had colonial
posessions and no one occupied germany as
a colony.....

i suspect that germany would have recovered no
matter who lead it although schacht may have
had a more beneficent influence than others...

Cheeky Bastard's picture

you have got to be kidding me. First of all, Germany had no stable financial system and no defined economical program. Second of all the reparations which were meant to be payed gobbled most of Germany's budget. Third, Germany had no colonies, except some part in the North-West Africa, and that was lost in the Treaty of Versailles and was given to France. Forth thing is that there was no valid infrastructural net which could unify the country and facilitate economical development. The first highway was built during Schecht position in Deutsche Bundesbank ( later Reichsbank ) and Ruhr-Westphalia was industrialized so it could fully exploit the potential of its mineral richness. Schacht was there to bring order into Germanys banking chaos and restore some equilibrium necessary for further development of the country. So your little thesis without any arguments holds no water; Schacht was one of the most brilliant European central bankers, and he had accomplished that during one of the toughest periods. Oh and also, he reduced Germany's debt not by borrowing but by improving production and manufacturing output and capacity.

Anonymous's picture

It's amazing, really, how Germany was able to accomplish all of this through an independent monetary policy, using a fiat currency (sovereign credit -- not a metallic standard) with an economic goal of full-employment. Despite the fact that it was in horrible shape, with ruinous war-reparation obligations and no prospects for foreign investment, the German economy was up and running within four years, even before the armament spending began.

Cheeky Bastard's picture

yes, thank you, i knew something slipped my mind. one of the main causes of, oh so famous, hyperinflation in the Wiemar Republic was, beside the reparation cost, that their debt was denominated in another currency; that was one of the major flaws, and when they changed the exchange rates from fixed to the price of gold, to floating rates the currency simply imploded/exploded. combining that historical factor with the prevalent economical policies Schacht enacted, the concept of Lebensraum ( Living Space ) was a direct consequence in assuring vast natural wealth as a pool from which raw materials could be drawn. Strategically the Annexation of Poland made no sense, but when one knows that Poland had one of the largest iron ore, and other metal, quantities in Europe that move was completely logical. And Schacht went separate ways with the top officials in Nazi regime when there were visible signs od racial and religious cleansing. up until that point Schacht was close to Hitler, because Hitler was a perfect " pawn " in securing that Schacht's idea of economically strong Germany is enacted. 


And, one last thing i would like to say is; dont confuse the political environment in which Schacht was working; just look at what he has done. And it is well documented ( search the internet for transcripts from Nuremberg Trials ) that Schacht was in strong opposition to Hitlers idea of racial purity and the idea that Germans ( Goths, not Aryans, Aryans are a tribe from India which settled in northeast Iran after it was defeated 1000 BC and lost control over India, and who can still be found in Iran settled in a semi-close communities in some areas in Kurdistan ) were superior to other nations. Schacht even spent 4 years in a concentration camp. And i strongly recommend to any of you ZHers who are interested in the role of a central banker to read as much as possible about Schacht and his policies while he was on the helm of Reichsbank. It will give you valuable information about how should a central banker behave in a times of great economic disturbance.

Anonymous's picture

Schacht may have been a Nazi, but that is debatable. His goal was national self-interest and not necessarily party policy management. The fact he wound up in a concentration camp and turned state's evidence at Nuremberg implies that at worst, he was an opportunist (much like Bernanke).
In addition, his goals of improving production and increasing output were as much fulfilled by the work of Albert Speer as they were by his own efforts....though I'd argue Speer was aware of the slave labor he employed to achieve some of these gains, while Schacht most likely was not aware.

All told, however, let's consider our current state of affairs. The primary issue is the increase of the money supply into a deflationary environment. This, in itself, is a "good" thing, though Keynes' called it "pushing on a string". It could have little or no effect. Or it could. And if it does, what would that effect be? Well, for one thing the effect is inflationary...because avoiding inflation is all about timing and supply management. Yet since there are so many sources of money supply out there (bonds, currency, etc.), you can't manage them all. Indeed, the issuance of stock is a money supply which is NOT managed by the Fed.

The question is - can Bernanke manage it the way he says he can? The answer MOST LIKELY IS NO. But maybe he can...I'm sure we all hope and pray he does. But I don't put my future in the hands of hope, like so many people did in November.

Anonymous's picture

Embrace the deflation, my friend, embrace the deflation.

Anonymous's picture

LOL. I expect hyperinflation.
However, I also recognize the next step AFTER hyperinflation is deflation.
Or a new currency.

Anonymous's picture

Germany was only better than a 3rd world country due to its history of growth and stability. By all other measures of political and economic stability, it was a disaster after WWI. It's being kind to say they were a third world nation.

The difference was, they had the political will to rise above their station.

As many soldiers returning from WWII said, they saw more of themselves in Germany than in France or Britain. The German desire to improve oneself showed itself moments after the bombings ended, and they began to rebuild as best they could.

Anonymous's picture

Define third world nation.

Anonymous's picture

The "classic" definition of non-aligned Cold War nations no longer applies, obviously. Nor would it to post war Germany.

The pejorative definition of a "developing" nation would apply to today and Germany.

Being more specific - a nation whose total output is below that of large industrial nations or without a stable political environment.

It's a given Germany faced unstable political situations until the rise of Nazi Germany. This was partially due to economic instability.

Post WWI, it's unclear what Germany's total output was relative to the rest of the world since reliable statistics are unavailable (though many guesstimates abound). What IS clear is that while Germany may have improved its total output, it was a developing nation DUE to war reparations, which were overwhelming the economy. By 1920, this took a very visible form as monetization caused hyperinflation over the next few years.

To say Germany was anything other than a developing nation prior to the cessation of war reparations is to take a leap of faith regarding its place in the world. Third World nations typically see large portions of their output exported - just as Germany was seeing.

Anonymous's picture

wow, TD, this is great. thank you for providing this analysis.

Anonymous's picture


. . .'s picture

Three points.

***First, Jansen and Yves miss the point that the Federal Reserve may be acting illegally in purchasing at auction using an agent (assuming Jansen's description of the law is right).

Jansen says: "I believe that the Federal Reserve can only buy securities from the Treasury when it rolls over maturing holdings. The Treasury only resurrected the 7 year note in March and consequently the Federal Reserve would have no bonds to roll in the auction. Ergo there lack of participation."

Jansen says it is illegal for the Federal Reserve to buy Treasuries at auction, absent a rollover.  Based on Jansen's claim, it is presumably also illegal for the Federal Reserve to purchase at auction using an agent.  (The government doesn't bless arson, just because you hire people to do it for you.)  Moreover, it is not unheard of for the law to presume that a purchase and resale is wired with the purported buyer acting as an agent of the ultimate buyer.  So, why isn't it reasonable to suspect bad intent by the Fed, absent the Fed presenting evidence to the contrary?  This isn't a criminal trial, and ZH doesn't have the resources of a prosecutor and police officer.

***Second, Yves and Jansen don't really focus on the impact an auction fail, or successful auction at a higher rate, would have had on the market.  If there'd be a big negative impact, why not suspect bad intent, absent the Fed presenting evidence to the contrary?  Again, this isn't a criminal trial.

***Third, Bernanke has been drawing a Nixonian/Clintonian distinction about monetization.

Tyler says "Furthermore, is Bernanke pulling a Clinton and while claiming under oath the he is not monetizing debt, he is effectively doing just that on well over $30 billion in Treasuries, which the Fed acquires within 10 days of issuance?"

Yes, I have understood Bernanke's testimony to Congress to mean that he thinks having the Fed purchase Treasury Securities is not monetization if the Fed's goal is to ease credit conditions for consumers and businesses rather than reduce interest rates for the US government.

arnoldsimage's picture

marla... how do i change my username?

Miles Kendig's picture

Send her an e-mail and ask...

assumptionblindness's picture

Change your username if you must but pleaaaassssssee keep your avatar!

Anonymous's picture

Furthermore, is Bernanke pulling a Clinton and while claiming under oath the he is not monetizing debt, he is effectively doing just that on well over $30 billion in Treasuries, which the Fed acquires within 10 days of issuance? <<<<<


it all depends on what "is"

rapier's picture

Bernanke really said he was not monetizing?  How odd.   There is nothing scandalous about this, it's what they do.  The current scope is unprecidented but for the life of me I can't understand why he would deny it.

What's the counter claim he makes? What does monetize mean?

If someone can link to the Bernake quote I would apprciate it. I want to get the whole context.

texpat's picture

Monetizing (printing money to buy your own debt) is one thing... but buying treasuries (with printed money) to 'keep their yield low' is called 'quantitative easing'.

Whoa! It's the same or similar thing.

Someone more qualified may be able to identify whether the money so injected is 'sterilized', or if indeed, this is relevant or makes any difference at all.

huubs's picture

e.g. listen at 1:15 in the video link at (though it is a bit a truncated context)

Anonymous's picture

Can't wait to hear from the experts. There must be a simple explanation that will render ZH concerns completely unfounded and hypochondriacal.

simonsays's picture

in experts we trust.

Anonymous's picture

Studies show and experts agree that people will believe almost anything if you say "studies show and experts agree that .. " I majored in sales and marketing because studies showed there was a far greater ROI from making people believe they are getting value than actually providing them with it.

-Pump Monkey-

Anonymous's picture

I majored in sales and marketing because studies showed there was a far greater ROI from making people believe they are getting value than actually providing them with it.

You forgot to say "and experts agreed"