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Primary Dealer Publicly Disclosed Holdings Plunge To Lowest Since February 2007

Tyler Durden's picture




 

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.

 

 

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Tue, 04/12/2011 - 12:40 | 1161948 baby_BLYTHE
baby_BLYTHE's picture

Is the bond bubble going to prick... sending the US economy into a Second Great Depression?

Tue, 04/12/2011 - 14:02 | 1162312 SheepDog-One
SheepDog-One's picture

Yes. Either way its going into the Greatest Depression soon, with fangs dripping venom and all. Either bonds collapse, equities collapse, or both since its all fake anyway. No way out.

Tue, 04/12/2011 - 14:13 | 1162360 Bam_Man
Bam_Man's picture

Oh great. Now you've got the baby crying.

Tue, 04/12/2011 - 14:56 | 1162553 baby_BLYTHE
baby_BLYTHE's picture

I shed not one tear over this. The American people can have the "take back your country moment" any time they desire.

No one will care until it is too late and their paychecks barley buy the groceries and the gasoline needed to purchase them.

Tue, 04/12/2011 - 12:38 | 1161950 tellsometruth
tellsometruth's picture

Bullish for sure

Wed, 04/13/2011 - 04:23 | 1164410 Forensic
Forensic's picture

Brandon

 

Saw you deliver killer Q. to Hoenig at the LSE. Been trying to track you down.

Sent details plus transcript of your comment to ZH and GATA but no bite. 

We need more people like you taking on the fraudsters:

http://forensicstatistician.wordpress.com/

Tue, 04/12/2011 - 12:40 | 1161955 long juan silver
long juan silver's picture

Of course, because the FRB owns it all!

Tue, 04/12/2011 - 13:00 | 1162038 MarketTruth
MarketTruth's picture

So perhaps the treasury should launch a new dollar plus outright default only on the FRB's holding of US debt. Imagine the savings to the country's citizens as a new and properly backed US currency and elimination of FRB's holding would save in interest payments over the short and especially long term.

Tue, 04/12/2011 - 13:03 | 1162055 long juan silver
long juan silver's picture

You're complicating a simple journal entry.

Tue, 04/12/2011 - 12:49 | 1161975 RobotTrader
RobotTrader's picture

Maniacal buying of bonds today.

Probably the usual suspects:

1) PBoC

2) BoJ

3) BOE

4) ECB

5) Frightened speculators, hedge funds, mo-mo junkies getting out of Dodge

Tue, 04/12/2011 - 12:54 | 1162005 lieutenantjohnchard
lieutenantjohnchard's picture

a good reason why you are such a poor trader is because you focus on everything and nothing at the same time. that's why you lose money holding positions that are in a bull market like gold and silver.

most successful traders develop a plan and work it. you spend the day throwing up ad hoc charts, which distracts your mind from your losing positions, and then project your fears and despondency onto other traders more successful than yourself.

Tue, 04/12/2011 - 13:19 | 1162108 topcallingtroll
topcallingtroll's picture

Yeah i think his posts are just fyi. While there are occasional opportunities to take advantage of ( i documented buying cyh yesterday at 25.65 average) a trader needs to stick to only a few asset.classes or a few stocks in my opinion.

Or one or two simple themes like bollinger bands, moving averages, or overbought oversold conditions and apply a basic.disciplined strategy to a larger stock or option universe

Tue, 04/12/2011 - 13:40 | 1162208 lieutenantjohnchard
lieutenantjohnchard's picture

exactly.

Tue, 04/12/2011 - 13:11 | 1162082 luk427
luk427's picture

Everyone bought real estate just before it crashed as well.

Tue, 04/12/2011 - 12:49 | 1161981 vast-dom
vast-dom's picture

Why the hell is my TBT bond short position NOT MAKING A KILLING TODAY? In fact, it is down big today....... What the F is going on?

Tue, 04/12/2011 - 12:53 | 1162000 rocker
rocker's picture

It always goes down with the market.  Bonds become a safe haven. So they think. Just buy more when the market stops going down.

Tue, 04/12/2011 - 13:32 | 1162179 Bob Sacamano
Bob Sacamano's picture

Long TBT = short bonds.  As graphed above, bonds are going up today (interest rates are going down).  TBT travels the same direction as interest rates, not bond prices.  You will make money when bonds go down (interest rates go up).

Tue, 04/12/2011 - 14:17 | 1162363 Bam_Man
Bam_Man's picture

Why is it going down?

Because you own it.

Tue, 04/12/2011 - 12:53 | 1161994 bogey4
bogey4's picture

"Primary Dealers most certainly do not retain the Treasury securities they purchased at auction..."

That's why they call them "dealers."

Tue, 04/12/2011 - 13:22 | 1162138 davepowers
davepowers's picture

and the FED pays them with extra aces which they store up their sleeves

Tue, 04/12/2011 - 12:52 | 1161997 Cleanclog
Cleanclog's picture

Does look like some serious curve flattening positions being put on.  Will be curious to see how 3 year comes today and how much other Treasuries in maturity area needed to be sold to make room.  Also think some dealers and others are getting twitchy again about who is on the other side of repo.  Name quality and liquidity concerns underneath.  Mini rumors.

Tue, 04/12/2011 - 12:54 | 1162007 earlthepearl
earlthepearl's picture

Seriously, I have a bundle of TBT Jan 12 Calls (Strike 48), this shit needs to move man

Tue, 04/12/2011 - 12:59 | 1162022 rocker
rocker's picture

TBT will go back up. So will TBF and PST.

Tue, 04/12/2011 - 14:18 | 1162392 Bam_Man
Bam_Man's picture

TBT is a double inverse (ultra-short) ETF.

That means that its eventual value is ZERO.

Good luck with those long-dated out-of-the-money calls.

Tue, 04/12/2011 - 13:09 | 1162080 Pepe
Pepe's picture

PING-PONG

Tue, 04/12/2011 - 15:09 | 1162600 Sandy15
Sandy15's picture

2 years ago I labled it "the Fed Bubble."

How hard was that to figure.

So here we are just like the housing bubbble, it is about to burst and the Fed is the one hiding that fact.

Target date... mid May 2011.

Tue, 04/12/2011 - 20:35 | 1163589 Rick Masters
Rick Masters's picture

Ya really think so? Really? I'm not questinging it. You are prob more knowledgable than I am but I was hoping maybe you could shed some light on why it will burst soon. Treat me like a two year old. I do act like one so it isnt hard.

Tue, 04/12/2011 - 15:07 | 1162601 gkm
gkm's picture

Wow shocker - did it ever occur that the 2008 fiasco was a contrived collapse to liquidate fixed income off the bankster's books?  It did to me and this helps to confirm this.  It was also suggested, by me, that the suspension of MTM accounting was not to reveal losses but to not reveal GAINS for what the banksters picked up after their put to the Fed.

How else were the banksters going to take that much paper down if not with a collapse that forced a bunch of people to pick up fixed income at exactly the wrong time.  

It was the greatest heist in history hidden behind a contrived financial crisis.

Tue, 04/12/2011 - 20:39 | 1163598 Rick Masters
Rick Masters's picture

Wow. I never thought of it that way. You opened my eyes to whole different game that i didn't even think of. Wow. Thanks. Fo real.

Tue, 04/12/2011 - 15:13 | 1162621 ivars
ivars's picture

The USA debt is anyway going to crash correct, so why buy it ? I think only USD notes and  overnight deposits are safe from haircut of some level. Coming in parts very soon, the haircuts. In the end, crash will also get to USA treasuries. Gold standard excluding Treasuries or what else? No hyperinflation, that is sure.

 

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a&sta...

 

 

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