The Cost Of Twisting (And The "Housing Recovery"): $100 Billion In Foregone NIM To The Primary Dealers

Tyler Durden's picture

When Operation Twist began in late September 2011, Primary Dealers reported that their net position in bonds with a maturity between 1 and 3 years was ($23) billion or the biggest short since January 2010, while reporting holdings of bonds between 11 and 30 years of $12.4 billion, for a net carry position (Short minus Long) of $(35) billion. What a difference just over 6 months makes: courtesy of Treasury Primary Dealer data, we now know that in the preceding weeks, with the Fed selling paper maturing in under 3 years, the Primary Dealers have loaded up to the gills on short-dated maturities, and in the week ended April 11, they reported $54 billion in 1-3 Year Holdings (a number which will surge as it comes very shortly after the traditional end of quarter window dressing when Dealers convert all their liquid holdings into cash to make their capital ratios more attractive for reporting purposes). At the same time 11-30 Year Maturities declined from the $12.4 billion at the start of Twist to just $7 billion: don't forget - this is the only type of bonds sold by the Fed (if also including short maturities than the explicit long-end that the Fed is buying).

What is interesting is that with nearly 80% of Twist over, the 10 Year was at just under 2.00% the day Twist started, and was....just shy of 2.00% on Friday, or unchanged over 7 months. In other words in order to "sterilize" the Fed's duration extension, keep rates, and the price of gold, low and promote a "housing recovery" (which keeps forgetting to appear as it is not the ratio of mortgage debt to disposable income, or even cost of mortgages that matters, but the mortgage debt service ratio to housing equity which has not budged one bit, but more on that shortly) Dealers have been "forced" to part ways with about $100 billion in Net Interest Margin generating units, as the Short minus Long position has risen from -$35 billion to +$54 billion, hitting over $60 billion a few weeks ago.

The bigger issue is that as we noted before, the Fed is running out of 1-3 Year securities which it can sell, and at the end of Twist will have at most two more months of inventory left, which in turn means that any further easing will no choice but to be unsterilized. As usual the market, and those securities most sensitive to whether future monetization is sterilized or not, will figure this out late to quite late.

But probably the most important Twist-related chart is the following from Bank of America, which shows just how much interest rate risk the Fed is taking on: over the duration of Twist, the Fed has basically soaked up all the issuance of debt (in terms of 10 Year equivalents) over 10 Years. Which also means that if and when rates spike up, not only will the Fed be impacted (at about $2 billion DV01 per most recent Fed holdings), but all the additional proceeds will be transferred to the Treasury. In fact, the higher the spike in rates, the more "profit" that the Fed will remit to the US Treasury. Is it possible that, in their stupidity, this is precisely what the authorities hope happens, as the convexity impact of rising rates on 30 Year paper will be much greater than on the belly and lower which is what the Treasury is most exposed to from a cash interest expense perspective?

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max2205's picture

But it moved stocks 40%. That's what this is really about

Future Tense's picture

Yep, and that 40% stock movement is about to move the other direction quickly. The following article discusses what would happen if the percentage of the population invested in the stock market moved back toward the historical mean (much lower). All the "cash on the sidelines" would be gone very quickly:

johnu1978's picture

If the banks dumped their shadow inventory we'd see the real estate market drop another 75%!!!


Primitive Skills Classes - Edible Plant Tours

Excursionist's picture

Fun soundbite, but (unless I'm missing something) selling short-dated debt to buy long-dated debt at best moves only some money out on the risk curve (e.g., into equities).  But enough to push the S&P 500 this far?  I just don't see it..  Op. Twist alone doesn't explain it.

vmromk's picture

Interest rates spike up ?

How can interest rates spike when the only buyers in the bond market are the Fed and other Central Banks in the interest of keeping the global Ponzi alive for as long as possible ?

Interest rates go up when there is a deluge of bond sellers and few buyers. The Fed is and will continue to be buying hand over fist. The minute the Fed stops buying, then interest rates will spike and bankrupt the U.S.

dannyboy's picture

The alternative to the deluge of bond sellers (that is a possibility, someone may trigger an all out sell, and thus the old adage "He who sells first, sells best.") but in my opinion it is unlikely as any significant bond holder of any size that could move the market in that type of respect would not want to instantly collapse the market as they know they wouldn't be able to unload all thier inventory at par. So effectively in my opinion what we have is all these foreign CB's, foreign government, PD's and every other major bond holder trying to unload thier US T bills while trying to get paid out on par.

In my opinion (really the tylers) is as our friends at Goldman Sachs points out is this.

"when it comes to securities price formation in a centrally-planned regime, it is flow not stock that matters. And as those who follow the Fed's thinking know too well, the Fed is convinced it is stock, not flow that serves as a consistent catalyst for subjective risk valuation."


What will collapse the bond market will be the feds inability to constantly be monetizing debt as this thing goes on. Thus the fed itself unintentionally will consume the bond market itself.

spiral_eyes's picture

"How can interest rates spike when the only buyers in the bond market are the Fed and other Central Banks in the interest of keeping the global Ponzi alive for as long as possible ?"

The pertinent question is more "how long can the Fed keep rates from spiking up?" (i.e. how long can the Fed maintain the price floor on treasuries, and thus the price ceiling on what the Treasury is paying on its debt).


banksterhater's picture

*******WARNING********* Another ASSHOLE linking youtube! GFY!


Ban these YOUTUBE - linking ASSHOLES !

vmromk's picture

The Fed can keep interest rates low as long as it wants or until public outcry over rampant inflation forces their hand.

Otherwise, there is no true bond  "market."

The Fed is the bond market.

LowProfile's picture

The Fed will buy every last scrap of debt to "save" the system at the expense of the currency.

Sam Clemons's picture

I know that people have said history is littered with examples where central banks have tried to keep bubbles alive and failed.  However, those times typically involved money (yes, including even paper in that) that was mostly solid and could not be distributed fast enough to the key players to keep bubbles alive.  

Now, we have digits.  It takes no effort for the Fed, BOJ, BOE to create as much as they want to buy treasuries.  In the event that doesn't work, I would not be surprised that the stock market falls to create the safety demand for treasuries.  How could bond vigilantes win?  This isn't a mighty ducks movie.  The game is rigged.

The only way it would ever be in their interest to let rates rise is to fight incredible inflation.  Inflation that they can measure any way they want.

LowProfile's picture

The Fed will buy every last scrap of debt to "save" the system at the expense of the currency.

DaveyJones's picture

If I only knew my war bonds were used to fight the middle class... 

GMadScientist's picture

Over Here

Over Here

We're often told

It can't happen

Over Here


GMadScientist's picture

Ah yes...the Primary Front-Runners are taking their places at the trough...make sure to apply that palm grease evenly now. We want a nice long pointless election cycle to keep people entranched (get it? like entrenched and entranced!).


Winston Churchill's picture

Interest rates,

How 20th Century.

We live in a Fed New World now.

vmromk's picture

Forgot to mention......FUCK YOU Bernanke.

DonutBoy's picture

You point out the cost to the Fed if rates rise, but rates will not rise.  The Fed, or at least this Fed, will find a way take all of the long-term paper off the market while handing unearned profits to large banks.

SIOP's picture

DonutBoy wrote: "You point out the cost to the Fed if rates rise, but rates will not rise.  The Fed, or at least this Fed, will find a way take all of the long-term paper off the market while handing unearned profits to large banks."

I swear I think I remember Bernanke pretty much saying the very same thing few years ago. But he conveniently didn't mention giving the profits to the banks.  I'm going to look to see if I can find where he said this.

ISEEIT's picture

 Monkey See 'debt as money'.

See monkey attempt to buy shit with debt,

It will break.

Now you have broken thing.

Follow me so far?

Wash, rinse, repeat.

Go America!!

ISEEIT's picture

Me no speak Chinese (yet?), however sound like ponzi sooooooooooooo complicated that maybe even chairman Bernanke grow nervous?

Central planning fails because of the inherent dishonesty attached to the concept of a few managing a many. Scale does matter and TBTF is truly TBNOTTOF.

The clowns attempting (yet again) to 'own the world' cannot even manage their own personal lives, let alone participate constructively in assisting their families and friends to be fully human.

And yet they play God?

Twisted bunch of fucks.

"a woman's right to choose"?

Seriously? I'm all for it but what about my right to choose? Did I surrender that 'right' by being born?

"social justice"? Are you fucking kidding me? (no, they are not)

How social is your fucking 'justice' if it leads to the collapse of society?

They ought to all live in a world created by themselves and leave the rest of us be.


AmCockerSpaniel's picture

You know, that kind of talk can lead to your sodden disappearance.

ISEEIT's picture

I don't submit to television, however I would become an addict were a program offered featuring these sociopath stooges in a version of survivor island. Imagine dimon, blankfiend, corzine, obama, pelosi, wasserman schultz, papa bush, both clintons, shummer, madcow, axelrod, poof, valerie, krugman, both koch ho's, soros...You know the whole enchilada competing for survival alone on an island with no sheep.

That I would watch.


And just for fun, we could film it all using drones!!


ISEEIT's picture

Give me "sodden" or give me?

Bam_Man's picture

Lloyd will tell you that doing God's work isn't always fabulously profitable.

Fred Hayek's picture

So will Krugman. They're both lying a55holes.

dudditz's picture

Ive been contemplating almost two years now since I pulled my money out of equities, about the eventual fallout from the Feds monetary policy (per Bernanks famous speech when he said that the money will be used to inflate equities).

What I see happening is real, ordinary, average people losing faith and not investing in the market anymore.  Compounding this problem is the executive and legislative branches letting banks and corporations make their own profit w/o even a hint of capitalism, because no one fails, and they foolishly think that everyones greed will sustain it.  This philosophy is doomed to failure.

I do think the government knows what it takes to placate the sheeple - cheap gas, food stamps, welfare and a hamburger on every corner. Our military is the sole linchpin keeping us from becoming undone.  Wasnt it Friedman who said, no mcdonalds w/o mcdonnell douglass?

Personnaly, until some sense of capitalism takes hold, my current investments have been in the hard, physical tangible asset classes.

Ramboy's picture

Who cares.  People are making money and getting laid and resting on a Sunday unlike you who's too busy acting like Satan, Ira and Chaim.

Plumplechook's picture

I am in 'agreeance' with the rest of you Zerohedgers - i.e.:  the fed manipulates our very life blood, as ordered by the lizard men, in order to create infinite debt and establish a soviet central planning regime.

And in other news, the Elders of Zion have decreed that George Soros will assume his predestined role as Lord High Priest of the new World Government starting next Friday,  as foretold in the Protocols.