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Weekly Capital Flow Observations, And The Fed's Treasury Purchase Sweetspot
Some of the key capital/fund flow observations from last fortnight:
Foreign Central Banks continue preferring Treasuries while shunning agency/MBS.
- $19 billion in Treasury purchases week of Sept 16, while $4 billion in agency/MBS was sold.
Primary Dealers only bought front-end Treasuries ($5 billion) under 6 years, while selling everything else, including dated Treasuries ($2 billion sold in USTs over 6 years) Agencies/MBS ($6 billion) and Corporates ($2 billion), in the week ending Sept. 16.
Even more troubling is that in the Sept. 9 week, while deposits rose by $21 billion to $3,854 billion, the money went only into cash, not securities
Below is a snapshot of the Fed's Treasury purchase sweet spot. Of the almost $300 billion in treasuries purchased via QE, roughly half of purchases has been of the 7 Year plus variety, with the following breakdown between 7, 10 and 30 Year: $57 billion, $40 billion and $30 billion. The tenor most preferred by the Fed has been 5 year maturities, at $63 billion purchase.
The last chart is particularly relevant, especially in the context of the previous disclosure about Foreign CBs focusing almost exclusively on Bill purchases, and even more so, that the Fed accounts for 50% of all UST purchases in Q2. Comparable data for Q3 will be presented as soon as the most recent TIC data is released, although major changes are not expected. One can assume that absent the Fed artificially creating excess demand for the 5Y-7Y sweet spot of the curve, the 2s5s and 2s7s would likely be substantially steeper, likely resulting in increased steepness further back in the curve, which would subsequently result in a much wider 30 Year Mortgage - 10 Year UST spread. As a reminder: the number one priority of this entire charade is to keep 30 Year mortgage rates down, and reflate the housing bubble. And while relative MBS/Agency spreads will likely be relatively fixed to the appropriate UST data point, the gradual swing in far-dated USTs wider, starting in one week, will make the cheap mortgage play increasingly more difficult. If the secondary threat of declining foreign purchases also materializes, then Bernanke will really have his hands full starting the first week of October.
Data sourced from Morgan Stanley
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Why don't the foreign CB's want MBS, aren't they like boxes full of gold and stuff?
The reason the Fed is focusing on 5y and 7y is because it is primarily these duration bonds (in addition to the 10y) which are tied to JP Morgan's $62 trillion in OTC interest rate swaps as reported by BIS.
That is, Treasury complex is being kept afloat by OTC derivatives which generate artificial demand for bonds. See the excellent work of Rob Kirby for details.
http://www.financialsense.com/fsu/editorials/kirby/2009/0804.html
It appears the dollar is a bit to fungible for it's own good. It passes in and out of fiction and make beleive more times than peter pan.
Very interesting and disconcerting. There is an elephant in my living room (and every living room for that matter), enough JPM IRS to exceed world GDP and for no logical honest use. I cannot get my mind around the reasons and implications for this. Clearly it's so large that it affects interest rate weather, modifies it, controls it even. And it's well screened from view. Why? National security? What? Are our new secret weapons atomic finance instruments? So sorry, they accidentally irradiated most of the population. Even more reason to keep them secret. Oh, and why should I buy that nonsense when greed is certainly the devil behind all this. Greed has historically been the driving force behind wars and war procurement. Fear is only the messenger.
But aside from speculative ranting, only natural when so many pieces of the jigsaw puzzle are missing, the sudden awareness of this shadow elephant in one's house is beyond disturbing. One looses all comfort, flits with madness, and paints future speculations with glowing orange and singularity black.
Thanks for the work of putting this together.
The "secondary threat of declining foreign purchases" is largely a bugbear of participant pavlovian and misinformed fears for now. Foreign purchases will continue for some time, most likely, and the long end of the curve will stay or trend down for some time, I'd wager.
Much of the chatter about China is not sufficiently serious to merit mention, and that includes some of the offhand hyperbole proffered at zeroh. The balance of trade issue must be given its due. And China's difficulties with a subsidized investment economy dependent on exports during a global demand contraction, are of the most moment. If anyone reading this has not digested Pettis and cannot come up with coherent counterarguments to his pessimism as regards China's ability to willy-nilly through the yoke of the dollar off their back, then they should not be taken seriously, in my opinion. In short, they will be buying our debt for their own needs for some time to come.
So, with that threat a bugaboo, there is indeed still tremendous pressure on the FED, as much political as operational. and to discuss that....
another time perhaps. The Hendry scenario will begin to play itself out shortly. Look for bonds to go long and yields to come in even lower. Look for EQ's and commods to pullback.
This is and has been a solvency crisis as much as a demand crisis (not a liquidity crisis), and the solvency issue has yet to rear its full head. I look for that too happen sooner than most expect.
Much of the "borrow and buy" trading will be unwound in order to work out the insolvency. Participants will begin to discount the more dire truth underlying the "extend and pretend" shortly. Q3 earnings may disappoint. Q4 will be time for whatever writedowns are operationally and politically feasible. and on and on.
China is buying our short term debt...Ben is printing our long term. As Julian so eloquently pointed out, when you become reliant on borrowing short term it is the beggining of the end.
China is also buying gold more and more...I doubt that Asia just doesn't show up to an auction but the feeling I'm getting is less and less debt, more and more gold (which will provide a hedge against their dollar holdings) They are also stock piling commoditites so when the global economy does resume (Asia leading the way) They will have the supply to meet the demand and the U.S will have to pay that price.
China has made it clear. Gold is good.
I will take some time and ponder the whole of your post. However, I could not agree more with the following:
This is and has been a solvency crisis as much as a demand crisis (not a liquidity crisis), and the solvency issue has yet to rear its full head. I look for that too happen sooner than most expect.
Very fine point deserves wider hearing.
no, if they don't show up in october then he can just let go of some of the high yeild toxic garbage and force them to buy. pay to play.
We're seeing M2 contract, the b!@#$%it in the HY world is beginning to feel gravity whether or not bond owners like it. Deflation is back baby!
Agreed, Tyler. Supressing the 10-year T movement has been the name of the game. Now we will see slackening seasonal demand layered with growing mortgage rates tracked to the movement of the longer-dated 10s.
I guess this means an extension of the cash-4-mortgages game. It'll go to $20k for another 6 months.
Fed has been shooting up its own recovery heroin for far too long, believing the green shoots will sprout from housing's pile of excess dung.
This calamity is another good reason to headquarter the Fed in Detroit.
good editorial from the Telegraph today
No reform, just a cosmetic patch for a discredited, flawed regimehttp://www.telegraph.co.uk/finance/comment/liamhalligan/6234947/No-refor...
"Obama's oratory was typically impressive. The trouble is, it wasn't true."
Don't you all see that this Liam Hailligan character is an overt racist?
Fuck you Congress!!! Fuck you Dodd/Frank...
How many more victims of your powerful Greed in the pockets of the Banksters!!!
http://news.yahoo.com/s/ap/20090926/ap_on_re_us/us_maryland_bodies_found
Stock market crashes are a great way for the Fed to get money into the treasury market.
The degree of manipulation in which the Fed imposes on the equity market through PD's is opaque at best (to me) but...If it is true they manipulate it to the upside my guess is that they can also manipulate it to the downside. And if the appetite for UST's decline (and their sole purpose is to keep the 30yr low) my only assumption is that a decline in the stock market will be one of the only options left.
Thanks (once again) TD for this analysis.
TD said: "As a reminder: the number one priority of this entire charade is to keep 30 Year mortgage rates down, and reflate the housing bubble."
I'm delighted that you put this in because in the midst of all the shit going down it is important to remember to keep one's eye on the ball and I happen to agree that this is the main objective of the Fed and US gubbermint.
I would recommend ZHers to read Bruce Krasting's column today on Warsh's letter...it's a good one!
DH - In case you missed it. I know you would be interested.
http://www.doctorhousingbubble.com/mortgage-electronic-registration-syst...
thanks layne...will read sunday a.m.
i did see the kansas case earlier this week....just don't know if it has any legs outside of that jurisdiction...i understand some FL and NY judges are giving the lenders a hard time as well.
I do recall from my title days that many of the county clerks in NY had issues and differences on recordation, assignment, etc issues with MERS
off topic
Today Google is eleven years old.
This is Google circa November 1998
http://web.archive.org/web/19981111183552/google.stanford.edu/
At the slightest whiff of "another bear market" in stocks, money will be fleeing back into Treasuries.
For now, everyone is buying fixed income en-masse, even corporates and junk.
Stock Charts
Members of the Bernanke, Geithner, LLP are all trying to keep multiple spinning plates aloft:
1. Keep mortgage rates ultra-low to entice more sheep to buy McBoxes.
2. Stave off deflation by keeping stocks well bid around the globe
3. Cap gold, oil, and agricultural commodities in order to perpetuate negative CPI numbers for years to come
4. Engineer Treasury yields down at least once a month to float the $100+ billion of Treasury issuances necessary to finance our garagatuan deficits.
So far, they have been 100% successful.
- Voracious demand for housing by former apartment renters, easily financed with 4.95% mortgage rates, is slowly mopping up the foreclosures.
- S & P 500 has rallied more than 50% off the lows, which has drawn in hordes of daytraders seeking to make a killing by "working at home".
- Gold cannot hold $1,000, all oil and gasoline rallies are capped immediately, natural gas, soybeans, corn, etc, trading at multi-decade lows when adjusted for inflation.
- Gargantuan Treasury issuances are 200% - 300% oversubscribed, month in, month out, with no hitches or problems whatsoever.
In a nutshell, the Fed has engineered "Financial Nirvana" for the time being.
Any selloff in stocks will drive interest rates lower, which in turn will eventually incite "Animal Spirits" and create another bubble in stocks.
Wash, Rinse, Repeat.
How easy is that?
Yes but the sheeple's lives are getting worse and they are starting to wise up to what is going on. Populist outrage may be the tipping point, either here, China, or Europe.
"As a reminder: the number one priority of this entire charade is to keep 30 Year mortgage rates down, and reflate the housing bubble."
As a civilized society, are we so ignorant as to let that happen again? Will I again be able to purchase $ 15,000 in tangible personal property and purchase a new home without having a job and money?
Sure call JP Morgan and have them arrange an IPO for ya. They'll upgrade ya to superstar on the way up the ladder and you'll have the cash by next weekend. Do it quick. Nobody is doing IPO's right now.
Thanks TD, PM, RT... All of you for this excellent thread.
Good stuff. The shortening of maturities is what money printing is all about.
About 60% of all mortgages in the US are recorded at the county court houses under the name MERS (mortgage electronic registration system) which efficiently allows for the sell/transfer of pieces of a MBS. The Kansas Court of Appeals just ruled MERS has no standing in foreclosurer process making it nearly impossible for lenders to get the dead beats out the homes and resale the home to pay off some of the outstanding debt. This "MERS" problems will likely become a larger national problems forcing the FED to buy and hide more near worthless MBS paper on their balance sheet. Will it never end.
The FED is not why we are in this position, we continue to chase the wrong parties, that is why I am so pro-FED.
The parties responsible will keep cheating and stealing from us, the FED is merely reacting to a total lack of regulation and implosion of the private sector.
We dont have TARP if banks/companies dont gorge themselves through margin, yet we arent doing a damn thing to change the events which caused the problem..
As usual our inept congress and stupid public looks for the easy target, while the cheats and frauds will continue to rob us blind.
Do you really think that congress would be able to function with spending only receipts and not borrowing via the 30 yr treasury (thanks for returning it GWB)?
To me the reason why open market transactions arent monitored as much is they are FLUID..they change all the time, one day flows are out, other days flows are in, plus it is IMPOSSIBLE to make a paper trail for currency swaps.
There is ZERO way that the GAO could either comprehend or track foreign currency swaps to their end user, what a total waste of time and money and effort to even THINK they could.
The discount window is another misnomer of the FED..so if you say that "friends" are using the discount window, well you are right and the discount window is a short term duration purpose for liquidity, and the discount window consumption serves a very important purpose and I have zero issue with the FED issuing and returning "commercial paper" esque loans in the short term during liquidity crises, which were CAUSED by the private sector.
Go after the margining, go after the financial firms, force them to both regulate themselves, AND pay for external regulation if we are going to try and make things better.