And You Thought QE Was Over: The Fed Will Monetize Half Of This Year's U.S. Treasury Issuance

Tyler Durden's picture

The Fed may have officially tapered QE at the end of 2014 but that doesn't mean it is done buying Treasuries: since the Fed never ended rolling over maturing paper, it means that it will remain indefinitely active in the open market. And while there were no sizable maturities from the Fed's various QEs to date (only $474 million in 2014 and $3.5 billion in 2015) that will change dramatically this year, when Brian Sack's team will have to purchase about $216 billion to replace matured TSYs. According to JPM calculations, this represents half the net new government debt that will be issued over the next 12 months.

The amounts rise from there: $194 billion comes due in 2017, about $373 billion in 2018 and $329 billion in 2019 for a grand total of $1.1 trillion over the next four years as shown in the following Bloomberg chart:


The Fed's intervention in the Treasury market is well known: here is a brief Bloomberg summary of where we've been and where we are going:

The Fed is the biggest holder of the government’s debt. Its $2.5 trillion hoard, amassed in a bid to support the economy after the financial crisis, is more of a focus for some investors than the trajectory of interest rates. From this month through 2019, about $1.1 trillion of Treasuries in the portfolio are set to mature.

Even though the Fed's holdings of Treasurys won't rise and remain flat at about $2.5 trillion, the Fed's reinvestment mandate means a return to active POMO which also means that there will remain a backstop net buyer for 1 of every 2 bonds issued by the US government.

Clearly this is bullish for bond bulls (one can stop wondering why year after year Goldman is so bearish on TSYs every year with its 3.00% yield target and is so eager to buy everything its clients have to sell) for whom "the Fed’s signals that it will roll over the obligations have been another reason to doubt the consensus forecast that yields will rise in 2016. If officials had chosen to stop funneling that money into new debt, the government would likely have to boost borrowing in the market by roughly an equivalent amount this year, potentially pushing up Treasury yields."

Hypotheticals aside, the Fed's indirect monetization of debt has led to the Fed being the owner of about 30% of all 10-Year equivalents currently, further leading to dramatic notional scarcities among CUSIPs that were most actively purchased by the open markets desk, usually in the form of Off The Run paper, which meant that the Fed has far less On The Turn to lend to Treasury shorts in repo, leading to major "special" prints in the repo market manifesting by near-fail, or -3.00%, levels when one wishes to borrow any given Treasury.

However, as Bloomberg explains, as the Fed will rolls over maturing Treasuries, it will add new On The Run issues to its balance sheet. Since Operation Twist, the Fed has had less of those sought-after securities to lend out in a daily program it has to ease shortages in the market. As a result, these Treasuries have frequently commanded a premium in the repo market -- leading more trades to go uncompleted, or ‘fail,’ in bond parlance.

If the Fed’s stock of those Treasuries grows, the central bank should be better able to alleviate the shortages through its SOMA Securities Lending program, said Joseph Abate, a money-market strategist in New York at Barclays Plc, a primary dealer.


It will become “easier for people to access the securities they need to cover any shorts in the on-the-runs and, correspondingly, the level of fails should fall,” Abate said. “The more difficult it is to cover a short, the less liquidity there is in the market."


Dealers say bond trading has become more difficult as regulator-imposed risk limits make it costlier for banks to transact in all types of debt. While Treasuries remain one of the most liquid global markets, failing trades rose this month to about 2.5 percent of average daily volume, from about 1 percent before Twist, according to Barclays. The dollar amount of uncompleted Treasuries trades reached the highest since 2011 last month, Fed data show.

The topic of soaring repo "fails" was covered recently, and is shown in the chart below: a direct function of the Fed's encroachment in the open market.

Then there is the question of remitting interest payments back to the Treasury, about as close to directly funding the US government as it gets (with the exception of course of the Fed directly paying $19 billion to fund the Highway Bill: that was undisputed direct funding of the US government by the banks that make up the Federal Reserve system). According to Bloomberg, if the Fed had opted not to reinvest this year, the Treasury would have had to make up for the lost funding with additional debt sales that might have boosted 10-year yields by 0.08-0.12 percentage point, according to Priya Misra at TD Securities LLC.

One wonders just how much more debt the Treasury will have to issue and how much higher yields will go up by if the Fed ever does unwind its balance sheet?

It also leads to another question: why did the Fed decide to begin the "normalization" process by hiking rates first instead of first removing the truly unorthodox support for asset classes, namely unwinding its balance sheet, or at least stopping the reinvestment of maturing bonds. The answer: because the Fed's rate hike is a farce, further compounded by the fact that the Fed Funds rate on December 31, the only day it actually matters for bank balance sheet purposes, was well below the Fed's 25bps floor.

But that's a topic for another post.

For now, we leave it to Mark MacQueen, co-founder of Sage Advisory Services Ltd., which manages $12 billion in Austin, Texas, to explain precisely why those who are long assets could care less about nominal rate hikes but are terrified of the Fed's actual balance sheet unwind: "The Fed tightening gave us little worry, but the unwind of the balance sheet gives us major worries. The Fed is keenly aware that the balance sheet has a much greater impact on the overall yield levels in the markets going forward than raising rates.”

And there's your answer why the Fed is hiking instead of winding down its gargantuan $4.5 trillion balance sheet: it might actually achieve the intended effect.

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juangrande's picture

Duh! Like they have a choice..

J S Bach's picture

"The Fed Will Monetize Half Of This Year's U.S. Treasury Issuance"


And the US Stock Market will again take off in a pathetic last-red-giant-star-gasp of expansion until the whole rotten structure implodes in on itself.  I love astronomy-economics.

Deacon Frost's picture



“When people of this (banker) class are stricken by guilt feelings while plotting world wars and economic depressions which will bring misery, suffering and death to millions of the world’s inhabitants, they sometimes have qualms. These qualms are jeered at by their peers as "a failure of nerve". After a bout with their psychiatrists, they return to their work with renewed gusto, with no further digressions of pity for "the little people" who are to be their victims.”

Carroll Quigley, Tragedy and Hope, Macmillan 1966, New York, p. 326


Soul Glow's picture

Dull your care.

- Bohemian Grove, "The Cremation of Care"

Ms No's picture

Yep, it's nothing that pretending to throw an infant in a fire at the base of a stone owl can't cure.  Plus there is all that gay sex later at "camp hillbilly".

Ms No's picture

I had the same thought.  Either way we KNOW the gay sex was real.  JK

cheka's picture

only the dupes thought it was over


Soul Glow's picture

And the US Stock Market will again take off

With the leveraged derivatives that banks own versus the debt owed by oil companies no fucking way.

Janet Shalom Bernanke's picture

If the corrupt Fed didnt' monetize this debt they full well know that rates would skyrocket, since there is no country in the world who could afford the U.S. govt's wallpaper.

We can only hope these monetizing crooks can be stopped in time.  It is unlikely.  


Hitlery_4_Dictator's picture

We peddeled some fictional -98 DOW futures to some folks....

philipat's picture

Of that $4.5 Trillion Balance Sheet, the $2 Tillion which is MBS has a M2M value of about zero. Now that the ESF is also buying the UST's dumped by Sovereigns, the USG/Fed/ESF should pretty soon have a complete monopoly in UST's?.....;-)

Soul Glow's picture

I hope that idiot is wearing his "I Heart QE" hat right now.

Jtrillian's picture

So nobody wants to buy our Treasuries, so we just print more money to buy our own treasuries. 

And no one blinks an eye or questions a thing while the national debt quietly launches to the moon. 

And that is how the US dollar lost it's reserve currency status. 

Chupacabra-322's picture

What's to question? So as long as the Sheeple have their bread & circus everything is fine. Look, over there. A Unicorn.

Just keep Stack'n.

WhackoWarner's picture

There is always a choice.  It is called END the game.  Call the bluff,  End the game.  Audit the Fed.  End the Fed and all central banks that are seeking control of every aspect of life for the benefit of private shareholders hidden in the wings.


There is a choice.

WhackoWarner's picture

And the choice starts by being less "obscure".  Most idiots on this planet would understand perfectly if explained how they are being raped and robbed.  Simple analogy that points out fist'fucking and rape would suffice.  Pickpocket illustrations.  A good guide to slave trade would suffice. 



Janice's picture

Nah, go back to sleep. Nothing new here, carry on.

steelhead23's picture

Some folks (I among them) think the U.S. Gov't should be self-funded.  Given the current institutional arrangements, the Fed's picking up new Treasury bonds to replace the maturing one's make's sense.  Yeah, yeah, it ain't a free market - get over it.

WhackoWarner's picture



Yeah get over it.  Your attitude os complacency.  Yeah get over it or be happy in your chains,

Perimetr's picture

A trillion here and a trillion there, and pretty soon, you're talking serious money.

Dethrone The Banksters's picture

Death to the Moneychangers !

lordbyroniv's picture

sounds kinda inflationary, no?

NotApplicable's picture

That's their only hope. Inflate things in order to catch up to the size of their unwindable balance sheet. Of course, it's our nightmare.

WhackoWarner's picture

inflation WILL  not cure this.  No way.  When you add up gov. debt. company debt, personal debt and the GREED of the "62" inflation will take to sanity.  We are playing for all the poker chips on the table.  and sitting with crooks and cheaters who have no intention of honouring any loss (bail-in).  Who stack the deck and deal from the bottom,

Systemic greed that has been concentrated slowly.  Far beyond some treasury bill sale or Libor rigging.



SillySalesmanQuestion's picture

+1 NA. Everyone with an ounce of sense and financial acumen knows this and it makes them very nervous...unlike the unwoken sheep, who are blissfully unaware and preoccupied with i-thingys.

Waddya mean it's gone...!?

Soul Glow's picture

The only reason the dollar isn't falling versus other currency is because the other central banks are monetizing double time too.

steelhead23's picture

No, this is not inflationary.  Asking your boss for a raise - that's inflationary.


Haole's picture

"You'll hear the printing presses from Mars." - Marc Faber

khnum's picture

The monies that have bought the offloaded treasuries so far most probably have come from the exchange stabilization fund,set up in 1934,,nothing else I can think of might have those sort of dollars spare

steelhead23's picture

Ahem - the Fed runs the presses and has grossly expanded its balance sheet.  This activity is simply the Fed creating money out of thin air to cover the liabilities of the U.S.  I am a bit curious as to why the bond gurus think that if the Fed didn't cover, bond rates would only rise about 25 basis points.  Seems low.

Yen Cross's picture

  Not only is Fed. boxed in, they super glued the door shut behind them.

JamaicaJim's picture

Nail gunned the door in Yen...from both sides...

gatorengineer's picture

What if they are rolling their balance sheet to longer durations?  This would seem to be the wise move.... what am i missing?

Yen Cross's picture

 They're cutting off the head to spite the tail... lol

 They already rolled shorter duration debt [operation twist] into longer dated debt a few years ago.

  The yield curve is flatening and the Fed. isn't retiring debt. They can't buy the short end of the curve because that would be deflationary, so bond traders know the money is going to be rolled into the longer end of the curve.[ buying longer dated debt]

 They're damned if they do, and damned if they don't. the Fed. want's a steeper yield curve, but they're boxed in at both ends.

WhackoWarner's picture

Would you lend your deadbeat, drug dealing more and more promises?  At what point do you call them thieves,

nmewn's picture

"I am being told to reiterate once again, we believe in very firm & strong dollars here! " - Vice Public Security Minister Meng Yellen ;-)

Soul Glow's picture

No monetizing here, move along!

Professor Fate's picture

Hmmm...Let's see how this works.  Treasury issues bills notes and bonds...check.  Fed buys Treasury's bills notes and bonds...check.  Treasury pays interest to Fed on bills, notes, and bonds...check.  Fed required to turn over net income to Treasury each year...check.

Here Ponzi, Ponzi, Ponzi.  Good dog.  

Fate the Magnificent
"Push the Button, Max" 

cheka's picture


they turn over whatever is left over after they do what they do to create 30+ billion dollar HOLIDAY bonus pools

BIG difference

arbwhore's picture

"We cannot foresee any way that these never-tried-before methods will have a negative impact."... 

opencircle's picture

Yes and No, since this will fall into rollover bucket.  We still need buyer for 100% of new issue. 

JamaicaJim's picture


Of they'll outright buy it themselves....out in the open..disguised as some shit....with the MSM covering their backs....

opencircle's picture

Yes and No, since this will fall into rollover bucket.  We still need buyer for 100% of new issue. 

JamaicaJim's picture

There is only one way out...


On a global scale.

I'm talking a hot war. Not a currency war or whatever....


Then the big re-set.

no matter how prepared one can be....most won't be....

and that's as planned.

You saw ZERO tears from the elites after WW2...none...and 70 million got snuffed....

Much more people on the planet now...much more......

cannon fodder