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The Fed's Ten Year-Equivalent Holdings Hit A Record 29% Of The Entire Treasury Market

Tyler Durden's picture




 

With the Fed purchasing $45 billion in Treasury securities across the curve each month, keeping a consistent picture of Ben Bernanke's consolidated, risk-adjusted holdings can be somewhat problematic: the best way to do this is to represent the Fed's $3 trillion balance sheet, of which $1.7 trillion is in Treasurys, in the form of ten year equivalents. A ten-year equivalent is the amount of 10-year notes that must be held by the Fed in order to remove the same amount of interest rate risk from the market as its current holdings. This allows for a uniform representation that eliminates the duration variance along the curve. Looked in this light it may come as a surprise to some that as of this moment, the Fed now owns some 29% of the entire amount of marketable ten-year equivalents outstanding in the entire US bond market.

As the thin blue line in the chart from Stone McCarthy below shows, as of the current week the Fed holds a record 28.98% of all ten year equivalents, an amount that is double what it was some 2 years ago. At this pace of accumulation, Bernanke will likely own about 35% of the entire bond market in one year, and the only reason it is not much more is because as Bernanke is monetizing, the US Treasury keeps adding paper to the TSY market keeping the Fed's share of total holdings relatively constant.

And for the detail oriented, below is a Cusip by cusip representation of the entire Treasury Curve, showing that while Bernanke owns virtually no paper with a maturity under 3 years, which makes sense as that paper is the risk-equivalent of cash courtesy of ZIRP, the Fed's holdings of everything with a maturity of > 3 years literally explodes and for a variety of Cusips is at the statuory limit of 70%, beyond which liquidity in any given issue becomes massively impaired.

But fear not: by the time the Fed is done, the entire chart above will be covered in black.

Source: Stone McCarthy

 

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Thu, 01/31/2013 - 18:40 | 3204222 CPL
CPL's picture

That's a lot of IOU's.

Thu, 01/31/2013 - 18:49 | 3204247 Vegamma
Vegamma's picture

Wake me when they get to 50%

Thu, 01/31/2013 - 18:49 | 3204253 NotApplicable
NotApplicable's picture

"I see a blue chart and I want to paint it black." -- Benron

Thu, 01/31/2013 - 19:01 | 3204282 negative rates
negative rates's picture

Read all about it, fed nails it again.

Thu, 01/31/2013 - 19:06 | 3204286 nope-1004
nope-1004's picture

 

 

     P

        O

           N

              Z

                 I

 

Thu, 01/31/2013 - 19:41 | 3204401 Bunga Bunga
Bunga Bunga's picture

Not so fast. When they reach 100% the real fun begins.

Thu, 01/31/2013 - 20:07 | 3204474 machineh
machineh's picture

If you own 2% of the Treasury market and it crashes, the Treasury has a problem.

If you own 29% of the Treasury market and it crashes, you have a problem.

Me Ben ... me print ... therefore me exist!

Thu, 01/31/2013 - 23:27 | 3205020 slightlyskeptical
slightlyskeptical's picture

Its not a problem if you are willing to buy everything that comes up for sale. That is the end game in my opinion. Own them and start over with a non debt based money system. The writing is on the wall.

Fri, 02/01/2013 - 12:08 | 3206387 JeffB
JeffB's picture

It may not be a problem for the Treasury from the standpoint of having to pay much higher interest rates to attract enough investors idiots to buy up all of their IOUs, but all of that additional money is bound to cause some problems in the real economy, I would think.

I suppose the Fed feels it can sop up enough of it by paying interest to banks to hold it on reserve at the Fed rather than lending it out. I guess we'll eventually find out.

 

Thu, 01/31/2013 - 18:57 | 3204274 SafelyGraze
SafelyGraze's picture

a lot of us on the fomc are wondering about what happens after we own 100% of the treasury securities

obviously this situation is unlikely to arise when the debt ceiling is (finally!) released to allow the treasury to borrow without bound

but even then, there is a possibility (although very unlikely, due to the historic strength of the dollar as an international reserve currency) that there will not be enough bids for future issue

one idea that has been gaining a lot of traction lately is what we call a "mission swap" between the fed and the treasury

in this scenario, the fed would issue treasury securities and the treasury would issue federal reserve notes.

these would then be swapped between the institutions, so that the treasury holds treasury securities issued by the fed, then auctions them on the open market

the immediate advantage to this arrangement is that the fed could hold *more* than 100% of treasury securities (as measured by auction), having issued them to begin with, retained a portion of them, swapped another portion with the treasury, then purchased 100% of *those* from the treasury

out analysts have modeled this approach and found that it will help smooth future fluctuations in the bond market

Thu, 01/31/2013 - 19:01 | 3204283 Al Huxley
Al Huxley's picture

This is a fantastic idea, however, I think you need to add a role for the primary dealers.  The extra layer of obfuscation will provide both cover for your activities and a great opportunity for your friends in the financial sector to squeeze more blood from the system.

Thu, 01/31/2013 - 19:06 | 3204294 SafelyGraze
SafelyGraze's picture

al -

we have been working out the details on that one

by holding the excess treasury securities (above the 100% of the auction market) in reserve, we can then lease these to the primary dealers.

the primary dealers can then sell these securities on the open market, including sales to the fed

Thu, 01/31/2013 - 19:08 | 3204299 Al Huxley
Al Huxley's picture

Excellent.  I should have known that you were on top of it.

Thu, 01/31/2013 - 19:11 | 3204305 SafelyGraze
SafelyGraze's picture

we're the fomc, and we're here to help

Thu, 01/31/2013 - 19:16 | 3204317 Pure Evil
Pure Evil's picture

Just make sure the Chinese are in a large portion of these trades so that US Citizinism can be slave to two masters.

Thu, 01/31/2013 - 19:11 | 3204303 SafelyGraze
SafelyGraze's picture

in a similar manner, the treasury can lease its excess holdings of federal reserve notes that it issued (i.e., the amount above its needs for paying the lawful amount for goods and services as required by congress)

it might, for example, lease its excess federal reserve notes to the primary dealers who could then use the notes as collateral to rent the use of treasury securities as the basis for their S&P longs

Thu, 01/31/2013 - 19:24 | 3204353 ShrNfr
ShrNfr's picture

Well, after Ben owns 100%, I am sure he will find a method to own 110% and issue toilet paper against it.

Thu, 01/31/2013 - 20:10 | 3204486 machineh
machineh's picture

That's what Cayman-domiciled SPVs are FOR.

Free Jeffrey Skilling!

Thu, 01/31/2013 - 22:02 | 3204456 EscapingProgress
EscapingProgress's picture

Good thinkin'. That sounds like a bulletproof plan.

Thu, 01/31/2013 - 21:40 | 3204739 Stoploss
Stoploss's picture

Now we know where Bruno Iksill went to work at after JPM.

Thu, 01/31/2013 - 18:43 | 3204227 bnbdnb
bnbdnb's picture

Buy high, Buy higher.

Thu, 01/31/2013 - 18:57 | 3204234 hedgeless_horseman
hedgeless_horseman's picture

 

 

Consequences shalomsequences. 

29% incest isn't so bad; it is just slightly worse than marrying your own...

grand parents,
grandchildren,
aunts,
uncles,
nieces,
nephews,
half-siblings,
double-cousins (children of 2 siblings x 2 other siblings),
identical twin cousins (children of identical twins).

They don't call him Uncle Bernanke for nothing!

Thu, 01/31/2013 - 19:33 | 3204384 knukles
knukles's picture

Hold the boat there, HH.

In Arkansas there is a state holiday on which you can legally marry your kin and double-cousins ain't considered kin anytime the year.

Thu, 01/31/2013 - 19:51 | 3204428 bdc63
bdc63's picture

Arkansas - the state where your family tree doesn't 'branch' ...

Thu, 01/31/2013 - 20:12 | 3204489 machineh
machineh's picture

... 'don't branch' ... wasn't you taught no grammar, boy?

Thu, 01/31/2013 - 21:49 | 3204759 akak
akak's picture

... DUDN'T ... y'all shur are dum!

Shee-it, my danged cousisterwife is callin' me agin!

Thu, 01/31/2013 - 18:53 | 3204236 fuu
fuu's picture

C'mon Stone, animate that thing already.

There is so much more room in the song...http://www.youtube.com/watch?v=QWMCWAqPnoQ

Thu, 01/31/2013 - 18:53 | 3204267 NotApplicable
NotApplicable's picture

Imagine black paint running down a wall.

Once they fill it in to the 70% line, I wonder, will they move the whole line down, set a different line for each issued maturity (like 90% of the 30 yr.), or perhaps move to the right, offering a 50 yr note?

One thing that's for sure, this event will occur if the regime is to last.

Thu, 01/31/2013 - 18:50 | 3204237 Getting Old Sucks
Getting Old Sucks's picture

So, when they end up owning 100% of the equity market, they just turn it over to the State and all becomes State owned corporations.  Isn't that the real plan? /sarc

OOPS!  Should had said the State takes it from the FED cause the FED would never diss their banks.

Thu, 01/31/2013 - 19:29 | 3204369 knukles
knukles's picture

Fabian Socialism at Work

 

(that is NOT a joke, fellas)

Thu, 01/31/2013 - 19:51 | 3204429 Poor Grogman
Poor Grogman's picture

Exactly just follow the thought experiment to it's conclusion.

The speed with which this is all happening shows clearly that they had this scenario gamed for many years before the GFC.

Either the FED ends or freedom ends, there is no other option that I can see.

Thu, 01/31/2013 - 18:45 | 3204239 ReptilianSlaveMaster
ReptilianSlaveMaster's picture

managed to sell the rest of my gold today and go long the S&P500 at a cool 1500 a pop.. DOW 15,000 here I come - UP UP AND AWAAYYYYYY

Thu, 01/31/2013 - 18:54 | 3204265 Al Huxley
Al Huxley's picture

15,000?  Have you no ambition?  This is the land of make-believe, where anything can come true as long as you wish for it hard enough!  Go for 150,000.

Thu, 01/31/2013 - 20:30 | 3204434 bdc63
bdc63's picture

yeah, i hear ya bro.  i ordered an entire container load of 'CNBC DOW 15,000' hats from China ... sure hope they get here in time ...

Thu, 01/31/2013 - 18:48 | 3204246 Al Huxley
Al Huxley's picture

29% - that seems like a lot, I'm just glad there are no negative consequences associated with it.

Thu, 01/31/2013 - 18:51 | 3204260 kaiserhoff
kaiserhoff's picture

Unintended consequences are for Earthlings..., oh wait.

Thu, 01/31/2013 - 18:49 | 3204249 bobthehorse
bobthehorse's picture

It's downright scary.

All that juice for a 1.5 percent bump in GDP.

We're not getting much of a bang for our buck.

http://www.angrysinner.blogspot.kr/2013/02/thursday.html

Thu, 01/31/2013 - 18:59 | 3204277 NotApplicable
NotApplicable's picture

Well, it's only a bump when you look at it in one of those funny fed mirrors, while blowing smoke in your eyes.

The rest of the time? Plainly has all appearance of a depression.

In other news, I've no idea why you pimp that one blog entry so much.

Thu, 01/31/2013 - 18:49 | 3204254 Conman
Conman's picture

Hey why not go for 100%.  chant with me now.....USA USA USA,

Thu, 01/31/2013 - 18:50 | 3204259 Mark123
Mark123's picture

Why don't they just go whole hog....print $100 trillion in fresh fiat digitial bucks, give it to their member banks and buy EVERY last asset, business, piece of land in the entire USA and then we can all live like kings (sort of slave kings). 

 

Now THAT would be a REAL man's balance sheet! Krugman would at least have to shut up then and there would be no need for stock markets, banks, or even governments.

Thu, 01/31/2013 - 18:54 | 3204270 Al Huxley
Al Huxley's picture

Fuck yeah!  And ponies for everybody!

Thu, 01/31/2013 - 19:23 | 3204349 notquantumdum
notquantumdum's picture

lmao

Thu, 01/31/2013 - 19:29 | 3204365 knukles
knukles's picture

Can I get a sheep about waist high instead?

Thu, 01/31/2013 - 20:15 | 3204499 machineh
machineh's picture

Please wait your turn behind Dr. Kurgman.

Thu, 01/31/2013 - 18:58 | 3204278 ReptilianSlaveMaster
ReptilianSlaveMaster's picture

America land of the Free

Thu, 01/31/2013 - 19:06 | 3204291 nope-1004
nope-1004's picture

. . . .  and home of the economically retarded.

Thu, 01/31/2013 - 19:14 | 3204310 Dr. Engali
Dr. Engali's picture

The retardeness of the nation isn't limited to just economics.

Thu, 01/31/2013 - 22:15 | 3204814 EscapingProgress
EscapingProgress's picture

I believe this is a relevant quote...

As democracy is perfected, the office represents, more and more closely, the inner soul of the people. We move toward a lofty ideal. On some great and glorious day the plain folks of the land will reach their heart’s desire at last, and the White House will be adorned by a downright moron. - H.L. Mencken

Timeless words.

Thu, 01/31/2013 - 18:54 | 3204271 Poor Grogman
Poor Grogman's picture

A long time in the future...

Sifting through the ashes of a lost civilization...

An advanced alien race discovered the one chart that made the disappearance of this curious race of humanoids, suddenly clear...

Thu, 01/31/2013 - 18:58 | 3204273 buzzsaw99
buzzsaw99's picture

The really scary part is that $85B doesn't even cover the entire budget deficit. Wait until they start buying it all. No interest for you!

Thu, 01/31/2013 - 18:59 | 3204276 Al Huxley
Al Huxley's picture

I just can't believe they were such pussies up to 2009.  Fuck, we could have all been enjoying the good life a hell of a lot sooner if they hadn't been so chickenshit up to then.

Thu, 01/31/2013 - 19:25 | 3204350 James-Morrison
James-Morrison's picture

Don't we get the new sheriff in 2014 when Bernanke steps down.  Then we can finally ditch this girly-man tinhorn.   

Thu, 01/31/2013 - 19:03 | 3204288 Sutton
Sutton's picture

But only Flow counts now.

Thu, 01/31/2013 - 19:15 | 3204302 oak
oak's picture

sorry. delete.

Thu, 01/31/2013 - 19:30 | 3204366 WhiteNight123129
WhiteNight123129's picture

Short Treasuries Bitchez.

The Fed does give a shit about the PMs but it would hate to see the long bond yield rise agressively. Fuck them by shorting treasuries and making money by the same token. The market has more money than the Fed always.

 

Thu, 01/31/2013 - 19:47 | 3204416 Seasmoke
Seasmoke's picture

Once you go black, you never go back.

Thu, 01/31/2013 - 20:25 | 3204535 Anonymouse
Anonymouse's picture

Thank goodness the Fed will be able to sell these down in 15 minutes if inflation ever appears.

Thu, 01/31/2013 - 21:51 | 3204770 tempo
tempo's picture

Its brilliant. Could the FED QE/ZIRP been written and ready to implement waiting only for the 2008 financial crisis? The rich are winning big time.

Thu, 01/31/2013 - 21:52 | 3204778 laosuwan
laosuwan's picture

Every bond the fed "buys" is a bond that no one else wanted to buy. Is that not true? The money the fed uses to buy the bonds is simply created electronically. In that case it is the same as someone getting a credit limit increase on their visa card and using the credit balance to buy food, clothes, whatever. This will work forever as long as the bank continues to give you a higher credit limit. People assume that like with an individual this behavior cannot go on and there will be a default. However, this case is different. The credit card holder is the bank. This can go on forever as long as people are willing to accept the credit card. Dont look for the dollar to collapse anytime soon.

Thu, 01/31/2013 - 22:18 | 3204850 akak
akak's picture

Was that supposed to be sarcasm, or are you Paul Krugman under an alias?

 

The (screaming) logical flaw in your "analysis" is quite simply that money, or debt, is not the same as wealth.  With each further descent into debt, and the corresponding monetization of that debt, more and more value is effectively stolen from all those holding, and being paid in, that currency.

Or do you believe in perpetual motion machines and Santa Claus, too?

Fri, 02/01/2013 - 06:29 | 3205489 laosuwan
laosuwan's picture

Not sarcasm, not krugman, not disagreeing with anything you said, just making the point that if debt monetization can kill the dollar it would have done it by now. Every country is trying to kill their currency. This can go on a long time.

Fri, 02/01/2013 - 06:53 | 3205505 No Euros please...
No Euros please we're British's picture

Wait! What do you mean? There's actually no perpetual motion?

Thu, 01/31/2013 - 22:35 | 3204876 Poor Grogman
Poor Grogman's picture

You're barking up the wrong tree mate..

Thu, 01/31/2013 - 23:08 | 3204967 yogibear
yogibear's picture

We know the Fed intends to be the only buyer of US treasuries.

Quite a sight when there is a currency crisis. 

 

Thu, 01/31/2013 - 23:22 | 3204999 slightlyskeptical
slightlyskeptical's picture

The Fed holding all the debt is the same as the treasury just printing the money. Something I am actually in favor of. Adopt it worldwide and the nations that can continue to produce will keep strong currencies and those that can't will have weak currencies. Production should be the basis and backing of a nations currency. The goal for all countries should be full production with no one wanting for anything. We need a system that rewards hard work, ingenuity and innovation but not to the degree that it leaves everyone else with mere scraps. It is only will that stops this at our point of development.

Inflation is always the reason against a system like this. If at the same time we took away the banking system's ability to create money then we could easily escape much in the way of inflation. Limit banks to lending 70% of customer deposits and let them borrow the other 30% to lend  straight from the Central bank at a fixed, ever constant rate.  Full production would also be a force that would inhibit inflation and likely cause deflation, but remember it is not the $ value of goods but the quantity of goods produced that really matters under this proposed system. If the bankers needed jobs well they could use their skills to crunch the numbers as to how to allocate our resources in a full production world. 

In terms of governemnt spending I can see annual printing (budget) limited to about 5% of GDP.  Note that without an income tax and at full production we can easily double GDP.  This would leave gov. spending at about 18% of GDP.  We would no longer have debt and interest payments and the need to police the world would be greatly reduced savings us easily half of the current budget.  Leaves us at about 7-9% at current spending levels. At full production welfare would be very limited saving another 2-3% of the budget. Reform drug laws and you have another 1-2%. We can get where we need to under this type of system, without giving up anything we need from government.

 

 

 

Fri, 02/01/2013 - 02:43 | 3205353 jldpc
jldpc's picture

You guys just don't get it. So long as the UST does not print more paper money/currency; how can this go wrong? It is just counter vailing entries on the books of two different federal entities. One is a lender and the other is a borrower - so they cancel out. So what. The sooner the FEd gets to 100% on a continuing basis the sooner we can forget the bad influences/threats/demands of foreigners. after all we owe it to ourselves; rather effciently; surely more efficiently than the stupid Japanese where individual citizens are purchasers/holders of all of those quadrillion bond debts. How stupid. Not us. We got the FED; and when its time we just close it down; send them home. Why pay them back; they just made up the "money" anyway? Actually they have never actually done anything like work, or production; so they have nothing to lose. So why the fuss? We shut down the FED, and voilathe debt is gone. And we can run a campaign that tells the $1T in student debt to do it for us. Tell them the truth, you young guys and gals have no hope whatsoever under the present system, so close it down. Think 16.5T and 1T gone in short order. What a relief. Instead of burning their grandparents (for real) at the stack for leaving them as debt slaves to the uber rich, they are set free to start their own 2nd Coming of the USA. As for the uber rich, they can deal with their CDS and pyriamid layers of cross collateralized, co-guaranteed, and they ought to be the ones responsible; they created that crap in the age old game of musical chairs. No chair; tough shit; your ass hits the floor. So I refuse to worry; I refuse to make threats against the powers tha tbe; I just believe that the massively unemployed young need to be told the truth; and the location of the ammo.

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