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The One Table That Explains Why There No Longer Is Any Treasury Liquidity
Earlier today, former CLSA strategist Russell Napier mused about the centrally-planned capital markets, pointing out the historic move in bonds in the morning of October 15 about which he said:
On the 15th of October 2014, as this analyst celebrated his 50th birthday, volume in the US Treasury market surged, suddenly and without warning, to a record high. Old timers smiled knowingly, as Magwitch did from behind the headstones, and younger members put aside their Angry Birds and wondered what was wrong.
There it was --- a real market come and gone in half an hour, like a pregnant panda at Edinburgh zoo. What did it mean and what should you do? You should pay attention to what happens to the direction of prices when volumes surge and markets work. When the veil is lifted, pay attention to what you see beneath. Last Wednesday, in the space of half an hour of active trading, the Treasury market had one of its most rapid rises ever recorded and equities fell sharply.
There is a very simple lesson that when the markets finally break through the manipulation they move to price in deflation and not inflation. This is key because it means financial repression has failed. Such repression requires the artificial depression of interest rates but, crucially, it must be paired with boosting inflation above such rates. On October 15th 2014, if only for a few short minutes, market forces broke out and the failure of central bankers was briefly evident.
He may be right or wrong, but fundamentally there is a far simpler explanation of the events that took place that morning, one that requires just two words:
- no liquidity
As we have been pounding the table since late 2012 when we explained how the Fed's QE3 would soak up a record amount of 10 Year equivalents from the private market, what the Fed has done is take its holdings of all CUSIPs across the curve to above the level it that previously considered was the threshold limit over which bond market liquidity becomes seriously impaired. We forecast most explicitly what would happen last May when we wrote: "As Of This Moment Ben Bernanke Own 30.5% Of The US Treasury Market... And Will Own All By 2018."
Of course, the Fed knew all of this, which is why back in December 2010, in a little noticed move, the New York Fed raised the SOMA Treasury limit from 35% to 70% per CUSIP, meaning that while previously the Fed could only hold up to 35% of any given Treasury CUSIP, since then it was allowed to take its holdings to over two thirds of total! Indicatively, the number 35% was there because based on extensive literature, liquidity begins to collapse around the time there is just below two thirds of the original outstanding notional of any given issuance left in circulation.
So where are we now? Well, as of the most recent data, as compiled by Stone McCarthy, the amount of ten-year equivalents held by the Fed was $1.947 trillion leaving some $3.674 trillion in 10Year equivalents available to the private sector. Or, in percentage terms, just about 34.57% of all 10 Year equivalents outstanding. Call it 35%.
However, as noted, that is a blended average of all Fed TSY holdings across the curve. Where things get really bad is when one focuses on what once upon a time was the On The Run issue, i.e., the most liquid bond on the Treasury curve: the 10 Year.
It is here where as Brean Capital's Peter Tchir shows in the table below, that the Fed is now the proud owner of over half of the total outstandings in the entire 10-15 Year bucket!
In short: the simple reason why there is no more liquidity in cash Treasury securities (Treasury futures are a different matter entirely) is because the Fed is now the proud owner of a majority stake of what once was the most liquid maturity across the most liquid bond market in the world.
So the next time the market freaks out and bonds have a 12 sigma move, once the shock and awe passes, fee free to send your thank you cards to the Marriner Eccles building for destroying what once upon a time was the deepest, most liquid market in the world.
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Belgium will take care of that.
Co. don't create jobs, only the Govt/FED can per H. Clinton. You are now officially a slave bought, owned and directed by the Fed. Govt. Vote often, its your last chance. don't be afraid.
Don’t be surprised if $360 Billion of UST’s mysteriously show up on Somalia’s balance sheet.
The Fed balance sheet is +/- $4.4 Trillion of which +/- $2.5 Trillion is in Treasuries. Good ole "debt to the penny" is: +/- $12.8 Trillion (Public) +/-$5.1 Trillion (Intergovernmental) for a total of +/- $17.9 Trillion. Does that mean the fed owns 19.5% (2.5/12.8) of all government debt or 14% (2.5/17.9)?
My question were is the $3 Trillion missing off the table? The posted table shows only $9 Trillion out of the $12 Trillion owned by the public.
What's the problem?
HFT-s could create that liquidity, too.
Is the end game to own of it? Wouldn't that be something, slaves to the Fed.
Watch out for winter. The are a lot of companies holding on by their fingernails and this year Christmas won't save them. In the retail end alone I see massive bankrupties coming next Spring and the knock-on effect will cause massive ripples upstream to suppliers and other markets. We will get to find out how useless QE really is when we hit the iceberg head on.
Don't worry the FED will loan them money. Welcome to the Federal Reserve's Sears, JCP, etc.
I have a terrible premonition it's gonna get DARK and COLD this winter . . .
does this mean ann-margret is not coming?
And she won't be breathing hard either.
No early morning dew??
Even Cronkite's said the war is now unwinnable
Soo glad he is here to sooth us!
The dead have been covered with lime.
...and there it is, fully owned by the Fed (and all the private entities behind it).
America and it's contents have been SOLD motherfuckers, now what are you ignorant peasants going to do about it?
Bleat them to death.
51% of what is essentially the say in the United States Corporation.
What else do Americans do best??? Sit back and watch the tube....its World Series Game 7 tonight....any rebellious demonstration will have to hold till tomorrow.....oh, its TNF on CBS Sports tomorrow....well lets just try for WHENEVER
Well with the EPA taking several coal plants offline this winter and the lack of a strong electrical grid, TV might be problematic.
Precisely why it is now impossible to avoid a global currency collapse. Some communities will be better prepared than others.
same as it ever was...
BUY GOLD.
NOTHING.
Government owns defense, banks, cars, health care and now the paper it prints as debt.
There is no need for a market.
Gov is now buyer and seller
The government merely is the host to the parasites that own it.
Government owns nothing. Those who own the government own everything.
+42
Government = Ultra Elite
Issues it which ultra elite
'Cause it worked so well in the USSR.
The government does not own the dollar. The owners and shareholders of the Fed do.
Ultra Elite = Government
That is inherent in any civilization
Any civilization is rule by ultra elite, in any form or shape, whether communism, capitalism or anything else.
Issue is: Which ultra elite?
Check Russia's case. Current ultra elite is expropriating the previous one and actually killing few of them
Something similar is going on in China, but much more quieter than the russian one
Americans will do what Americans do best: Complain about America then salute the flag and recite the National Anthem at a sporting event.
Orwell would love to see modern America in action (or should that be inaction?).
I do not view this as the FED buying up America. They have bought worthless (intrinsically worthless) paper to fund the USA and or to provide liquidity to those who were holding the bonds/notes.
They are trying to keep the sinking ship afloat and doing very unusual things in that effort.
If the dollar fails what value will those be to the Fed?
As long as the dollar is the world reserve currency, then, the FED is buying up America. The inflation gets exported to China, among others, which then builds more real production or buys real money. If the FED can keep up the balancing act long enough, they will own everything. 3rd world, dead ahead.
No need to worry, the Fed has ended QE. All back to normal now!
Define normal......
Shit, anything 10+ is game over. Market is calling it. 7-10 for lights out. My bet is closer to 7 at most... with the fun kicking in 3-5.
I am in the "1-3" camp. The chart above basically says the "3-5" time frame is already fucked. Between now and the 2016 election. That's when shit really starts hitting any available fan.
30 yr futures went from 143 to 148 that day, 5 points. Yes, Treasury Futures are a different matter entirely. I believe this is where the short squeeze took place, am I right?
LawsofPhysics: ...and there it is, fully owned by the Fed (and all the private entities behind it).
America and it's contents have been SOLD motherfuckers, now what are you ignorant peasants going to do about it?
Metaphorically speaking "I'm going fishing".
My goal in life now is to be as close to a non working non producing (non)consumer as I can.
Yep, good plan actually. Full faith and credit as it were.
This is where the US Treasury mints platinum coins with a $1 Tril denomination and buys back/retires the bonds, while the FED lives to fight another [war]. Or better, the US Congress eliminates the FED, nationalizing that inventory as it were, so that it can be retired. The banks get back to earning their living and hire real risk managers. Europe is left to find another way to coast, besides interest payments from the US taxpayer. [IF they think a back up in US rates is going to fund the European social security system they have another guess coming....] The idea of "greenbacks" freaks out the Chinese government and they start spending. Should take 15 years to find equilibrium.
Well golly gee. I guess the thing to do is sit in cash and wait to take advantage when the bond-reckoning occurs and/or the SP500 crashes to 600.
Still waiting...
<-- the 10y yield is going to < 1%
<-- the s&p is going to > 2500
<-- all of the above
A dog eating its own vomit is the only image that comes to mind.
What about a dog eating its own turds?
.."A dog eating its own vomit is the only image that comes to mind"..
..there are worse optics available..
https://www.youtube.com/watch?v=aQ8pfjJru60
warning.. ah na.. no warning.
hmmm...
SO THE EQUITY MARKET DEFLATES - AND THE LONG ONLY EQUITY TRADE UNWIND PROVIDES THE FLOW/BID UNDER TREASURES AND ESPECIALLY THE 10 YEAR LEFT VACANT BY THE FED.
"PUT" UNDER EQUITIES OR ARE EQUITIES JUST A "PAWN"....
STAY TUNED
as a t bond holder may i suggest that the lack of available Ts wouldn't be so acute if the fucking stock market wasn't rigged to hell and back
ok--so there are 18 tril of treasuries out there--5 tril in soc sec and medicare trusts--thats 13 Tril. This chart shows 2.3 Tril of Treasuries--I thought Treasuries held by Fed were closer to 4 trillion.if fed holds 3.5 tril then that equals the 9.5 trillion.
while calcs are a little off, we know what it is directionally.
while miost do not want to count interagency, its going to count as medicare has to start liquidating its portfolio.
Central banks are likely to hold their through a crisis. Private parties might panic and sell. the banks don't hold paper for profit. Individuals and funds do.
FedRes has $2t in toxic RMBS and CMBS, $2t in UST's.
We are taking their word for that of course, as they are unwilling to have an audit.
The NY FED and the merry prankster primary dealers think that the futures market is the same as the treasury bonds available in the market - it is not (although it helps them greatly in trying to manipulate long-term rates higher). When SHTF, as it did on October 15th, the few holders of on-the-run 10 and 30 year treasuries will not give them up on the cheap! That's why yields collapsed that morning and the NY FED and the merry pranksters had to pull desperate measures to bring long-term rates back up.
This will not end well for the risk-on players.
SO WHAT?
What's preventing the Treasury from cutting out the middleman and going for the full Mugabe print and spend?
Federal job protection I suppose.
That is exactly what the Fed does not want to have to do. In fact with the whole world watching (the whole monetary world) they really can't do that unless they are willing to admit total failure.
The fact that most people don't follow the problems in the monetary system is irrelevant. The cluelessness of the media is in that same category. All the central bankers and the really wealthy of the world as well as sovereigns are well aware of the precarious position of the dollar. It almost failed in 1979 and was barely saved then. The world is prepared for this. It is still going to be a very messy affair.
The Euro was created after 1979 and was structured to survive even if the dollar failed. The billions of souls on the planet can't survive in large numbers without a currency that works in international trade.
These events are only surprising to the masses. Currency management is what central banks do. You can assign nefarious intent if you wish but I believe they are doing what they can to keep the world as stable as possible through what will be one of the most significant events in human history.
Rob Kirby talked about this Oct15 event nearly as soon as it happened. Wake up Sheeple: "The Magical Deceit of the Real Flight to Quality" … http://youtu.be/Uw_Jm-6OckQ
yeah...Kirby seems to be as close to seeing what's happening as anyone and better than most.
For the long tern view I still prefer Fofoa but when it comes to following the day to day action and trying to get a peak at action as it unflods, Kirby is good.
Am I missing something with respect to the Brean Capital table?
According to the table the Fed owns just over $2.34 trillion in Treasury debt. The Federal Reseve's most recent balance sheet says that it owns $2.459 trillion as of October 22. This could be taken from a blance sheet that is a couple weeks old. This isn't the problem. The problem is that Brean Capital table says that there is just over $9.73 trillion in publically held Treasuries. According to the Treasury Department there was just over $12.81 trillion in oustanding publically held Treasuries. Is three trillion dollars missing from Brean Capital's number or is he using a different metric than I think he is using?
Hello.. I would like to pay My Visa Bill... My MasterCard Number is.....
Confusion here on Supply vs Liquidity. Less Treasury supply from the Fed owning 51% of Treasuries can boost Treasury liquidity. Liquidity in the Treasury market is from interested buyers ,with cash ..If few buyers, you have less liquidity. If big institutions are underweight Treasuries because the Fed owns so many....then normalizing their weightings with buying, boosts Treasury liquidity. High debt countries tend to have falling interest rates for a long time because with such high debt they can't afford higher rates and the economy keeps failing. Raising taxes to pay off debt also slows the economy..etc