The Fed Now Owns 27% Of All Duration, Rising At Over 10% Per Year

Tyler Durden's picture

When it comes to diving trends in the Fed's take over of the Treasury market, there are those who haven't got the faintest clue about what is going on, such as Paul Krugman, who naively looks (as Bernanke expects all economists to) at the simple total notional of securities held by the Fed and concludes that the Fed is not doing anything to adjust fixed income risk-preference, and then there are those who grasp that when it comes to defining risk exposure in the bond market, and therefore in equities, all that matters is duration, expressed in terms of ten-year equivalents. Sadly, this is a data set that not every CTRL-V major or Nobel prize winner (in order of insight) can grab from the St. Louis Fed - it is however available to those who know where to look. And as the chart below shows, even as the Fed's balance sheet has remained flat in notional terms, its Ten Year equivalent exposure has soared, rising by 50% during Operation Twist alone, from $900 billion to $1.313 trillion. What this means in practical terms, as Stone McCarthy summarizes, is that the Fed now owns 27.05% of the entire inventory in outstanding ten-year equivalents. This leaves less than 75% of the market in private hands.

The chart below shows the total Ten-Year Equivalents in Duration terms held by the Fed, and total outstanding including and excluding the Fed's SOMA holdings. Observe the red-line which is precisely what the Fed is targeting - it shows that courtesy of Twist 1+2, there has been virtually no change in the private market constituency in 10-Yr equivalents.

Perhaps most important is the chart showing the percentage ownership of the entire bond market by the Fed expressed in 10-Yr equivalent terms. It is now at 27%, and rising ever more rapidly.

The visualization of the complete takeover by the market is even more obvious when instead of observing ten year equivalents, one tracks the simple maturity of the debt entering (the SOMA) and leaving (the private market).

And the same using Mid-Modified Duration. Once again: you will not hear Nobel prize winning economists ever discuss these concepts.

Finally, and as demonstrated before, here is a snapshot of the Fed's nominal holdings by CUSIP spread by maturity. Some may be surprised that the Fed already owns 70%, or the maximum allowed without the Fed destroying all liquidity in a given CUSIP, in various issues, primarily in the 7-10 year window.

This is how the Fed's holdings distribution looked like in a bygone age, in July 2003 when the first LSAP operation began, when things were "normal" - it will never look like this again, as the Fed will never be able to sell its portfolio into the market. After all, the Fed now is the market.

* * *

Where are we going with this analysis? It should be rather obvious. Zero Hedge was the first to forecast what the Fed's balance sheet would look like, anticipated a $1.2 trillion increase in the Fed's asset size through the end of 2013, or a total of $4 trillion. Subsequently, Bank of America came out with a forecast of $5 trillion through the end of 2014, at which point the Fed will stop the liquidity tap.

Now it is Goldman's turn to opine.

Sure enough, the team led by Jan Hatzius who has been pushing for not only QE3 since January 1, 2012, but for NGDP and other programs that finally kill the Stock argument erroneously used by the Fed for decades, and replace it with a Flow-based approach to asset-price 'modelling', sees QEternity continuing not only into 2013, into 2014, but well into 2015. June 2015 to be precise.

To wit:

...we expect the unemployment rate to fall to 6¾% in the middle of 2016. This pins down the timing of the first rate hike for mid-2016 as well, a year later than under the FOMC’s more optimistic view.


The corresponding projections for QE3 are shown in Exhibit 4. Under our own forecasts, we expect purchases of $75bn/month through 2013, split into $30bn/month for MBS and $45bn/month for Treasuries. By the end of 2013, we expect the committee to reduce the pace of purchases to $50bn/month, and buy at this pace through the middle of 2015—again, a year before the first rate hike. So in effect, the program proceeds at the same pace as under the FOMC’s economic forecasts, only for a longer period because the recovery is more sluggish.


Under these assumptions, the overall size of QE3 would be just under $2trn, split into $900bn in MBS purchases and $1.1trn in Treasury purchases. If so, QE3 would be three times as large as QE2, though only moderately larger than QE1. Again, the average flow of purchases would be somewhat smaller than under both of the prior programs, and the difference in size would be due entirely to the longer duration of QE3.

What this means is simple, yet tragic: the Fed will continue increasing its 10 Yr equivalents by roughly 12% (of the total market) per year, for at least the next 3 years, at which point it will own 60% of the entire Treasury market. It means that the Fed will monetize all gross long-term issuance every year for the next 3 years, while leaving the ZIRP paper, ala that maturing under 3 years, and yielding negative return in real terms to the Direct and Indirect investors with its blessings, as all sub-3 Year TSYs in inventory become the equivalent of cash (albeit with a maturity date).

Alas, since it is the Fed whose actions continue to distort the structural basis of unemployment, and since inflation is and has always been purely in the eyes of the governmental beholder, manipulated at will, it is virtually certain that the only thing that will stop the Fed in the future, is when it literally runs out of paper to buy, and has to monetize every dollar of new issuance, which at this rate will happen some time in 2016-2017.

But that will only be the beginning, as at that point the Fed, which will hold every US Treasury paper in the entire market, will simply pull a BOJ, and proceed to monetize everything else: REITs, ETFs, Corporate bonds, but not stop there and go ahead and purchase all the insolvent student loans, pension funding debt, and all other rate-based paper.

The only question is how long until this glaringly obvious endgame is priced in by what remains of the "market."

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pendragon's picture

excellent analysis

Silver Bug's picture

One day the FED is simply going to implode on itself.

True.North's picture

All your duration belongs to us!

LMAOLORI's picture



You know those lizard people conspiracy theorists talk about stop to think of it krugman looks like one of them and his economic theories are out of this world

QE3 leaves the Fed without any more ammo so financial markets will fall and fall this fall

syntaxterror's picture

No more ammo?

Just extend ZIRP (ie NIRP) out until 2020 or 2050 or 2100. And he can start buying equities directly in QE4. And then buying dead malls with QE5. And then burned out Chevy Volts with QE6.

The ammo is limitless and the free market wall street elite will bust a nut in anticipation...

Renewable Life's picture

Still 75% more to go, until we are Japan!!!!

These criminals know how far they can still go, and if we wait quietly for them to "burn out" and think things will go back to normal, we are the ones dilusional!!!

Colonel Klink's picture

Ah so, you have miscalculated grasshopper.  Amurikans are not the Japanese!  I look foward to the day upon which the Fed awakens the sleeping giant of the American sheeple.  Then the tides of war will change.

dark pools of soros's picture

It's real.  That's all I can say at this time..

EscapeKey's picture

The Bank of England formerly owned about a third of British gilts (when Mauldin wrote his "Endgame" book). That has since increased with further QE programs.

pendragon's picture

difference is we are a tinpot nation, we aren't trashing the reserve currency and our qe has zero impact on global commodity prices

surfersd's picture

As interest rates rise the FED will become insolvent pretty darn fast as their entire bond portfolio will be underwater. Will they have to print more to fix that problem?

syntaxterror's picture

Rise? Simple, just keep them from rising ever again. Working so far in Japan.

WhiteNight123129's picture

Japan would love to see interest rates rise.


Mine Is Bigger's picture


Does it even matter when you can print money?

Sancho Ponzi's picture

This is Bennie's 'Bucks for Bonds' experiment. He'll buy up most of the outstanding bonds, then Ben and Tim will light 'em all on fire. Bennie's assets (purchased bonds) are vaporized, but who cares? The Fed doesn't have to make a profit or balance the books. The liability side of these transactions (trading FRNs for bonds) is all that fiat money he's been printing, but that's ok with him - more cash to line the pockets of his masters. Timmy's liability vaporizes as there are no more bonds to repay, so the debt shifts from the Treasury to the Fed, but that's ok, because we all know the Fed will never be held accountable for its actions.

DeadFred's picture

And what will the derivatives traders use as collateral next week when they have to back their positions?

Edit: and how does anyone take seriously an estimate on the unemployment rate in 2015?

timbo_em's picture

Keynesians like the iKrug and all politicians love those mid to long-term estimates and I'm pretty sure those crooks take themselves pretty seriously. But other than those guys? I guess nobody.

magpie's picture

The sinking fund posing as a central bank could just repackage and sell them anyway.

Bay of Pigs's picture

Ah Houston, we have a problem...

Yen Cross's picture

 The new "National Anthem" and "Great Seal" of The United States Treasury.

Zero Govt's picture

"...there are those who haven't got the faintest clue about what is going on, such as Paul Krugman.."

Krugman being clueless is not news ...well maybe to Krugman it is but not the rest of us!

"..the Fed, which will hold every US Treasury paper in the entire market, will simply pull a BOJ, and proceed to monetize everything else..."

Krugman nirvana, he has wet dreams about this

just one problem Paul, put the economy in the hands of unproductive idiotic meddlers (ie. politicians and central bwankers, or academics) and you enter a crash and burn suicide cycle as demonstarted by communist USSR and China

history is whistling you a tune Krugman, don't you hear it dickhed?

WhiteNight123129's picture

Krugman misunderstands Keynes. When economy is in the funk, force the ones with cash to spend, it is not always the gov. This time it is NOT the gov, it is the Rich and Corporations, make the long bond go down create a mini shock  oil prices upwards by purposedly creating instability in middle east, push the Gold price up, make the stock market start to sag, let the 2 +20 burn their monied capital  and redemptions will fall like the rain, those people and corporations will spend.


CheapBastard's picture

Ok, so the 10-year was over 3% 2 years ago and now is heading south to what, less then 1.5%?


The 'practical effect' to push investors into riskier assets while operation twist holds the 30 years down also to avoid the tail end of the curve rising which still 'forces' investors into 'the markets' and out of treasuries if I read this correctly (pls correct me if I am wrong). Seems like oil, gas, food and PMs will reflect this 'practical effect' soon despite what Dalio said the other day about the deflationary forces.


As far as unemployment dropping, I don't see meaningful jobs being created any time soon. Low paying jobs are the 'new paradigm' for most people. I just hope all those fired BAC and Nomura bankers don't steal my part-time job at McDonalds.


I am already competing with those 30,000 HP job-less:


Thank you for this thought-provoking article.

Mr. Regression's picture

Rather than get "pushed" into riskier asset classes.......I just spend less.  Over the past few years I've developed a whole new attitude.  Look, do I really need that Lexus anyway?  You have to be debt free to do it though.

Sorry Ben, you can't make me.

WhiteNight123129's picture

If you are a holder of Treasuries, Ben is buying everything to better wack you later. This how he will force big cash hoarders to spend.



Mr. Regression's picture

You're right, but what the hell, we're all going to get wacked anyway.  I don't own treasuries.  For the time being it's just CD's and a little bit of PM's.  Not to exciting but I sleep better.

magne13's picture

What is the difference of a Pimco cornering a 10yr market or the FED doing the same thing.  Theoretically they can force short treasury participants to pay up to any price to satisfy and obligation, thus theoretically keeping an artificial cornered bid to the treasury complex.  The function of the actual treasury market in terms of secondary market is virtually an unshortable market.  For what type of issue will a seller be able to deliver if the issues are not there to borrow.  This to me should be illegal for one entity, especially a private entity to be able to do this.  I guess in todays finance nothing is illegal, just rather frowned upon.  Hell if Japan can buy everything and still keep rates at zero than the US can do exactly the same thing.  Buy Stocks, Buy Gold Buy Treasuries, this is a no lose proposition.  The only way this trade loses is if the world ends, I don't think our generation is so lucky.

dark pools of soros's picture

eaxctly but they will have 'crashes' to keep the peeps scared and to rinse and repeat..  cashing out and crashing is good for quick profits and shows that the market is still 'natural'



FranSix's picture

Very ironic that the Federal Reserve as the central bank is now obliged to buy bonds out of the market while other central banks sell them, and other central banks are buying gold with the increase in currency reserves, as they diversify.

laomei's picture

I'd say "toot toot all aboard the Nippon express", but the US has really shitty trains and nothing really material to show for all this shitfuckery.

Yen Cross's picture

 This is classic. The fed. monetizes debt into oblivion, and causes massive inflation due to devalued Fiat, with the end result being raising interest rates on "shit", that no one can afford!

bob_dabolina's picture

This makes me think that anyone wanting to be President of the US is probably an 301.9 (Axis II), 318.2, and probably suffers from 787.6 on the DSM-IV.

No normal person would look at all this shit and be thinking...yea, I'll be the fall guy for this, I think that's a really good idea. Hell, George Bush is still getting blamed for shit and he hasn't been President for 4 years.

Schmuck Raker's picture

6 3/4% unemployment by mid '16? Yeah right.

And as UE doesn't show improvement, we'll see the Fed monetizing on Fast-Forward.

All these projections will be short of the true numbers by 3-4X by '15, about the time it all falls apart.

Tic tic tic tic tic tic......

laomei's picture

It'll get there, but the labor force participation rate will be in the mid-40s by then.

PAWNMAN's picture


thorgodofthunder's picture

Why hasn't $US tanked yet then?

PAWNMAN's picture

Just like the housing bubble, and the tech before it, these things always take longer than anticipated. Also, the U.S. has benefited from the European crisis, distracting people from the REAL crisis playing out here courtesy of Helicopter Ben. The chickens WILL come home to roost believe me!

max2205's picture

Think macro. 1900 - 1929 up 1930- 1945 flat 1946- 1970 up
1971-1983 flat 1984-2000 up 2001 - 2012(?) flat? (13 yr-16 yr flat)

Next move? You tell me. The population of the US : 1900 30 mill, now 350 mill

sasebo's picture

I think it was delusional asshole geithner who said something like --- "we can't make it without a financial sector".

He just can't comprehend that the real economy came first, then came the financial parasites.

If you really want to impress someone with your deep wisdom, explain in detail how all this meaningless financial crap affects the REAL ECONOMY. That's the only thing that matters. I keep reading all this vague, meaningless  bullshit like this post but never see anything useful. From the Keynesians, Austrians, Peter Schiff, Gary North, Lew Rockwell ---- nobody knows. Just all vague crap.

I'm talking about something useful. Either no one comprehends are they're keeping quiet. 

WhiteNight123129's picture

The Fed needs to be the biggest holder of treasuries in order to be able to push long bond yields up, yes UP later on!

The Fed has to corner the market and can force prices up through corporate borrowing rates via yield curve itself, read the XIX century litterature to check how that works. This way they can wack the bond holders slowly but terminally and force spending from cash hoarders. Do not hold hold your breadth for Japan guys on the long side for bonds. Once the Fed has gobbled up everything they can charge up the defibrillator and shock the shield curve upwards in total control and force prices and inflation up (through corporate borrowing rate) and wack over-crowded capital owners into converting their monied capital (their dear treasuries, they will be sobbing)into circulation. Do not fight those guys. People believing those guys are dull are making a  HUUUGE mistake, they are sending the market on a goose chase (as usual). The guys believing the Fed wants to buy for eternity while assuming that they lose control of the yield curve like Japan (too many bonds in public hands there, you got to remove it!) are in total contradiction with themselves. Short the 30 years, no brainer trade and lift your Gold position a bit when yield hits 4.5% by mid 2014 on the 30 years. Yield curve =inflation expectation = inflation = decision to hoard or spend.

Techically the Feds balance sheet would be insolvent until those bonds mature, there is a massive excess of financial assets to circulation, wait when the financial assets are converted into circulation... Debt to GDP shrinks. Ben, the commodities traders love when you fuck the bond holder and equity guy while they think you are their friend. Comodities part on and bear market on bonds started a couple of weeks ago.

The Fed does not need to buy bonds look at Germany, the only reason the Fed buys bonds is to be able to push the yields to historical lows and pierce the bond bubble abces and start the move of bonds down and have the economy start to function in inverted mode, rising long bond, rising commodities, deflating financial assets (and debt) to circulation (GDP), deleveraging. In this mode nominal GDP  increases, yet it sucks for capital owners.

Many people only understand the leveraging mode, there are two modes out there.




Clever Name's picture

So, the Fed ends up owning most if not all of the US debt and all of the BS 'assets', MBS, etc. Throws all of it into the incinerator (or Corzine vaporizes it!) and poof! Debt gone!

Bernanke: See, I told ya I could fix it!

thorgodofthunder's picture

Interesting hypothesis White Knight. But doesn't your theory crush the banks capital? Don't the banks own the Fed? How is that in their best interest?

Btw, what are your thoughts on real estate assets like apartments?

pismo10's picture

And what is the endgame, death of the dollar. You guys are also forgetting the 75 trillion in welfare bills coming due soon.