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Primary Dealer Short Treasury Bill Positions Rise To Lehman Crisis Levels
The New York Fed has released this week's Primary Dealer net holdings update. While the data indicates that PD's were aggressive sellers of virtually everything (USTs, Corps, Agency, except MBS) in the prior week, the one category that stood out was Treasury Bills, in which net short exposure reached levels last seen during the Lehman bankruptcy. Last week's net short exposure of ($15) billion compares to the ($26) billion two year low seen on September 17, 2008. The Lehman collapse period was very curious as during it PDs saw both a record selling in Bills followed by a record buying of Bills, all within a month: whereas in the week ended 9/17 $41 billion of Bills were sold/shorted, the week of October 22, saw a covering/buying spree of over $51 billion. We have not seen this kind of amplitude in the past two years. Over the past 5 weeks, PDs have sold a total of $29 billion in Bills, starting with a net long exposure of $13.8 billion in the week ended January 13, and culminating with a net short of ($15) billion on February 17.
So Primary Dealers generated about $30 billion dollars simply by shorting a zero carry instrument. What did they do with the proceeds? A part of the new cash went to buy Coupon securities: as the chart below demonstrates, over the same period, PDs bought $ 14 billion in Coupon bonds, with half the Bill shorting proceeds converted into Coupon purchases.
A granular analysis indicates that PDs did not buy Coupons even across the curve: the under 3 year category was largely shunned- PDs had a net ($23) billion position at February 17. The same goes for the 3-6 year bucket, where levels have been flat for nearly half a year at just slightly net short positions. PDs have demonstrated by far the greatest enthusiasm for 6-11 year Coupons, where net positions were positive to the tune of $16 billion. In the 11 year + bucket holdings have also been relatively flat, and closed the February 17 week at $5 billion. More detail in the charts below.
Compiling all the Primary Dealer securities data, indicates that over the past week, PDs generated roughly $13 billion in cash from sellling and shorting various Treasury and Corporate fixed income securities. What that money was used for is unknown, although if one were to guess that it was likely used to purchase equities, one would likely not be incorrect, especially since there is little verifiable evidence to disprove such a hypothesis.
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Buckle up for Credit Crisis 2.0.
Credit Crisis 2.0... with a vengeance...
But, but, but, Ben said he STUDIED the Great Depression and learned how to prevent another one. Next myth to pop like the bond bubble, coming up.
Hey, that is a nice arb against the curve.
...and you get to reload it every 30-60-90
Nice work if you can get it.
Let's skip Credit Crisis 2.0 and just go to Credit Crisis 7, in honor of Microsoft.
-MobBarley
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahuuwBS8KYq8
"The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program."
so how long does a review of a foreclosure situation take by a governmental agency? A couple of minutes? Now times that by a few hundred thousand files..
Of course that would be good for employment growth..
This market, and our leaders are a total and absolute joke.
It is called socialism. In the former Soviet Union people would get apartments for free, once they had waited in line for 10-15 years...
It'll be alright Libor will keep pumping like crazy just like through the lehman crash.
Why is it that every data point points to crisis,yet we have no crisis?
A really good question. I think it can only be that in 2008 very few saw the tsunami approaching so not many people made it to the high ground. Now there are a lot of sentries on duty.
That's part of it, though I don't think it's the whole story - there were a fair number of people who did see that things were getting unstable as far back as 2006, though of course few of them were saying it from the MSM and the Bush administration did everything it could to keep the problems under wraps.
At the moment, there's a fairly significant concerted effort on the part of the PTB to do anything they can to maintain the illusion that the economy is improving, largely by manipulating the stock market to make it happen ... and everyone is looking to the stock market as the place where the crash will manifest itself. Yet the equity market at this stage is very much divorced from either the health of the economy or any real crisis venue, largely because when volume is low a big market maker like Goldman can pump up the index by manipulating just a few stocks. The market falls only when trouble comes from unanticipated directions, largely because people are expecting trouble to show.
Broadly, the market will decline some for a while because of Greek and other EU problems causing safe haven flight to treasuries, which in turn changes the pricing equation of the indexes, but it'll be a slow, excruciating slow move downward.
It does make me wonder what the market would look like if you did a time series weighting for index value multiplied by volume. I suspect that the actual indexes would be sitting at 60-70% of their current values if volume factored in.
This of course is the problem. It is very difficult to find an absolute benchmark against which things can be measured. In the past gold was one such measure but with the onset of derivatives, futures, options, ETF's et al, the market price of gold has become detached from the source commodity and it therefore loses its value as an absolute measure. Once a virtual market is created, the price of anything becomes virtual as well.
There are of course products and assets where no virtual market exists, but none that I can think of that can be traded on a global exchange and would therefore serve as an absolute benchmark. However, when the virtual world comletely loses touch with reality as seems to be the case now, sooner or later it will be revealed that the emporer has no clothess.
Simple, we are living off of what little savings is left in this country, pretending everything is ok. There will come a day when all of the productive capital is gone, and there will be blood in the streets. I mean that literally. People will wake up to find that their paychecks have all bounced, and everything they own is worthless, because all of the value is lost to counterfeiting, and the lifeline from the East has been severed.
Right now, we are basically living off of the largess of China. They make the things we need in exchange for paper. Once they realize the paper they have is worthless, they will shut off the spigot, and everything will blow up in an instant.
I hope you have gold and silver (and stored food, guns, and ammo). It will be nasty, perhaps as nasty as the fall of Rome (or worse--we don't have any barbarians to liberate us from our government!).
That's a risk free trade, for them.
Why all is possible for GS, why all is allowed to GS?
What is happened with AG is incredible. This is tantamount to building a house, planting a bomb in it, selling it to an unsuspecting buyer, and buying $20 billion worth of life insurance on the homeowner – who you know is going to die!
This is called murder and $20 billion are motive of crime!
stop it
Eleonora from PIIGS contry
"But regardless, something very, VERY strange is going on in US debt auctions.
I wrote earlier this year that bonds, not stocks, would be the big story of 2010. We’re only into February and there are already some very unusual things happening on both the long (30 year) and the short (4 week) ends of the Treasury curve. And with the Fed’s Quantitative Easing Program scheduled to end in March, things are about to get a whole lot more interesting (barring of course an extension of the QE or QE 2.0).
Keep your eye on US Treasuries. Stocks, despite being so popular with investors are usually the LAST to get what’s coming down the pike. And investors just parked $30 billion for a month with Uncle Sam at virtually NO YIELD yesterday."
http://seekingalpha.com/article/190362-something-very-strange-is-happeni...
this why discount rate matters. With latest FED hike it will be harder to do trades like this...
How would this effect 401K's where one sits in an index bond fund?
With all the bad news I pulled out of my 401K equities into 100% index bond fund.
Any help would be much appreciated.
Joe
Bonds, in general, are screwed. Your best bet is to park everything in short term Treasuries. As close to the real deal as you can get.
Everybody is going to be trying to raise money via Bonds. Few will be able to pay it back.
401K's in general are screwed as well. During the next big leg downward, what money you have left will be forced into Treasuries (probably long term). They are already debating this in Congress. Since 401K's are one of the last Treasure Chests around, you'll see this coupled with a 100% early withdrawl penalty.
After the next big crash, when the Credit in the system is destroyed, you'll then see inflation kick in with a vengance. What remains in your 401K will only be able to buy peanuts.
This is not financial advice, just my personal opinion. Nor am I, or ZH, your financial advisor. See a professional if it's financial advice you want.
Joe,
While it is useful to understand all the reasons we are crunked, it is meaningless to base your investment philosophy on sound logical presumptions.
If the Squid says SPY at 1300 by mid year, then buy equities.
When rates rise bond prices fall.
When bond prices fall, the net asset value of index bond funds falls.
Other forces play into it but on the surface that's it.
I expect violent correction in eur (north) and spy (south). They have been manipulated beyond belief, spy should be where eur is now (50% retrace of the post March bear rally) and eur should be where spy is now (50% retrace of the post Lehman drop).
if you want to borrrow money real cheap, borrow bills and then sell them for cash. The shorting bills of Bills is a funding issue I would think. I see no evidence that they 'bought anything with this dough. They probaby paid down some other debt. Mighty curious.....
Isn't it though. There's things happening without a WORD being said about them.
No one seems to think that the PD's were trying to front run the huge auctions that we had this week and got short in anticipation of a bad auction. Some of you feel a few drops of rain and anticipate a hurricane. I believe the PD's basically saw 122 billion in bonds coming to market this week and got short. They are now caught short as people are ramping the bonds up after the last of the auctions.
And my handle is dadoomsayer sheesh
Sometimes it is just a trade, it isn't always a conspiracy. Looks like a bad trade this time.
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