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Two Operation Twist 2/QE3 Confirmations Courtesy Of Today's Dual POMO; Or Does No QS2 And QN3 Flip Mean QE3?

Tyler Durden's picture


When we provided our advance look at today's dual POMO day we said that: "while we expect Dealers to go balls to the wall in flipping the just auctioned off 10 Year reopening in the form of Cusip QN3, their interest in flipping the recently auctioned off QS2 will be far more muted." As a reminder, this is predicated by our interpretation of Bill Gross' tweet from last Monday, that "QE3 [is] likely to take form of "extended period" language or interest rate caps on 2-3 year Treasuries [sic]" and a result Dealers who believe Gross' prediction will hold off on flipping On The Run just issued bonds, a practice widely espoused across the curve up until the date of Gross tweet. Indeed, we already saw that during last week's 2 Year POMO not a single OTR was flipped back to the Fed, an outcome which at the time puzzled us (we had not noticed Gross' tweet). Well, the results are in... and we were half right. As we predicted, there was not a single OTR 3 Year bond (the QS2 Cusip) sold to the Fed by the dealer community during the just concluded 2:00 pm $4.6 billion POMO: a development in stark contrast to events as recent as 2 weeks ago, when the then 3 Year On The Run QM3 was massively flipped back to the Fed, just a week ahead of Gross tweet. Yet we were also half wrong: we expected that guided by Gross' expectation that the upcoming "Operation Twist 2" would focus on the front end (2-3 Years), would mean major flipping of the OTR 10 Year, as per the first POMO today. Wrong. In fact, just as during the 3 Year POMO, not a single 10 Year OTR (Cusip: QN3) was sold to Brian Sack. It appears that Dealers are now virtually certain the Fed will proceed with some form of Operation Twist, but are simply unsure whether the Fed will focus on the 2-3 Year Space, or go all the way to the 10 Year: the point that David Rosenberg predicted would be the threshold for interest rate caps. That this is happening despite a substantial drop in yields, and thus profit, for all the Dealers who hold the OTRs since auction day (both the QN3 and QE2) makes the case all that stronger. The FOMC announcement this Wednesday just got very interesting as there appears to be a substantial pricing in of an interest rate cap disclosure in some format, just as Bill Gross has predicted. Translation: that would be the start of QE3, and would explain the paradoxical strength of the Euro in the face of simply horrendous news out of Europe over the past week.

The results from the 3 Year POMO (On The Run 3 Year highlighted):

And the results from the 10 Year POMO (OTR 10 Year highlighted):


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Mon, 06/20/2011 - 14:31 | 1385615 plocequ1
plocequ1's picture

??????????? The answer is yes. Rally on

Mon, 06/20/2011 - 14:38 | 1385672 nope-1004
nope-1004's picture

Every country on the globe is broke.  The entire Western financial system is past outdated and beyond repair.  They have no choice.  QE forever.


Mon, 06/20/2011 - 14:57 | 1385752 Popo
Popo's picture

QE forever = infinite transfer of wealth out of your hands into the hands of the banker class


In other words:  A return to serfdom.   Ready?

Mon, 06/20/2011 - 15:03 | 1385796 mayhem_korner
mayhem_korner's picture

Transfer of wealth into the hand of people holding real assets and real money.  Serfdom for the rest.

Got PMs?  (that doesn't read right, does it?)

Mon, 06/20/2011 - 14:36 | 1385629 ssp2s
ssp2s's picture

As long as rumors are sufficient, no need to engage in actual QE3.

Mon, 06/20/2011 - 14:44 | 1385694 swissinv
swissinv's picture

well you should meanwhile know how a treasury auction looks like without a bidding FED

Mon, 06/20/2011 - 16:46 | 1386336 kito
kito's picture

yes, the way it looked before the fed meddled. the way it will look after the fed folds tent (as in no more qe for a while, if ever). the world will continue to devour our treasuries because ours are the most reliable and liquid that can be offered (sad as that may be). 

Mon, 06/20/2011 - 15:30 | 1385928 Arius
Arius's picture

i see .... now i understand the reason why gold collapsed from 1548 all the way  down .... lol ...

Mon, 06/20/2011 - 14:33 | 1385633 Josh Randall
Josh Randall's picture

QE3 - yippeeee! Oh what the hell, breakout the fishsticks!

Mon, 06/20/2011 - 14:37 | 1385639 Robslob
Robslob's picture

A rally fueled by already low and now "capped interest" rates doesn't neccessarily mean rally in stocks to me...please explain what an extension of near zero rates says inflation since it will be without QE on top?


Mon, 06/20/2011 - 14:43 | 1385645 buzzsaw99
buzzsaw99's picture

buy the 10y, plus sell the ir puts. like anyone with a working brain is surprised with the 3y already near zero.

edit: obviously this telegraphs that the fed is expecting an imminent t-bond crash. hahahahahahahaha

Mon, 06/20/2011 - 14:34 | 1385647 Boston
Boston's picture

If the Fed can't take the life support (QE) off the patient (the risk markets) for even a few months, I'd be stunned.  

What does that say about the health of the patient?


Mon, 06/20/2011 - 14:39 | 1385655 glenlloyd
glenlloyd's picture


Mon, 06/20/2011 - 14:41 | 1385666 Deep
Deep's picture

I agree. I have been saying all along, while everyone here thinks that we will rally like theres no tomorrow, i bet we rally maybe 5-10% most, then slide.

By then it will become WAY to obvious that we are in big trouble.

Mon, 06/20/2011 - 16:51 | 1386343 kito
kito's picture

prepare to be stunned

Mon, 06/20/2011 - 14:35 | 1385652 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

The only way the scum 'elite' are going to get away with more QE without destroying the $dollar (and all the consequential implications of that) is to do more QE at the same time as making sure the rest of the world (i.e Europe) burns to the ground, giving the illusion that the $dollar still has some value.

Mon, 06/20/2011 - 14:35 | 1385654 Robslob
Robslob's picture

Screw all this mumbo jumbo...when is gold going to break out?

Mon, 06/20/2011 - 14:55 | 1385745 mayhem_korner
mayhem_korner's picture

Titanic is in that "bobbing like a cork" phase right now.  Market has to wobble a bit before gasping for more QE.  Once the addict is sure his fix is coming regularly, that's when gold is going on an unabated march to 1,800 by Columbus Day.  

I'm grabbin' a bunch o' gold maples as we speak.  We may see a dip, but the last two weeks performance by gold suggests its going to hold it's own, even while the broader commodity complex takes a dive while Ben changes ink cartridges.


Mon, 06/20/2011 - 16:23 | 1386219 jomama
jomama's picture

give it a week and a half; 10 calendar days, 8 more trading days.

Mon, 06/20/2011 - 14:41 | 1385663 baby_BLYTHE
baby_BLYTHE's picture

So the stock market doubles and no one has any more reason to take to the mall in Washington?

The FED must be stopped! Destroying the currency to save a few criminal banks isn't f u cking worth this

Mon, 06/20/2011 - 14:47 | 1385692 LongBalls
LongBalls's picture

They are saving themselves. The Fed. is owned by those very banks.

Mon, 06/20/2011 - 15:06 | 1385781 Greeny
Greeny's picture

Doubles from where? from S&P 670? Look for another Double. "Destroying the currency" Against Gold maybe, but against other dead currencies? Don't forget that stock profits are taxed up to 30%. By supporting the Markets, Uncle Sam collecting 30% of entire pop.. If you not in stocks, then it doesn't worth it for you, of course, but for people who's only income is stock trading or Forex trading as nothing left on the table? Yes, it's worth it. Even if traders don't care about direction Volatility still can wipe out most of them betting either direction (up or down), that's why stable Finance Markets are the key..

Mon, 06/20/2011 - 15:41 | 1385966 kito
kito's picture

there is a million dollar march being planned.

Mon, 06/20/2011 - 14:38 | 1385667 TooBearish
TooBearish's picture

OTR 2yr traded quite special today Ty

Mon, 06/20/2011 - 14:42 | 1385674 Cognitive Dissonance
Cognitive Dissonance's picture

So is Gross now carrying the Fed's water?

It appears Bernanke has lost all credibility and now must enlist more 'respected' voices aka Gross to continue to manipulate the market and keep the Ponzi going.

Mon, 06/20/2011 - 15:13 | 1385829 GeneMarchbanks
GeneMarchbanks's picture

I'd say affirmative. Gross, El Erian or whoever wants to mediate. Reeks of PR despair. At this point I still don't see how Bernanke doesn't look like a wildman rubbing chicken bones together at least to a somewhat intelligent American minority populace.  

Mon, 06/20/2011 - 15:33 | 1385931 Cognitive Dissonance
Cognitive Dissonance's picture

As long as they are Hot Wings and I get first bite I'm OK with whatever he does with the bones afterward. I'm assuming I can still purchase the Hot Wings after the collapse using some 1964 or earlier Silver dimes or quarters.

Mon, 06/20/2011 - 15:46 | 1386022 baby_BLYTHE
baby_BLYTHE's picture

I once tried to tip a waiter using a 1964 Kennedy half. Got a look of confusion.

I responded, "Just kidding" and then unloaded the fiat.

The sheeple will have to learn the hard way as always

Mon, 06/20/2011 - 14:42 | 1385675 statlawyer
statlawyer's picture

low volume... must be an up day for stocks

Mon, 06/20/2011 - 14:52 | 1385710 Cdad
Cdad's picture

Yep...a day for all the dumbest algos.  Ridiculous...the lengths to which the criminal syndicate known as Wall Street will go to portend no one can see just how ridiculous this rally is today, with algos grabbing on to certain stocks and driving them up to overbought conditions in one session.


Pink slips in the financial services industry, please.  Hundreds of thousands of them...would be a good start.


Mon, 06/20/2011 - 14:41 | 1385680 Cyan Lite
Cyan Lite's picture

Thank goodness I registered recently.  Anybody want to buy it from me?  Maybe we can link straight to ZH from it...

Mon, 06/20/2011 - 15:39 | 1385971 kito
kito's picture

i bought

Mon, 06/20/2011 - 15:57 | 1386102 JW n FL
JW n FL's picture
by Cyan Lite
on Mon, 06/20/2011 - 14:41


Thank goodness I registered recently.  Anybody want to buy it from me?  Maybe we can link straight to ZH from it...


dont you have used cars to pawn off on some lil old lady that is half blind?

bottom feeding insect, go buzz around the steming pile of shit you create Some! Where!! Else!!!

Mon, 06/20/2011 - 14:45 | 1385683 Robslob
Robslob's picture

"everyday MUST be an up day for stocks"


There...fixed...just like the markets, bonds, interest rates, court cases and sports.

Mon, 06/20/2011 - 14:48 | 1385708 statlawyer
statlawyer's picture

anybody else want to break something watching the market these past 3-4 days?

Mon, 06/20/2011 - 14:52 | 1385714 BCTwelve
BCTwelve's picture

the s&p makes me want to puke

Mon, 06/20/2011 - 14:51 | 1385739 buzzsaw99
buzzsaw99's picture

watch the financials instead, why lose your lunch? SharkFIN soup bitchez!

Mon, 06/20/2011 - 15:00 | 1385762 BCTwelve
BCTwelve's picture

all i want is the vix at 30 and a greek that too much to ask?

Mon, 06/20/2011 - 15:12 | 1385817 buzzsaw99
buzzsaw99's picture

you don't ask for much. imo both will happen. "when" is the money question.

Mon, 06/20/2011 - 15:46 | 1386030 kito
kito's picture

it makes you puke? why? are you some crazed socialist who is rooting for the stock market system to implode? does it make you sick that there are a number of solid large cap corporations fairly valued and doing well, and therefore being reflected in their stock price?

Mon, 06/20/2011 - 16:01 | 1386103 Greeny
Greeny's picture

"it makes you puke? why?"

Yeah, cause he eats too much BBQ beans. They are

as good as Silver coins, can stock them in

the basement too. And he sick, cause we making profit by

trading stocks. Keep farting bud...

Mon, 06/20/2011 - 14:52 | 1385716 sbenard
sbenard's picture

Calamity is therefore certainty!

I'm curious: What's the consensus of how much time we've got before it occurs?

Mon, 06/20/2011 - 14:55 | 1385760 silvertrain
silvertrain's picture

Sometime in 2013, we will for sure get through the 2012 elections...But really, who the fuck knows? I would just be prepared..One thinbg is for sure and that is that all good things do come to an end, this system is no exception...Patience grasshopper..

Mon, 06/20/2011 - 14:55 | 1385747 tony bonn
tony bonn's picture

qe4 is just as jim willie predicted - inevitable and as certain as day following night....disguise it as you will but it will be upon us....

the obsession with the short end of the curve is a signal that the titanic has hit the iceberg....bryan sack and his 20-something bond buyers will be busier than a 1 armed paper hanger papering the taj mahal....while little tax cheat geithner will be rolling over short term debt faster than lucy ricardo manning the candy conveyor belt....

the real problem is the irs - no, not the goon squad.....those are more radioactive than fukushima and will cause massive financial tsunami once they start to unravel....

now is the time to liquidate all bad debt and consider antal fekete's proposal of the re-introduction of gold bonds...we are pompeii; we are vesuvius c. 78/79 ad

Mon, 06/20/2011 - 14:52 | 1385749 TradingJoe
TradingJoe's picture

Whatever "they" are thinking of, it cant be called QE anymore! Politically not correct!

It has to be called something else, it is clear though, that the looting is not going to be over just yet! I do have my doubts as to "their" timing! Rates are "low" already, nothing going to happen there, I bet on more "buying" of whatever they can justify! For this week, markets will go lower!...I think :())))!


Who cares anymore, really?!?! If you're not done with insulation yet you're fucked already!

Mon, 06/20/2011 - 15:12 | 1385841 francis_sawyer
francis_sawyer's picture

Maybe they ought to call it "Dancing with the Banksters" (& invite Jamie, Blanky, & Bennie & Blythe to come show us their 'shuffle steps')

It ought to be a big hit then!


Mon, 06/20/2011 - 14:57 | 1385753 hungrydweller
hungrydweller's picture

Here comes the return of Meltup Mondays!

Mon, 06/20/2011 - 14:59 | 1385783 topcallingtroll
topcallingtroll's picture


I am going all in today and tomorrow.

I think the dealers just gave away the game.

Thank you tyler.

Mon, 06/20/2011 - 15:25 | 1385888 hungrydweller
hungrydweller's picture

I'd be careful with that.  There is no POMO Wednesday and the whole Greece issue is still flapping in breeze.  Wednesday could be big time down.

Mon, 06/20/2011 - 15:01 | 1385778 topcallingtroll
topcallingtroll's picture

Capping interest rates means loss of control of money supply.

Ben must be very confident the deflation monster is our biggest worry. He might just get away with it. People who understand macro economics can find several reasons why, including that the fed may be the only substantial source of money supply growth

Mon, 06/20/2011 - 15:11 | 1385820 HpDeskjet
HpDeskjet's picture

Why is it so hard to figure out that all people that went long commodities/stocks/high yield etc. will just automatically switch into treasuries after the expiration of QE2. Growth and inflation will be low for years...

Mon, 06/20/2011 - 15:14 | 1385822 Boston
Boston's picture

A bunch of economists in this Bloomberg piece think the Fed has done enough. 

No QE3, Operation Twist, etc.....

Mon, 06/20/2011 - 15:09 | 1385827 nicktd
nicktd's picture

If Bill Gross already knows what QE3 is going to look like shouldnt we see xfers into 2-3yr such bonds within his fund?

Mon, 06/20/2011 - 15:11 | 1385837 statlawyer
statlawyer's picture

if Gross can predict the future, why'd he start shorting 10 years back when they were yielding ~ 3.6%?

Mon, 06/20/2011 - 15:27 | 1385897 Boston
Boston's picture

My thoughts exactly!

P.S. I went long the 10 year in Feb when it yielded 3.6%.

Mon, 06/20/2011 - 15:33 | 1385951 nicktd
nicktd's picture

I concur Towelie. I would go further that at this point Fed is scrambling and even sending false signals to expert network (ie still accepting input from PD's and regurgitating) input) on what QE3 will look like.

Still believe QE3 is a ways off and fx markets will be wrong once we know FMOC annoucement.

Mon, 06/20/2011 - 15:26 | 1385895 Justaman
Justaman's picture

What I don't understand is why would anyone think this is good for stocks? 

If the banks are required to keep treasuries (I mean decide to keep treasuries, cough, cough), their capital is going to be tied up in this paper in lieu of freeing up the capital to go into the stock market like during QE2? 

Does this mean there is going to be another credit squeeze, too? 

Just thinkin'...


Mon, 06/20/2011 - 16:12 | 1386150 Greeny
Greeny's picture

Cause it's capping interest rate near 0% or below :). Where you think money will go to collect any yield? Stocks are the best for low interest rate environment. Besides, some miners are now at half price, would you just sell some of your Silver and buy miners to double your money till year end? If you believe that Metals will run higher, then Miners will blow up ones summer is over. Wait and see..

Mon, 06/20/2011 - 17:48 | 1386543 Justaman
Justaman's picture


I understand your point and the impact of low interest rates on valuations.  Cheap money will continue to flow into stock markets and chase yield/returns.  Understood. 

BUT, if the interest rates on these issues become capped, which is ridiculous in it owns sense in a "free" market (and I really don't get how that works if they continue to trade as one of the most liquid investments in the world), who will buy the new T's at such low rate of returns?  Why would the Govt limit its audience by capping rates when it's primary buyer is "stopping" its purchases?  Well, we know the Fed could force the banks to own the T's as they are issued.  If they have to buy and keep the T's, what happens to capital?  Can someone say, capital freeze as it will be stuck in this black hole.  Goodbye net interest margin!

Mon, 06/20/2011 - 15:28 | 1385909 poydras
poydras's picture

Thanks...It feels like you have called it.  And thanks to BG.

The logical evolution was that they a) Had to call it something different; and b) The new program requires some type of open ended target.  Interest rate targeting beyond the FFR meets these objectives.

Mon, 06/20/2011 - 15:32 | 1385926 ThirdCoastSurfer
ThirdCoastSurfer's picture

Banksters stike again, claim it is lack of buyers holding down the market.

If I was a bank and I knew that I could be assured that the 10 year would be capped at 2.5% for a decade or more, I would then be more assured that the amounts I lend out for such things as mortgages would be protected. Lending a 30 year at 4.5% to find rates at the historic average of 7% sometime later would represent a large lost opportunity cost of 2.5% on the money lent out at 4.5%, but with the protection of Twist, I have no such concerns as the money I invest in treasuries, as part of a balanced portfolio,  has no "cost".

Mon, 06/20/2011 - 15:52 | 1386073 AldoHux_IV
AldoHux_IV's picture

With each attempt at QE in one form or another-- the masses will wake up to the economic genocide they have been put under thanks to the central banks, banking cartel, and their paid-for politicians.

Mon, 06/20/2011 - 16:10 | 1386153 tradewithdave
tradewithdave's picture

Even twist cheese from a can taste great when it sits on a Ritz.... good cracker.

Dave Harrison

Mon, 06/20/2011 - 21:12 | 1387260 Itsalie
Itsalie's picture

Looking at 2 year action since last Monday, I say no QE3/OT2 this Thursday. The yield curves on Greek sov debt says NO defaulting this year, so no need for QE3 for now. ISM has not printed anywhere near 50 yet, and so for the 3rd time, no QE3 this Thurs. Short the freaking euro when it hits 1.44/1.45 the next 2 days on more tape-painting type rumors such as read here.

Tue, 06/21/2011 - 03:59 | 1388190 bakken
bakken's picture

AGREE-AGREE-DON'T:  The Chinese will be supporting the Euro, one way or another, invisibly or not.  They need to create a "Real"  reserve currency that they control, but control at a distance. Yuan reseerves woud be a disaster, the Euro suits China just fine.  Keeping the Euro UP, devalues the Yuan in essence, so exports to Europe do not collapse.  With a bigger spread,  they can afford a fairly stable dollar peg.

And, they will need dollars soon.  Cheap food for the masses being one reason!

Mon, 06/20/2011 - 23:25 | 1387732 PulauHantu29
PulauHantu29's picture

How does flipping one bond for another result in higher gold prices?

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