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