While conducting our periodic analysis of the Primary Dealer fixed income holdings (mostly Treasury but also MBS, Agency and Corporate Notes), we stumbled on something quite surprising. As of the end of Q1 total Primary Dealer holdings among these asset classes were exactly $200 billion. This is a massive $55 billion drop in assets in the past two weeks, and is the lowest combined total since February 2007! It is also less than half of the all time high posted in January of 2008 when it hit $414 billion. While it is undoubted that end of quarter window dressing is to a big extent reason for the plunge, we are confident that the recent collapse in the repo market, which today hit 1 basis point in the Overnight rate is a substantial culprit. The question is where is the balance? Some have suggested that it could be due to accelerate shorting of Treasury and related positions (in line with what Bill Gross is doing) either outright or in the forms of curve flatteners. The alternative, which is quite as possible, is that capital gained from monetizing fixed income holdings, was simply used to bid up equity assets. The truth is we don't know absent a report of PD equity holdings. One thing is certain: Primary Dealers most certainly do not retain the Treasury securities they purchased at auction, and flip these immediately back to the Fed.
Below we present some observations and suggestions from Stone McCarthy on this dramatic move lower in PD holdings.
First, the charts:
Total Primary Dealer holdings by week:
The same as above, but removing the noise, and highlighting the Window Dressing effect: every quarter for the past two years has now seen the EOQ total PD exposure be the same as the lowest carried during the quarter.
Breaking down the recent change in holdings by Category.
And a chart of the relative exposure of the Treasury curve by Primary Dealers:
And some much needed clarity from Stone McCarthy:
- Looking at the outright dealer position figures, primary dealers' combined overall average net long position for Treasury, Agency, GSE and Corporate fell to $206.3 billion during the week ended March 30 from $235.0 billion the prior week. That is the smallest overall net long position since the week ended September 30, 2009. Dealers' average overall Treasury position continued to tumble to a net short $28.4 billion from the prior week's $21.3 billion net short position. That is the largest net short Treasury position since the week ended November 4, 2009. Average GSE holdings also tumbled, falling to a net long $72.7 billion from the prior week's $87.9 billion net long position. That is the smallest average net long GSE position since the week ended December 29, 2010, and before that since the week ended December 30, 2009. Average Dealer MBS holdings declined to $50.6 billion from $53.1 billion, and their average net long Corporate holdings fell to $111.5 billion from $115.3 billion. That is the smallest Corporate position since the week ended December 29, 2010.
- Dealers Treasury bill holdings tumbled, which is unusual just ahead of the April tax date. Their overall Treasury coupon position was significantly less short, however, while their average TIPS position broke back into net long territory following the prior week's record plunge.
- Dealers' average Treasury bill holdings plummeted to a net long $8.0 billion from the prior week's $29.9 billion, and $31.5 billion two weeks prior. The unwinding of the Supplementary Financing Program may have resulted in extra volatility in bill holdings in recent weeks, while dealer bill holdings have also suffered more recently from an unusual lack of CMBs this time of year as Treasury works to remain under the debt ceiling. The most recent release may also have been impacted by positioning ahead of the FDIC decision on bank assessment fees, which has been a factor in the disappearance of front-end collateral as banks no longer find it worthwhile to lend the collateral out.
- Dealers' average overall net short position in Treasury coupons was $37.0 billion following the prior week's $48.8 billion average net short position. The prior week's average net short position was the largest since the week ended December 3, 2008.
- Dealers' average net short position in the 3 years or less Treasury sector increased to $12.8 billion following the prior week's massive $18.0 billion plunge in this sector the prior week to a net short $10.0 billion from an $8.0 billion net long position two weeks prior. The most recent net short position in this sector is the largest since last September 29. Dealer short positions in Treasury coupons have generally been increasing as the Fed lifts supply as part of their large scale asset purchase program.
- The average dealer net short position in the more than 3 years but less than or equal to 6 years sector was $12.8 billion in the most recent release, down from $19.3 billion the prior week and $19.9 billion two week's prior, which was the largest net short position in this sector since the week ended January 28, 2009.
- Dealers' average net short position in the more than 6 years but less than or equal to 11 years sector fell to $11.7 billion from $20.3 billion. The prior week's average net short position was the largest since the week ended October 1, 2008. There has been a massive turn in this sector since the beginning of December as a result of the Fed's large scale asset purchase program. Until the week ended December 22, dealers had not been short this sector since the week ended October 28, 2009.
- Dealers' average position in Treasuries maturing in more than 11 years remained very marginally long at $0.3 billion following the prior week's $0.8 billion average net long position. Their average position had turned slightly net short three weeks prior, which was the first average net short position in this sector since the week ended May 12, 2010.
- Dealers' average net long corporate position fell to $111.5 billion from $115.3 billion. As noted above, that is the smallest corporate position since the week ended December 29, 2010. Even so, dealer corporate holdings have generally changed little since mid-August, holding to a range of just above $108 billion to just above $120 billion. More broadly, there has been no consistent direction in corporate holdings since the beginning of 2009, holding to just below $90 billion and just above $130 billion.
- Average dealer GSE holdings fell to $72.7 billion from $87.9 billion the prior week. Also as noted above, that is the smallest average net long GSE position since the week ended December 29, 2010, and before that since the week ended December 30, 2009. Dealer GSE positions had largely held to a range of around $75 billion to around $115 billion from shortly after the government put Freddie Mac and Fannie Mae into receivership in 2008 until a spike up to as high as $122.2 billion through mid-October of last year. Positions fell hard after that, but steadied after reaching just $71.0 billion during the week ended December 29.
- Average dealer GSE discount note holdings fell to $26.6 billion from $33.8 billion. That is the smallest discount note average since the week ended February 9. Average coupon holdings fell to $46.1 billion from $54.1 billion. That is the smallest level of GSE coupon holdings in more than five years - since the week ended January 25, 2006.