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Primary Dealers Net Treasury Long Positions Spike To 2010 Highs, Is There A Major Derisking Occurring In PD Portfolios?

Tyler Durden's picture


The FRBNY has disclosed that Primary Dealer bond holdings have surged to 2010 highs, with net Coupon holdings of nearly $20 billion, and all Treasuries (including Bills) accounting for $36 billion. Contrast these holdings with the lows recorded in late January in which Coupons were a net short position of ($24) billion. Bills have also surged by $32 billion from ($15) billion on February 17, to $17 billion on March 24. Incidentally the accumulation has occurred even as recent Bill and Coupon auctions have been very week over the past two weeks. Are PDs becoming unable to offload auction allocations? After all this is capital that the Primary Dealers would much rather use to gun the stock market than be locked up in instruments yielding virtually nothing. Alternatively, if PDs are accumulating Treasuries, could this merely be an indication that they are reallocating capital away from equities and to USTs? Furthermore, Corporate bond holdings have dropped to near 2010 lows - is there a major shift away from risk (yes, that includes stocks) occurring under the surface? Altogether, PDs have spent $33 billion to cover shorts and accumulate fixed income instruments (including Agency and MBS) over the past month, and $60 billion Year To Date.

Expanding beyond Treasuries, the chart below shows the decline in virtually all other asset holdings by PDs, except for MBS, which has just hit 2010 highs.

The same chart in table form:

With virtually no fixed income shorts remaining in PD portfolios, one wonders what the source of capital is. As can be seen above, PDs have spent nearly $60 billion YTD, especially since starting to cover Bill and Coupon shorts. Is the funding coming merely from currency carry trades? Or are PDs now also short equities, which would be a big surprise in light of the market low volume melt up. If the last is true, the could be the biggest contrarian play seen by the Big 18 in a while, as all major banks have lately been extremely vocal in their endorsement of the stock market. Have the PDs learned from Goldman and are taking just the opposite side of the trade they recommend? The stock market action over the next few weeks should (dis)prove this thesis.


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Sat, 04/03/2010 - 00:09 | 284918 Gen X Gen Y Hybrid
Gen X Gen Y Hybrid's picture

Tyler - Do you ever sleep?  Your passion is inspiring!

Sat, 04/03/2010 - 00:12 | 284924 Hansel
Hansel's picture

My perception of the world does not equate increased Treasury holdings with derisking.  To each his own.

Sat, 04/03/2010 - 23:15 | 285336 knukles
knukles's picture

As an old time bond geek, what with the last set of auctions, it is most likely that the street (read primary dealers) got hung with the majority of the paper.  Happens now and then.  Gotta bid and nobody else steps up, and at times, ya takes yer lumps.

One or two lumps, Mr. Bond?

Sat, 04/03/2010 - 00:30 | 284928 bc0203
bc0203's picture

Since the Primary Dealers are also banks, couldn't this just reflect them building up required loss reserves?  Or is that unrelated?

Sat, 04/03/2010 - 01:14 | 284941 SilverIsKing
SilverIsKing's picture

I couldn't wait for the Chinese Drywall thread so I had to run with this.


Sat, 04/03/2010 - 11:38 | 285116 non-anon
non-anon's picture

Poisoned dogfood, poisoned toothpaste, lead painted children's toys, is China trying to tell us something?

Sat, 04/03/2010 - 01:41 | 284953 Gordon_Gekko
Gordon_Gekko's picture

Perhaps they are holding more and more Treasuries because nobody else will (except, of course, the Prechterites).

Sat, 04/03/2010 - 02:29 | 284980 The Person Fami...
The Person Familiar With The Matter's picture

"It's costing us as much as we paid for the house," Joyce Dowdy said. "But we can't just walk away ... Our house is worth nothing at the moment."

I'm sorry, did you just say..

Sat, 04/03/2010 - 04:42 | 285019 bond trader
bond trader's picture

treasuries are probably accumulating involuntarily and as hedges against corporates. customers going nuts buying corporates which probably accounts for the low inventories,

Sat, 04/03/2010 - 05:47 | 285028 EscapeKey
EscapeKey's picture

This occoured in the same month the US Treasury auctioned off $330bn, and the bond markets showed signs of saturation?

How much of the $330bn came down to "direct takedown"?

Sat, 04/03/2010 - 06:48 | 285033 DoctoRx
DoctoRx's picture

Does anyone have information about the predictive value of this information?  In a simple-minded way, I would want to be investing along with the PDs.  TLT and IEF peaked in price in late Jan/early Feb as PD was max short Treasuries.

Sat, 04/03/2010 - 09:13 | 285067 DirtySouth
DirtySouth's picture

Yields move up for a bit.. talking heads in TV land get their panties in a bunch and cry inflation..  blow off in the markets..  decent sized correction... yields move back down for a bit... rinse, repeat.

Sat, 04/03/2010 - 09:39 | 285074 uno
uno's picture

When 10 year yields get to its down-trend line (around 4.3% now), Turbo and Banana will stop buying S&P causing the rotation into safe(?) treasuries.  Then it is rinse and repeat, S&P up until next trend line hit.  Last time it hit the trend line was summer 2007.

Sat, 04/03/2010 - 10:03 | 285081 RobotTrader
RobotTrader's picture

Its no accident that all of these are at a key "pivot point"....

Sat, 04/03/2010 - 18:58 | 285389 Missing_Link
Missing_Link's picture

Indeed.  What's your take on where these are headed?

Sat, 04/03/2010 - 12:52 | 285149 ghostfaceinvestah
ghostfaceinvestah's picture

Right from the Argentina play book - first force the banks to buy govt debt, next will be the personal pension funds.

Sat, 04/03/2010 - 13:58 | 285190 vote_libertaria...
vote_libertarian_party's picture

My hunch is that for 12 months there were buyers they could find who weren't comfortable with stocks.  Retail and hedge fund managers.  They have finally reached the saturation point.

Now we should have PDs slowing down their buying to add to the Chinese slowing down their buying.  And who knows what kind of game was happening with MBS buying money flowing into buying Treasuries...well that should be done now too.

It is set up for some weak, and weakening, auctions starting this week.

Sat, 04/03/2010 - 15:28 | 285280 sheeple
sheeple's picture

PD loading it up for...pensions?

Sat, 04/03/2010 - 22:49 | 285498 TooBearish
TooBearish's picture

The PD are all Carry pigs and will buy every dip to defend - until Ben says get out of the way and we will absolutely bang em over the head to get out....

Mon, 04/12/2010 - 04:24 | 296074 mark456
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