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Why There Is No Treasury Liquidity In One Chart

Tyler Durden's picture




 

It was back in 2012 that Zero Hedge first warned about a topic that now has not only the buyside, but also prominent pundits, regulators and - ironically - even the Federal Reserve scrambling: the collapse of Treasury liquidity, manifested in the multiple-sigma, i.e. "flash crash (or smash)" moves in the Japanese JGB, the US Treasury and most recently the German Bund markets.

What we said, and what it has taken the mainstream some 3 years to figure out, is that the primary culprit for the collapse in sovereign bond market liquidity are the central banks themselves, first the Fed, then the BOJ, and now, the ECB. Because as we noted in September 2012, "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."

Before:

... and After (as of 2012):

 

Unfortunately, while the Fed's holdings expressed in 10 Year duration terms have so far peaked at around 35% of total, a level which many expected wouldn't be dire enough to lead to the evaporation of bond market depth also known as liquidity, what happened since then is that coupled with the surge of HFTs in bond market trading which contrary to popular opinion not only doesn't provide, but soaks up liquidity, as can be seen on the Nanex chart below...

... the 30% 10 Year duration threshold which had previously been greenlighted by the TBAC, ended up being far too high and as a result events such as the October 15 flash smash, and the May 2015 Bund flash crash, have become a normal and regular feature of the fragmented, central bank-manipulated and HFT-dominated markets.

So in case any readers have missed our constant coverage over the past 6 years, predicting accurately not only the breaking of markets due to the advent of HFTs, but the soaking up of all market liquidity by the Fed which in its increasingly more desperate attempts to reflate assets to record levels (remember when years ago it was blashpemy to suggest that the Federal Reserve is pushing the market higher - good times) has broken the markets even further and in fact made selling virtually impossible, thus trapping all those who have put their funds into the so called market, here is the chart showing how much bond market "depth" there is, or rather isn't, as a result of 6 years of Fed central planning.

The data comes courtesy of Stone McCarthy:

The amount of ten-year equivalents held by the Fed decreased to $1.835 trillion from $1.849 trillion in the prior week, which reduces the amount available to the private sector to $3.944 trillion from $3.919 trillion in the prior week. There were $5.778 trillion ten-year equivalents outstanding, up from $5.768 trillion in the prior week.

 

After the Treasury issuance, maturing securities, rising interest rates, and Fed operations during the week, the Fed owned about 32.05% of the total outstanding ten year equivalents. This is above the 32.03% from the prior week, and the percentage of ten-year equivalents available to the private sector decreased to 67.95% from 67.97% in the prior week.

And here is a visual representation showing how much of the entire bond market expressed in 10 Year equivalents is now held by the Federal Reserve: a chart regular Zero Hedge users have seen consistently over the past 3 years.

The chart above also explains why absent a massive debt-funded government spending campaign, the Fed will be unable to launch QE4, for the simple reason that QE, which is nothing more than the Fed's deficit-funding coupled with a boosting of asset prices via the outside money reserve channel, would promptly soak up all the remaining bond market depth, and even as the S&P hit all time highs, it would lead the government bond market to terminal instability.

Which is why, paradoxically, for the status quo to persist, either the government will have to lower taxes which would require far greater debt issuance by the Treasury, and thus provide far more dry powder for the Fed to monetize, or the US will finally have to launch that deficit ballooning war it has been itching so hard to start since 2013.

That, or the Fed may finally realize that by reflating asset prices it does nothing to boost the actual economy as the S&P has and always will refuse to trickle down to the middle class, and the Fed will finally engage in what has been the endgame from day one: paradropping bricks of cash all over the continental US in the last ditch desperate effort to reflate a debt-load which has now pushed not only the US but the world into secular stagnation.

 

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Sat, 05/09/2015 - 15:16 | 6076218 order66
order66's picture

"...where are the liquidity worries at the moment? Equities would be the toughest to exit.. it's like a 5-lane highway going in and goat trail coming out."

-Kyle Bass

Sat, 05/09/2015 - 15:18 | 6076228 El Vaquero
El Vaquero's picture

So, you want to be the guy with lockers front and rear, a wench and some MTs if you are going to make that exit.

Sat, 05/09/2015 - 17:31 | 6076546 Consuelo
Consuelo's picture

Hey - as long as I get me arse outta there with a 'wench', I reckon all's not that bad laddie...

Sat, 05/09/2015 - 15:46 | 6076289 j reuter
j reuter's picture

I freelance over th? internet and earn about 80-85$ an hour. I was without a job for 7 months but last month my paycheck with big fat bonus was $15000 just working on my computer from my home for 5-6 hours. Here's what i have been doing... www.jobs-review.com

Sat, 05/09/2015 - 15:54 | 6076312 TeethVillage88s
TeethVillage88s's picture

Nice quote, I'm not a great financial guy but seems to me that the British Trade Economy is based on Lords investing in ships, charting ships to sail to India or other places to plunder. Privateering is where the King provides a Marque' to the captain to attack ships flying the flag of the Enemy and pirating the goods, men, and ships. I like to call them Nabobs. Traders. But sailors got next to nothing and could be shanghaied into service. If a lord owns the peon then he could press them into war service or ship duty. So the Captain, the Ship Owner, and the King or Queen might be the few to make the riches.

So how does the rest of the British Economy fair under Globalism and Free Trade??

Looks like Domestic Private Investment in Capital Facilities and Capital Equipment is always kept low.

Keeping Investment Low could be many factors that few in MSM really bring up in everyday news:

1) Risk to Economy, Recession, Depression, Pull Back
2) Trends in Capital Flight, less investment in manufacturing
3) Trends in Produce and Fruit coming from overseas at low prices
4) Other Consumer Goods, Durable Goods, Mining Ore, Lumber, natural Resources Trending away from the Country like USA, UK, Europe
5) Free Trade Deals allowing Slave Labor Wages and no auditing of Labor Practices in countries with no Labor Laws other than requirements to keep books

So Liquidity is the Question here.

A) US Long Term Treasuries have been attracting money from all over the globe including the PIIGS, BRIICS, and whoever apparently as a safe harbor or hedge against NIRP/ZIRP/LIRP
B) China has enough liquidity to fund state projects and buy gold at the same time, Japan has enough to expand it's stock market, USA has enough to expand it's stock market and even Student Loans at high interest rates

It doesn't look like a Liquidity Crisis for State Governments, stock investors, Banks...

TPTB simply don't have a priority to fix infrastructure, invest in cheap education or health care, to promote jobs, to create a protection for jobs, wages and wealth.

The State Priority is for a Trading Economy and Mammoth Corporate Power. Free Trade and extreme financialization are part of this strategy. MIC with strong private defense contractors is part of this. International oil & gas and Construction and Engineering all over the world to provide infrastructure for water, electricity and roads to develop oil extraction is part.

So is the Thesis of a Crisis in Liquidity Valid? only if you are on Main Street looking for a Job.

It is really a Crisis in Economic Models, Political Economic Models, Trade Models, Investment Models, and a Model of Radical Financialization of Everything.

Crisis, What Crisis? Be Specific.

** Holding Back Domestic Investment while empowering Bank Financialization of all Assets and Leveraging Slave Labor is not an Economic or Domestic policy that can be Justified **

Does the USA or UK or Europe have Founding Documents that allow them to be Super Powers in Capitalization that doesn't provide local economies with money velocity, and doesn't Leverage Jobs & Wages while promoting Inequality??

Of Course not.

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Self-Interested Leadership only Self-Promotes while turning it back on Wage Rates, Jobs, High Welfare Rates, Wealth Inequality, Wealth Extraction, Dangers of Corporate Bailouts, Dangers of Oligopolies, Dangers of a Blind Eye to Labor Cut and Retirement & Pension Disappearances

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Colonialism may have morphed into current European Trading Nations, but Stifling Domestic development of your own country is the most callused of Leaderships.
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Sat, 05/09/2015 - 15:17 | 6076223 El Vaquero
El Vaquero's picture

They cannot start QE4 in earnest, yet they must start it in earnest.  Nice little catch-22 they put themselves into.  Fuck'em.

 

(IMO, they are already engaging in QESTEALTH Lite™.)

Sat, 05/09/2015 - 16:07 | 6076344 Kirk2NCC1701
Kirk2NCC1701's picture

And yet the Gov is acting like Californians:  "Liquidity?  We can manage that too.  There's an ocean of liquidity out there.  Fore!"

Sat, 05/09/2015 - 17:02 | 6076357 Ham-bone
Ham-bone's picture

A quick recap of the Ponzi progression from '07 til present...in '07 the SS surplus ceased as a significant buyer of US debt coupled with a surge in issuance, the Fed stepped in with massive QE.  First buying some of every duration and then in Twist selling all bills and short notes to go entirely long notes / bonds.  Once the Fed started approaching ownership limits for the longer duration isuance in midyear '11 and the debt ceiling debate...seems there was some sort of backroom agreement that Fed would take over "foreign held" buying via Japan and BLICS (Belgium, Luxembourg, Ireland, Cayman Islands, and Switzerland).  All other sources of net buying, including BRICS and OPEC, stopped or slowed to a crawl...espectially if one were to look at longer duration notes / bonds. 

So, in essence the Fed (directly and via shadow QE in BLICS/Japan) has turned the Public US Treasury longer duration note / bond market into a full Ponzi approaching ownership at 100% of all net issuance.  Fed and Foreigners hold $9 trillion of the $13 trillion in Public debt...but US domestic holders are nearly all short duration bills and notes...

http://econimica.blogspot.com/2015/05/veneer-of-us-growth-normalcy-has-worn.html

 

 

Sat, 05/09/2015 - 15:17 | 6076226 remain calm
remain calm's picture

Ben, Time to fire up the helicopters. 

Sat, 05/09/2015 - 15:18 | 6076230 all-priced-in
all-priced-in's picture

Liquidity chart looks like a bullet hitting ballistic gel.

 

 

Sat, 05/09/2015 - 15:39 | 6076244 Flagit
Flagit's picture

redacted

Sat, 05/09/2015 - 15:29 | 6076256 AldousHuxley
AldousHuxley's picture

VIRT ...latest to IPO of highly frontrunning trading platform is  owned by: Major Holders....Vincent Viola, Michael Viola, Teresa Viola.

Vincent was chairman of NYMEX and is a billionare

 

You bet backdoor dealings with Rubin/Clinton/Obama are in the works to guarantee success for VIRT in order for the Violas to cash out their holdings.

Sat, 05/09/2015 - 15:30 | 6076257 q99x2
q99x2's picture

Up on high volume down on low volume = BTFD

Sat, 05/09/2015 - 15:34 | 6076271 CarpetShag
CarpetShag's picture

There's more liquidity in an octogenarian's ejaculation.

Sat, 05/09/2015 - 18:00 | 6076619 Spigot
Spigot's picture

Crude, but entertaining.

They need to drive the TotalDebt/GDP down into the 0.6-1.4 range in order to get back to a historically sustainable level. In the process of targeting 1.4 it will drop far below 1.0 (strategic advantage if you understand this and are positioned accordingly).

Current US TotalDebt/GDP is 3.35 https://ycharts.com/indicators/us_total_debt_gdp

They can approach this one of two ways: 1) mark down debt by 70% or , 2) increase nominal GDP by hyperinflating the currency by 335% from current levels.

That is the corner into which they have painted themselves. What actions can they take which they can blame on others and which they can survive the aftermath and remain in power, etc?

If they somehow implode the debt markets, such that those markets do the dirty job of marking down the debt, then the economic engine will simply freeze up. Credit will evaporate, cash only basis.

If they hyper inflate, then the blue hairs (amongs the many who will be marching to DC with torchs and pitch forks) will be assaulting Pennsylvania Ave with their canes and wheel chairs.

Pick your poison.

Sat, 05/09/2015 - 15:37 | 6076273 buzzsaw99
buzzsaw99's picture

The chart above also explains why absent a massive debt-funded government spending campaign, the Fed will be unable to launch QE4...

i disagree. they can and will buy everything that isn't nailed down. not just treasurys, everything. yadda, yadda, rules prohibit blah, blah, blah, notwithstanding.

other than that the final three paragraphs are very good though.

Sat, 05/09/2015 - 15:54 | 6076316 aliki
aliki's picture

BINGO - the fed & c-banks around the world can't afford to have rates go up. they found this out Wednesday into Thursday morning when they floated that trial balloon about selling a portion of their book starting next year. rates spiked overnight and futures got murdered. result = massive buy waves in treasuries mid-day and they banged rates back down. My grandfather went in with 1/2 his cash position when they hit 2.25 - his claim has been we are eventually going to be working for the banks. I told him I agree and it will happen thru NIRP (ZH is spot on this 1). they can't let the market develop naturally because as they found out on that overnite trade, rates would fly. Rick santelli pointed this out thurs and fri in that the US 10-year might have double-topped @ 2.25% (ironically, where they fed "allowed/endorsed rates to go up to before they knocked 'um back down ... they are closet technicians). bottom-line; we are either gonna fire-UP thru 2.25% hard or crash-DOWN thru 2.00%. reason my grandfather put in 1/2 now and will whind up stopping out to the down on a break of 1.90% or see how high they cud fly

Sat, 05/09/2015 - 16:17 | 6076358 buzzsaw99
buzzsaw99's picture

i must be a degenerate in some small way, the other day i found myself looking for a 3X Long Long Treasury ETF. lulz

There are plenty of 3X Short Treasury ETF. That tells me that the banks and fund managers WANT people to short treasurys which means THEY want to buy them.

Sat, 05/09/2015 - 18:36 | 6076721 Bay of Pigs
Bay of Pigs's picture

You have nailed this particular issue for several years now.

Congrats, well done.

Sat, 05/09/2015 - 16:49 | 6076427 Hype Alert
Hype Alert's picture

The question is, who would stop them from doing "whatever it takes?"  Answer: Nobody and the crowds would cheer with thunderous appause.

Sat, 05/09/2015 - 15:37 | 6076279 22winmag
22winmag's picture

Still the cleanest dirty shirt at the circle jerk.

Sat, 05/09/2015 - 16:42 | 6076412 Youri Carma
Youri Carma's picture

Shrinking liquidity exposes markets to crunch
1 May 2015, by Jamie McGeever - London (Reuters)
http://www.reuters.com/article/2015/05/01/us-markets-liquidity-idUSKBN0NM3H220150501

Sat, 05/09/2015 - 17:35 | 6076554 Consuelo
Consuelo's picture

"The chart above also explains why absent a massive debt-funded government spending campaign, the Fed will be unable to launch QE4..."

Which may in part explain the hemming & hawing (buying time) going on now.   In the end however, they'll jack this sucker up with whatever it takes as long as there is gold in the market for China to acquire. 

Sat, 05/09/2015 - 18:07 | 6076648 Babaloo
Babaloo's picture

Is it just me, or is their math wrong?  How can going from $3.919 to $3.944 be a reduction?

Sun, 05/10/2015 - 00:20 | 6077391 RMolineaux
RMolineaux's picture

Yes, the Stone McCarthy quote contains a error that needs correction.  If indeed Fed holdings of Treasury debt have decreased, then there is, short term, more liquidity in the market and the author's argument is weakened.  Maybe there are simply too many players in the market currently (including HFT's) and that number should be reduced, thereby making their inventory available to other participants

Sat, 05/09/2015 - 18:28 | 6076702 Yancey Ward
Yancey Ward's picture

When QE is reinitiated, the Fed will simply start buying the debt of state and local governments.  I know the law says they can't buy that, but they never let the law get in the way.

Sun, 05/10/2015 - 10:28 | 6077910 m111ark
m111ark's picture

What I'm hoping for, and you should too, is that the FED monetizes all the debt, after which the congress removes from the FED the power to create "money", reaquires all debt instruments from the FED which are paid off with Treasury created debt-free money, and at the same time de-authorizes commercial banks from creating "money" with every "loan" they make. Henceforth, the Congress simply spends the money the Treasury creates out of thin air... no more public debt, no more rentier class living off the work of everyone else, no more federal or state income tax, no more real estate tax on one's primary residence and a resurgent middle class.

There. Solved the whole economy thing for ya.

 

Sun, 05/10/2015 - 10:29 | 6077911 m111ark
m111ark's picture

What I'm hoping for, and you should too, is that the FED monetizes all the debt, after which the congress removes from the FED the power to create "money", reaquires all debt instruments from the FED which are paid off with Treasury created debt-free money, and at the same time de-authorizes commercial banks from creating "money" with every "loan" they make. Henceforth, the Congress simply spends the money the Treasury creates out of thin air... no more public debt, no more rentier class living off the work of everyone else, no more federal or state income tax, no more real estate tax on one's primary residence and a resurgent middle class.

There. Solved the whole economy thing for ya.

 

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