Guess Who Is NOT "Rotating" Out Of Treasurys

Tyler Durden's picture


If one reads sellside research (especially that of Bank of America or Goldman), if one listens to comedy-finance fusion TV channels, if one reads newspapers, one can't help but be left with the impression that everyone and their grandmother is now dumping Treasurys and buying stocks. Why - because this is a key part of Bernanke's latest masterplan (which is the same as all his previous "masterplans", which have failed so far about 4 times previously) to force what little retail investing capital is left out there out of the safety of bonds (return of capital), and into stocks (return on capital). The catalyst? This time, for real, central planners will generate enough (controlled) inflation to create losses for anyone holding long duration paper (such as the Fed of course, whose DV01 is the biggest in the history of the world at over $2 billion, but we digress). So just to test whether or not this was indeed the case, we decided to go to the source data for what the smartest money of all is doing: the 20 or so (RIP 21st PD MF Global) primary dealers. After all, if everyone is dumping Treasurys over fears of an imminent surge in yields, and rotating into stocks, it would be them right? Well, the result is charted below: we present it without commentary.

OK, a little commentary. Yes, the black line just hit an all time high, confirming that while everyone else may be selling, the Dealers, the smartest people: those who not only get an advance notice from the Fed itself, but provide feedback on what it should do, are not only not selling, they have never owned more Treasurys than they do now...

Do what they say, or do what they do?

Source: NYFed

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Thu, 12/20/2012 - 16:14 | 3083926 fonzannoon
fonzannoon's picture

NIRP Bitches.

Thu, 12/20/2012 - 16:16 | 3083938 TruthInSunshine
TruthInSunshine's picture

The thing about NIRP is that municipalities and other large entities are already in big, big trouble under ZIRP.

I fear that NIRP would be the death of them, financially speaking. Oh me oh my.

Thu, 12/20/2012 - 16:21 | 3083964 fonzannoon
fonzannoon's picture

I gotta figure Ben has a special printer just for them. They just have to call the red phone. But never between 8-9pm because that is when family guy is on.

Thu, 12/20/2012 - 16:28 | 3083988 TruthInSunshine
TruthInSunshine's picture

This is a fair point. He'll probably "never bail out municipalities since doing so is violative of the Federal Reserve's charter" the same way he "will not monetize the debt."

Thu, 12/20/2012 - 16:29 | 3084001 fonzannoon
fonzannoon's picture

I may send him a note saying I saw him with that midget and I want 10k or I am going to the press. I say there is a good chance he pays up.

Thu, 12/20/2012 - 16:41 | 3084018 TruthInSunshine
TruthInSunshine's picture

Cullen Roche has an interesting article where he argues that the Fed is not monetizing the debt. I like to think that I'm of at least average intellect, but I'm finding it a very abstract essay for whatever reason:

The Fed: Still Not Monetizing the Debt


I think he's point blank wrong, but my present faculties would not allow me to write a concise & coherent rebuttal of his claim at present (that's not a wimp out, it's just true).

I shall lay waste unto his flaming pile of horeshit a little later.

Thu, 12/20/2012 - 16:44 | 3084037 fonzannoon
fonzannoon's picture

Think about what we are talking about here.....the end of the worlds reserve currency. It may take a little while...This cockRoche like to poke fun at Schiff for being wrong. He obviously did not see the hundreds of economists that mocked Schiff about the 2008 crash. He just can't wait to get in line to get steamrolled this time. Maybe in his mind any publicity is good publicity.

Thu, 12/20/2012 - 16:50 | 3084053 TruthInSunshine
TruthInSunshine's picture

Indeed. Roche is a paradox to me, because once in a while, he'll write something spot on, yet other times, he's so far off the mark that it's hard to believe a person is capable of thinking & writing in such an inconsistent way.

Thu, 12/20/2012 - 17:34 | 3084164 SafelyGraze
SafelyGraze's picture

if the fed would go ahead and just buy treasurys directly from the treasury, the PDs wouldn't have to go so far out on a limb loading up on those bonds

would be so much simpler

and the fed could just pay the PDs a "lost business" fee to guarantee whatever the spread would typically have been for the PDs to pocket

by "fed" is meant "taxpayer"

Thu, 12/20/2012 - 19:13 | 3084464 The Alarmist
The Alarmist's picture

You know, a DV01 of $2b really isn't all that much given the rumoured size of their portfolio ... I've got DV01 of $6m on $3b of exposure across the curve.  Are you sure it is only $2b?

Thu, 12/20/2012 - 19:43 | 3084587 strannick
strannick's picture

At we hear that when the FDIC insurance ends on Dec. 31 and all this newly uninsured institutional money is now forced into the safety of short term Treasuries -cue canned laughter- then NIRP goes wild, and the Primary Dealers are proven right once again.

Thu, 12/20/2012 - 20:33 | 3084828 Mike in GA
Mike in GA's picture

Fonz - that's the thing that gets me - the world's reserve currency blowing up.  Never happened before.  It's not simply the size of the debts; huge as they are and worldwide to boot, but the fact of the most widely accepted currency around the world teeters like a seesaw over the precipice while the Fed piles more debt on the dangerous end of the board.

There seems to be no better currency ready and able to supplant ours so if we do blow up due to, say, an overnight popularity reversal, wouldn't that lead to war as cross border flows stop, unpaid liabilities freeze commerce and there's NO ONE big enough to bail the out?  I find the risks here unbelievable.

Somebody shoulda just up and shot Mr. Keynes before he got too big to fail.


Thu, 12/20/2012 - 16:59 | 3084083 Quinvarius
Quinvarius's picture

That guy is an FN moron.  The Fed is defacto buying debt with printed money.  The Fed pays back interest payments that it receies to the Treasury.  That is the definition of monetizing the debt.  His has no point to make other than he wishes he understood economics.  Nothing he wrote is even related to the topic.  It was the Chewbacca defense.

Thu, 12/20/2012 - 17:01 | 3084089 fonzannoon
fonzannoon's picture

Quinvarious you are way off with Chewbaca, it is obvious it is frozen caveman lawyer he is going for.

Thu, 12/20/2012 - 17:03 | 3084101 TruthInSunshine
TruthInSunshine's picture

Guys...guys...please. I said I would lay waste unto his claim later, and now I have less to do.

Thu, 12/20/2012 - 16:39 | 3084024 kito
kito's picture

that was a funny movie fonz.....british i believe? something about a funeral?..............

Thu, 12/20/2012 - 16:49 | 3084046 fonzannoon
fonzannoon's picture

That may be my investment plan for next year. Enough with the market. I will buy $500 of stamps and send out a cookie cutter "I saw you with that midget" letter to a random group of people. No details, nothing malicious. I bet at least a few people still send me a check.

Thu, 12/20/2012 - 17:00 | 3084085 kito
kito's picture

better investment plan would be to hold on the stamps as rare collectibles, as the post office has a few years left at best...............

Thu, 12/20/2012 - 17:03 | 3084099 LMAOLORI
LMAOLORI's picture



Since 2008 they have been paid to hold onto them and that's risk free so yes you could say he has a printer for them


How Bernanke Can Get Banks Lending Again If the Fed reduces the reward for holding excess reserves, banks will have to find something else to do with their money, like making loans or putting it in the capital markets.


The Fed sees this as a radical change. But remember that it paid no interest on reserves before the 2008 crisis and, not surprisingly, banks held practically no excess reserves then. In early October of that year, Congress gave the Fed authority to pay interest on reserves, which it promptly started doing. When the Fed trimmed the federal funds rate to its current 0-25 basis-point range in December 2008, it also lowered the interest rate on reserves to 25 basis points, where it has been ever since.

But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things.

Thu, 12/20/2012 - 17:59 | 3084246 fig_newton Trader
fig_newton Trader's picture

At this point say the fed was to get rid of the excess reserve rate and it worked- banks started lending. Couldn't that also be detrimental as it will flood the economy with liquididty from QE which wouldn't keep up with demand?

Thu, 12/20/2012 - 16:23 | 3083975 Joe Davola
Joe Davola's picture

Gonna be the death of seniors savings forcing more of them on Medicaid, killing that also.

Thu, 12/20/2012 - 16:31 | 3083976 Popo
Popo's picture

If all public companies were both efficient and trustworthy, Ben's plan might actually work.   But Bernanke has never worked for a public company and nor is he an experienced trader.  Therefore his effort to put wealth towards productive purposes will simply add to the massive bonfire of malinvestment, fraud, mismanagement, corporate graft and executive fleecing.  What Bernanke fails to understand about his master plan is that corporations are not able to invest any better than people in environments where profits are irrational and unearned.  These policies create corporate asset bubbles in aquisitions, material, personel, technology, inventory and in every conceivable expenditure.  Bernanke is creating an unprecedented era of corporate inefficiency.  

What creates real efficiency and competition are not eras of wealth and largesse, but eras of scarcity and change.  A good analogy is that war creates better armies and better weapons, not prolonged periods of peace.   Bernanke of course has zero understanding of what happens to large companies when financial reality is made irrelevant, and capital is made plentiful.  (Growth and efficiency are by no means a logical result). This is what happens when academics who are deeply inexperienced in business run monetary policy designed to stimulate business.   The market is going to bend him over the table and humiliate him eventually.  And then all that capital that he injected into the market is going to evaporate, and a generation of Americans will be financially obliterated.

Thu, 12/20/2012 - 16:44 | 3084036 chdwlch1
chdwlch1's picture

Great post.  I agree with 99% of what you've said.  My one point of contention would be that the Fed is concerned with stimulating business.  The only business the Fed is concerned with stimulating is the Banking business, and they sure as shit are stimulating the hell out of the banks!!  If there happens to be a corollary benefit to "other" businesses, then all the better.  But first and foremost, the Banking system must be taken care of.  How long until the banks are healthy again?  Despite all of the recovery proclamations, no one truly knows (except the Fed and the Banks) due to the continued suspension of FASB mark-to-market rules.

Thu, 12/20/2012 - 17:02 | 3084094 Shizzmoney
Shizzmoney's picture

Not even God himself could print enough money to fund JPM's and Goldman's over-levered speculation.

Thu, 12/20/2012 - 19:15 | 3084474 The Alarmist
The Alarmist's picture

You missed the news ... Lloyd and Jamie did a LBO of Heaven, so they don't need God anymore.

Fri, 12/21/2012 - 04:10 | 3086024 Tompooz
Tompooz's picture

Of course! Now I get Lloyd "doing God's work".  

Thu, 12/20/2012 - 17:41 | 3084185 eddiebe
eddiebe's picture

Popo and all you others, better re-think about Ben. I have a feeling he knows exactly what he's doing.

Thu, 12/20/2012 - 17:03 | 3084095 A. Magnus
A. Magnus's picture

Good riddance to bad trash, I always say! Those oversized corporations run by inbred bankster spawn need to get schooled properly...+1

Thu, 12/20/2012 - 18:08 | 3084273 ball-and-chain
ball-and-chain's picture

Aren't treasuries doing well?

Why would people get out of them?

If your expecting a complete collapse, you're mistaken.

The model is Japan.

Endless recession and deflation are the future.

Death by slow cuts.

Thu, 12/20/2012 - 19:44 | 3084590 THX 1178
THX 1178's picture

The foreign holders of US treasuries won't allow it. They see what QEternity means for them, and they will soon be offloading teasuries faster and faster.

Thu, 12/20/2012 - 16:16 | 3083942 firstdivision
firstdivision's picture

Why no love for the 6-11?

Thu, 12/20/2012 - 16:17 | 3083943 viahj
viahj's picture

i reckon that they'll be flippin about $45b/month back to Bennie, with a small fee

Thu, 12/20/2012 - 16:17 | 3083944 CrashisOptimistic
CrashisOptimistic's picture

The Fed has EXPLICITLY SAID it is buying Treasuries, in enormous amounts.  

How is that not a bid under them?  If you owned long term bonds in Jan, you're up 14%.  Why would that change next year when Bernanke is buying MORE than he did this year?

Thu, 12/20/2012 - 16:25 | 3083978 AmCockerSpaniel
AmCockerSpaniel's picture

You are right on about the Fed buying Treasuries from the dealers (Fed is paying cash this time). So what is the Prim Dealers going to do with all that "new" money?

Thu, 12/20/2012 - 16:27 | 3083986 buzzsaw99
buzzsaw99's picture

bonuses, duh

Thu, 12/20/2012 - 17:01 | 3084087 AmCockerSpaniel
AmCockerSpaniel's picture

You know you are right, and it makes me sick.

Thu, 12/20/2012 - 17:03 | 3084097 kito
kito's picture

hey look on the bright side, at least the yacht industry will continue to flourish...............................who says there is no manufacturing left here!?!?!?

Thu, 12/20/2012 - 16:25 | 3083980 fonzannoon
fonzannoon's picture

It probably won't change next year. Maybe not even the year after. But when it changes no one will be kind enough to tell you in advance. Luckily your face will get ripped off so fast you may not feel the pain.

Thu, 12/20/2012 - 17:04 | 3084102 CrashisOptimistic
CrashisOptimistic's picture

I'm going to presume you're younger than 60.

If you're older than 60, you don't have to stay in.  You make your money over a couple of years and stand down into cash.  $30K/yr funds a nice life for your final 20 yrs if you own your house outright.

After you have cash, 30K/yr X 20 yrs to age 80 is only 600K, required.  If inflation heads up, buy TIPS, but owning your house outright eliminates rent inflation, which would be the primary source.

An awful lot of guys on ZH are not calibrated on where the money is.  Old ppl have had a lifetime to accumulate.  Young ppl have not.  You have to think like a scared old person to know where it's going to flow.

Thu, 12/20/2012 - 17:11 | 3084118 fonzannoon
fonzannoon's picture

Old people can't/won't wrap their mind around the fact that this is unsustainable. If you are 60 plus, the idea of a "reset" is not very palatable. The young people won't have much fun with it either. Like Kyle Bass said last night, it's not an if anymore it's a when.

Thu, 12/20/2012 - 18:51 | 3084399 TwoHoot
TwoHoot's picture

For the over 60 set (I've been there for a decade), inflation and ZIRP is the killer. Deflation would be a windfall (if the kids and grandkids don't show up on the doorstep with luggage). I am sure we will see both inflation and deflation but the sequence and timing is unknowable, at least to me.

I have been edging out of the system for many years. No debt, more tangibles, and less money on deposit with financial institutions of any kind. I quit pricing silver and gold in dollars and started thinking about them in terms of things I will need. For example, an ounce of silver is about 10 gallons of gasoline or 20- 25 loaves of bread. Fifteen ounces of gold is a modest funeral and twenty is a modest new vehicle. I set aside 15 ounces of silver and call it a month's utilities. Overall, I think I need about 100 oz of silver for a month's living expense.

Gold looks overpriced to me right now so I am buying more silver than gold. It has varied over the years but pricing PM's in essentials instead of dollars offers a different perspective.

It takes a lot of years to move money out of the regular IRA or 401-k and out of the financial system without moving into higher marginal tax brackets or paying penalties. If you are under 60. Smallish 401-k loans help some if you employer allows them. Sadly, all the silver and gold was lost in a burglary and insurance didn't cover it. That happened while I was worrying about boating accidents ...




Thu, 12/20/2012 - 16:19 | 3083950 koaj
koaj's picture

Damn it feels good to be a banksta...



Thu, 12/20/2012 - 19:16 | 3084481 francis_sawyer
francis_sawyer's picture


Thu, 12/20/2012 - 16:18 | 3083951 youngman
youngman's picture

But if no one is buying at the auctions... the PD´s have to buy them....that is why they are PD´ either they are buying them because they think they are a good deal...or they are forced to buy them...because no one else is????? 

Thu, 12/20/2012 - 16:20 | 3083956 koaj
koaj's picture

the fed buys them in a month anyway at a nice little premium and then gets the government to charge us an income tax to cover the rest of the interest on the bonds


best. scam. ever.

Thu, 12/20/2012 - 16:23 | 3083969 humblepie
humblepie's picture

In that sense, this article has a point. The PDs never lose money, or the FED makes sure they don't. So, yields are not going up....

Thu, 12/20/2012 - 16:22 | 3083962 humblepie
humblepie's picture

you read my mind (or I yours?), youngman

Thu, 12/20/2012 - 16:39 | 3084014 AmCockerSpaniel
AmCockerSpaniel's picture

The Fed is printing "new" money (inflation) to buy those bonds, and will hold those bond forever. This dept destruction via the Fed. Free money for the government (USA). We will never see hyper inflation because it's being done slowly. But there will be inflation from all that money they are printing this time. I'm looking for a disconnect from the paper Gold, and the physical Gold. 

Thu, 12/20/2012 - 16:20 | 3083954 humblepie
humblepie's picture

PD holdings are at a record high because they HAVE to buy at auctions, which by desing, cannot fail. The record holdings by the PD's just means there is a RECORD of less buying by entities other than the PDs. 

Thu, 12/20/2012 - 16:24 | 3083974 Tyler Durden
Tyler Durden's picture

Actually no: the Fed promptly monetizes all gross 10Y+ exposure onboarded by the dealers via POMO in the $45 billion of 7/10/30Yr flow monthly (the right end of Twist which going forward will not have the Fed selling the short end). Observe how quickly any given cusip is consumed by the Fed in POMOs following any given auction up to the 70% threshold.

On a net basis, the ONLY window where dealers maybe should have a notional position is, ironically, in the 6-11 hump where until now the Fed was far less active, and where PDs in fact have a net short exposure.

And Dealers have always HAD to buy at auctions, not just in the past 6 months.

P.S. one thing not mentioned is that MBS holdings recently also hit an all time high, at $94.4 bn a week ago.

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