This page has been archived and commenting is disabled.
Successful Week for Treasury?
The Treasury had a very successful week. They sold a total of $109 billion of new coupon securities as follows:
2 year: $42 billion
5 year: $39 billion
7 year: $28 billion
The auctions went very well. By Friday evening interest rates on the ten-year had fallen from 3.75% on Monday to 3.5%. A very big downward move in yield given the large supply of coupons. Follows is a chart of the weeks trading in the ten-year. Note that the bulk of the drop in rates occurred after the release of the 7 year results on Thursday. From 1:30 on Thursday through the close on Friday it was just one gigantic money making opportunity for the primary dealers.
Treasury/the Dealers had some help from their friend, the Federal Reserve. On Thursday and Friday the Fed bought $29 billion of fixed coupons. Of that, $6.5 billion were direct obligations of Treasury, $23 billion was Agency MBS. The effect of these purchases was to provide stability to the broad fixed rate market. It worked very well.
Net net 27% of last weeks Treasury debt sales were offset with demand from the Fed. The Fed/Treasury strategy is clearly working, at least in the short term. The problem is that it can’t be sustained.
I think the timing of these Fed purchase constitutes Intervention in the market. This is not just a program of quantitative easing any longer. This is market manipulation. That never works for very long. And when the intervention ends (it must) the jump in rates will be breathtaking.
»
- advertisements -
Fellahs...you all seem bright, what you are talking about is the fundamental repudiation of our fiat based civilization...the catch is: we'll take our creditors down with us. The FED is playing a giant game of chicken with the holders of our debt...they are showing that the market can be bought up. Once those jumpy folks in Beijing see that they too can manipulate our currency we'll be ready for World War 3! Forget the housing boom...let's talk about the boom boom of conventional warfare on just before Larry King! Shock and awe!
Okay, that's maybe a bit far, but the FED is showing everyone else the path to righteousness: do a big buy and the dollar will stay up!
Note that more than half of the yield decline came on Friday. Hmmm. Could it be that personal consumption expense declining 1.2% is highly delationary, i.e., it means real Treasury yields are higher (at least for the time being).
Naw, better to go with the conspiracy theory.
This won't last long - USD tanking oil up again. The end destruction will be horrible.
Bruce, another great post. a lot of people don't understand the ratcheting effect of buying MBS - by driving MBS yields down, the Fed drives demand for treasuries, since MSR hedgers need to go long treasuries to hedge the fall in MBS rates (not quite as simple as that, but that is the net effect). and to the point about borrowing short and lending long, that is exactly what is happening, apparently the Chinese are stepping further and further down the curve. that $1.25T added to the money supply to buy MBS will never be extracted since it will be so far underwater in a year it will be unsellable (it extends like crazy - imagine selling a 4% 30 year bond when interest rates are 10% and climbing). this WILL end in a currency crisis, by this time next year.
Let's see...borrow short and lend long in the mortgage market (again); quick, everybody refi now while rates are low! Your lender can eat shit and die (again) when rates spike and your 30 year 4% mortgage sits on his books and LTV goes to 125% (again)...do you think they'll write them down (again)?
It's amazing what a Banana Republic maquerading as the world's reserve currency can do - pimping the rest of the world like a toothless crack whore.
"And when the intervention ends (it must) the jump in rates will be breathtaking."
To say the least.
Market manipulation was one of many issues for FDR in the 1932 campaign. It's interesting to note that the candidate recommended prevention of Federal Reserve funds from being used for speculative enterprises. Source: Joel Seligman, The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (2003).
Bernanke must be stopped America must
realized the Fed has to be audited Look what
Citibank did to Argentina currency with the
Bond market.... Remember Clearstream
this is going over the edge but look up
December 21, 2012 on the computer and see
what comes up.... did you know that Argentia
currency collapse was December 21, 2001
the under ground economy is at works now
Why did the USD drop so hard Friday?
Simple: Because they shorted hard
assets like gold and silver
for two days prior and then
had to buy to cover.
Trade SLV if you want to sleep at night.
Even if it loses 10% in value
when you get caught off guard (shorting) you can buy the options on the way back up.
Its better than gold, has
multiple uses and easier to
trade than any currency.
Why would someone short gold with the GDP report coming out? If anything, it would have been people shorting the dollar. Inevitably, the price of gold was going to go up at some point because the US dollar has a greater effect on gold than gold does on the dollar; that is, there would have to have been HUGE amounts of shorts or HUGE amounts of money backing those shorts to have a series of covers move the US dollar as it did. The only explanations for someone to want to short gold is that they were expecting a massive dumping of gold onto the market or there were not so informed wealthy people or many uninformed people somehow thinking that the GDP report was going to somehow strengthen the US dollar.
Gold did dip a bit, but that could also be to the swings gold goes through during the course of any given day; but then about as long as it took FX traders and others to go over the GDP report and know that the government and the Feds will keep "printing" money, especially given how the media got all excited.
The disturbing thing about Friday's big dip is one has to ask: is the US dollar becoming a funding currency for the carry over? And if a panic hits the short end? The great unwinding and everyone tries to sell out of the position. Come Sep and Oct things for the dollar should be shaky as a lot more liquidity comes off vacation. what a mess....
Google "GATA" and learn much...
gold shorting has nothing to do with gdp
or currency markets....it has everything to
do with the bond market.....
gold serves as a counterweight to paper....when
people lose confidence in paper or its returns
are inadequate for the exchange between
wealth and income, wealth owners pull back into
gold....doing so forces discipline on the
paper market....
the fed knows this and both the fed and treasury
have admitted the need to manipulate gold for
this very reason.....larry summers published a
paper on this topic in the 1980s....
the gold cartel which is 3-4 banks which own
over 90% of all shorts on comex has been doing
the treasury's and fed's bidding....short gold
to keep it from rising in price....most of the
shorting is naked and when the bet goes bad
the us treasury releases its gold to the
traders to cover losses or make good on delivery....
when the stupid gold buyers learn to take
physical delivery of their gold then they will
see an unprecedented rise in their gold assets....
gold price is suppressed in order to make
treasuries attractive or at least to make gold
unattractive by comparison.....in the long
run gold wins but in the short term the
oligarchy is doing all it can to maintain
the attractiveness of its paper...
the spikes in various markets were due to the
fed buying large numbers of bonds from which
money went into gold and oil....the release of
so many dollars cheapened the dollar which in
turn fell off the side of a cliff....and
10 yr yields followed likewise....
it's not rocket science folks....
Not only did the dollar drop, but gold and silver spiked in relation to the drop, and to top it off there was a spike in the futures market on the US 10yr bond; no doubt other correlations can be found, these are just a few. One, of course, has to look at the time of the event and then attempt to uncover an antecedent or consequential event that might hope to offer explanation of this abnormal event (the dollar index dropping).
Ah, the GDP report was released, and although the press release claimed that there was only a 1% contraction and this is true based on BEA’s categories and compiling of those categories and then the milling of them through their statistical factory.
But look closer at the GDP release—and let us assume the BEA’s numbers at face value. Everything is declining—especially consumption and inventory stocks—; everything, that is, but government spending and debt (which was down last quarter when we had a massive contraction, the spending part that is). Further, if one correlates this with the quarterly reports of publically traded companies (yes, there was earnings, but these earnings were no revenue driven—a point green shoot gardeners and defunct Nobel prize economists conveniently over look)), one comes to the conclusion that the only way we will see growth or a continuation of slowing contraction is through more government spending.
However, the issue becomes more complicated when we consider HOW the US government gets its revenue, and this is done by either by taxation, securities auctions, “printing” money, and/or inflation.
Taxes could increase, but this would stifle consumption and business earnings, thus the US consumption driven economy falters.
Securities, as has become well documented, are primarily (and almost only) supported by foreign countries and primary dealers (PD). The problem here is that China is not only not happy with US monetary policy at the moment, but they were distinctly absent from two securities auctions this week (not to mention that the 5yr bond posted only a 1.92 bid/cover (~1.18 of that being PDs). This option for the US is becoming increasingly limited, especially in the light that most of the PDs are the institutions the Feds and the government bailed out (which can only really mean that they are using tax payer money to buy US debt, since most of them will suffer the fate of becoming zombie banks). A temporary solution here, and a likely one, is that more institutions will be allowed to become primary dealers, but a point will be reached that even they wont be able to make convincing bids, even though they are required to.
The government can simply print the money, which they are doing, and let the Fed distribute it through the zombie banks who are PDs and then in turn buy government securities and then the government will in turn redistribute it through its various functions, and back to some of their creditors, like the Chinese; and even better still some of this will also be redistributed back to the zombie banks as they will need much more bailouts as revenue falls or fails to appear (hard to “earn” your way out when you have no earnings) and more toxic assets comes in. Of course all of this is inflationary, either through the government directly stimulating the economy, paying employees that consume, paying their utility bills and such, that is, just existing, and/or simply through the velocity of money having to rapidly change hands—and the faster the system falls, the more they need to expand the money supply and rev up the velocity of the money to prop it up.
And then the government could simply “choose” to cause massive inflation in order to inflate their way out of debt, that is, the government hands you a relative high valued dollar, but as it exchanges more hands it loses value due to the effect of inflation which cause prices to rise which in turn causes more devaluation, and this in turn causes government workers to strike because their wages do not keep up with inflation, so the government “prints” up more money to pay them more, and so the circle goes until they “print” themselves, and us, into oblivion.
Needless to say, this does not pose a good fundamental outlook to those who are holders of US dollars as all the above scenarios are dead ends, and so the great dumping began (selling dollars), and that is why there was a dramatic drop in the dollar. There are many other reasons as well, that are interconnected to the above issues in general, and the US dollar in particular.
The Fed can certainly hold onto a lot of debt and really expand its balance sheet but there is a market out there somewhere ... somewhere. Maybe I can see it if I squint.
Hello ...!
The 'chatter' on the internet has the idea that oil prices will start to move higher, maybe sharply on Fatih Birol's latest:
http://www.independent.co.uk/news/science/warning-oil-supplies-are-runni...
The safety issue is in the background which makes Treasuries worthwhile for the Fed and primary dealers to hold. I might look more skeptically of the developing countries as I suppose more liquidity issues are going to pop up ...
... that and the short squeeze which passes for economic policy these days.
Excellent post!!! You seem to really understand the game the Fed + Treasury is playing.
"A temporary solution here, and a likely one, is that more institutions will be allowed to become primary dealers,"
Already happening - two Canadian banks were made primary dealers within the past couple weeks. No doubt all of them will be PDs before the year is up.
And, surprise, surprise, the Bank of Canada is being run by an ex-Goldman guy. Wonder if they are funneling money to their banks to support Treasury auctions? It would be in Canada's best interest to make sure the US doesn't collapse - where would a desperate America turn for its natural resources, including oil?
I picked the wrong week to buy the TBT
TMV here. I won't even think about selling it until 30 year is 6.5+.
Bought at 49.50, hoping the 30yr yields will rise a bit to get TBT to the mid-50's.
They may rise a lot, but the TLT,TBT has been range bound for a couple months.
No rational basis for expecting 30y rates to move up in the short term...no inflation, QE program in effect, 30y swap spread is still around -20bps.
30y auction this week could go poorly...the successfull 7y auction may have most believing all is well, and a contrarian long bet after the 2y and 5y auctions (before the 7y)would have worked out well.
Two trains of thought...surely an "impure" situation in regards to pricing.
My short position in treasuries is getting killed. Any basis for getting a lawyer involved? :)
The money is, I.M.O., better spent on something exotic like the SS-N-26 YAKHONT "Yakhont-M" land attack super-sonic cruise missile ... sort the FED/GS b*stards out right and proper! We should start a collection!!
... and the dollar dropped.
Housing crisis 2.0 (maybe 3.0 after CRE defaults greater than expected... who am I kidding, no matter how much CRE defaults it will be less than expected)