Fed Is 4 Times More Efficient At Selling Government Bonds Than The US Treasury... With A Taxpayer-Funded Twist

Tyler Durden's picture

Something curious happened today. As we pointed out earlier, for the first time as part of Operation Twist, the Fed, instead of buying bonds in the open market, actually sold bonds: a departure for Bernanke, and only the first time the Fed has practically rebalanced its portfolio since the first Operation Twist 50 years ago. In essence, by dint of its adjusted mandate, the Fed became the Treasury - what proceeded at precisely 11 am was the announcement of a sale of $8.87 billion in bonds with maturities from January 31, 2012 through July 31, 2012, bonds that were sold not by the traditional issuer of bonds, but by the Fed. Granted no new money was raised by the US in the process, but it was still a curious development. What was far more curious was the staggering turnout by the Dealer community, which indicated an interest for, wait for it, a whopping $242.6 billion in bonds!  Said in conventional terms, the Bid To Cover was an unprecedented 27.3, or there was $27 in demand for every $1 of bonds finally sold by the Fed. Why is this worthy of bolding. Because, in a traditional Treasury auction, the Bid to Cover by the Dealer community is far, far lower. In fact, as the most recent 52 week Bill auction demonstrates, there was $89.5 billion in Bids for $14 billion in bonds allocated to Dealers, or a 6.4 Bid To Cover. Said otherwise the Fed is about 4.3 times more efficient at finding buyers than the Treasury. How is this possible? And should the Fed take over Treasury in all future bond sales? Nope: the answer is that this is nothing but yet another taxpayer funded gift to the (recently expanded by 2 Canadian banks) Dealers. Let us explain.

First, here is what the mechanics of the most recent 52 week Bill sale looks like:

One can see how the Dealer Bid To Cover is a respectable 6.4.

Alternatively, here is what today's Fed's POMO looked like in its final form:

Bid To Cover? 27.4!

How is this possible? Is the Fed really 4 times more efficient at selling bonds than the Treasury? How and why can dealers have such a huge apetite for paper which yields inside of 0.1% and thus provides absolutely no real top or bottom line benefits?

Simple. As Zero Hedge has discussed many times in the past, POMO, in whatever format, be it under LSAP auspices or Operation Twist, is nothing but a taxpayer funded gift to the Dealer community.  As a reminder, the actual POMO process is conducted in the form of a reverse dutch auction, where the collusive Dealer Community (recently expanded to include 2 more Canadian Banks, BMO and Bank of Nova Scotia, which simply means that US Taxpayers are now on the hook to bailing out two more banks which are part of the supposedly safe and stable Canadian banking system) submits best bids or offers to the Fed, depending on whether the community is buying or selling bonds. Today, for the first time, it was buying, so it was Bidding. And while we can not prove it as the actual details of the price allocation are a non-public mystery, we are 100% confident that the answer lies precisely in the risk-free arbitrage, funded by the Fed, and hence the US taxpayers, consisting of a collusive wholesale bid at prices far lower than prevailing market rates, and the ability to immediately flip the bonds to the open market upon allocation for a tidy profit.

How tidy? We have no idea: the data is private. However, it is tidy enough to generate 4 times more buying interest than would be there normally. Hence the, pardon the pun, twist.

We are confident that the "99%" will be delighted to learn that Operation Twist, while flattening the 2s10s and 10s30s massively, a terminal scourge for the Net Interest Margin-reliant community, also contains in it the salvation for these very banks, and specifically the bonuses for their bond trading divisions: because all QE or Twist or whatever really is, is an ongoing subsidy via the bid/ask spread, funded by US taxpayers, to keep America's hurting banks solvent.

What is the ultimate top line benefit? We are not sure. But we are confident the result will be made immediately obvious once the monthly POMO details are revealed. We are eagerly looking forward to reverse engineering just how much money the middle-class is now funneling into America's banks via what is once again a daily POMO bail out.

And here is what the actual flip looks like in process: below we show the price chart of one of the cheapest bonds in today's POMO, 912828NS5, which accounted for $1.2 billion of total, and how its price changed starting at 11 am once the POMO was concluded. One can only imagine the amount of leverage involved in this operation...

And another:

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Zonker's picture

That Bernanke is somthing else isn't he?  One of the Chosen ones heading into the most important Holiday.  g_d speed Big Ben!



Smithovsky's picture

My only question is, where do I sign up to be a bond dealer? 

I want to participate in this racket.  

mayhem_korner's picture



Trust me, you're participating in it.  You're in the "deferred benefits" section.  :0

Mactheknife's picture

And then the dealers get another freebie when they turn around and sell the long bonds back. The Bernank knows who he works for.

The Limerick King's picture



The Dealers are making a killing

That Kleptocrat Ben is so willing

To hand them our wealth

Through bond twisted stealth

Our assholes they soon will be filling

HCSKnight's picture

Now work in the part where this helps the Dealer balance sheet move left on the curve to better weather the eventual economic inflation.

Slash's picture

sell short dated bonds back to dealers

wait a couple months while things fall apart

announce QE3

buy bonds back from dealers at hugely inflated prices


Keri at Bankster Report's picture

This is exactly what (most) of the "Occupy Wall Street" crowd doesn't seem to get: a bunch of protesters "occupying Wall Street" yelling for "reforms" is like the "Guardian Angels" "occupying the neighborhood" and demanding that the FBI arrest the corner dealer....while the CIA flies another load into Mena, AR and the FBI brings the product right back to the 'hood. Both groups are protesting the wrong damn thing, in the wrong damn place.

We don't need to occupy Wall Street: we need to occupy Maiden Lane. And Liberty St, and Nassau St, and William St.  Surround the NY Fed.  Banksters don't need addresses (on Wall Street or anywhere else) to subjugate the world: all they need is a central bank. POMO is the perfect demonstration of this: its a cargo plane en route to Mena.

Banksters and dealers are a lot alike: both are powerless without some magical government backing. For the dealers, they need a federally-enforced contraband society in order to sell naturally cheap, renewable products (cocaine, weed, whatever) at exorbitant prices. For the banksters, they need a federally-enforced counterfeit society in order to sell products (credit, fiat, etc) that don't even EXIST. Occupy Wall Street all day---and see what happens. Run all the banksters out of NYC, and they'll find another nation to call home, and set up freakin' eurodollar accounts with the Fed and get right back to their same ol' tricks.

Occupy Maiden Lane, Liberty, Nassau, and William if you want to see something change. End the damn Fed.

Corn1945's picture

Is it really the middle class or is it China? Seems like China is the only player in town with real money.

rubearish10's picture

Not sure this is true. It is possible that the Chinese might be running low on cash flow. It is possibl ethat they (China) is borrowing against copper and other commodity stockpiles to fund cash requirements. This could explain the recent price declines in copper. What I think is happeneing is the market is beginning to realize there is a hoarding glut (i.e corn and copper) which is supported by lack of aggregate demand. The sham continues to become more exposed. At some point US TSYS will be for sale, BIG! Hey, this is just one view.

CapitalistRock's picture

The American middle class is several times larger than all of China. With all the talk of China it is important to keep in perspective how small their economy still is.

Ahmeexnal's picture

Some bonds are more equal than other bonds.

knukles's picture

My coupon's bigger then your coupon.

Barnaby's picture

Nice analysis, Ty. So everything out of the shoe is a push yet the gambler still tips the house. Casino Nation.

GeneMarchbanks's picture

So... buy BAC?

Basically there is no way of starving this beast because there are 330 million hostages. As unpleasant as this news is, it is much appreciated TDs.

This'll give us something to meditate on for the next couple of months.

depression's picture

exactly, now eat your peas !

Hook Line and Sphincter's picture

Yes GMB, 

BAC. although insolvent, bankrupt, and seemingly a black swan will sit tight and pretty, knowing it has been dressed up in the black pidgeon costume. Website BofA antics aside, they're not going anywhere right now. 40 some odd Trillion of derivatives clearly speaks of continuation - kick the AmeriCAN down the road. The owners on the other side of the bet have to double down with FedTwisty. The captured gov won't let the insurer be tested anytime soon either this time (read AIG).


GeneMarchbanks's picture

Dude, my sarcasm was on. Even if there was a sure trade in BAC right now I wouldn't take it. I'm all about physical if you know what I mean;)

Also, fuck Buffett.

Hook Line and Sphincter's picture

You weren't thinking of literally doing that to Buffet, were you?

(I was!)

AmericanFUPAcabra's picture

More like 270m. you hafta factor in the people on the dole. and the 50 week unemployment train or whatever redic figure it is. 

Actually anyone know how many people would be left out in / unable to pay into this? 

buzzsaw99's picture

:surprised: [/sarcasm]

Smithovsky's picture

Is this why MS is doing so well all of a sudden?  

Cognitive Dissonance's picture

For crying out loud, where the hell am I every time the Fed opens the (free) soup kitchen window? By the time I get there, all that's left are crumbs, used rubbers and lots of sore asses.

Dammit, I never get to have any fun.

bigdumbnugly's picture

it's a big club and 99.98& of us ain't in it.

Hephasteus's picture

Buy a psychotic a gun. Get a free inkject cartdrige.  You just don't hang out with the right violent people.

Now it's time to celebrate the summer of stealing gaddafi's gold.


Hook Line and Sphincter's picture

I'll try to get to the soup kitchen a little bit after you Cog. Sorry about the asses.

fyrebird's picture

The dealers are sharks and can smell money in the water.

You don't even have to see the money or know how it might have gotten there. The dealers can smell it they know it is there and they want it and will swim in from all corners of the financial world to devour it.

Nothing new. Not even much of a twist. It's the usual looting by the usual villians, aided by the same traitorous fiends.

macholatte's picture

The dealers are sharks and can smell money in the water.

Maybe not. Maybe they're just a bunch of bankster panhandlers. The coke has their olfactory numbed so they just wait for a phone call, get their instructions and go from there. Clearly, what happened was not without notice to the banksters. They needed some time to prepare. You just don't raid the cookie jar if you don't know where it is.

This is not  a casino. It is premedited, cold blooded and calculated well in advance of execution. 


It is a rather pleasant experience to be alone in a bank at night.
Willie Sutton

LawsofPhysics's picture

This is a shell game that the Fed controls.  No surprise that they are better at their own game.  Come on guys.

Bull v. Bear's picture

Leeeeeeeeeeeeeeerrrrrrrrrrrrooooooooooyyyyyyyyyyyyy Jennnnnnnnnkkkkkkins.........

GeneMarchbanks's picture

For the second time today:   "At least I have chicken"

monopoly's picture

This is all so totally screwed. Santelli could do a good job backing up Zero Hedge but then they would put him in another time out for a week. Not easy to understand all of this and that is why 95% of the population has no clue as to what is going on. So it will continue.

Interesting how rates have been creeping up the last 3 days, no big deal, but worth noting.

And what the heck got into silver today. I thought only Kodak used silver....

Hephasteus's picture

How about that gold euro philharmonic price in dollars. Pretty schizophrenic.

moondog's picture

Silver is a barbaric relic like gold. A bunch of damn Luddites must have bought the shiny stuff. FIAT currency and government bonds are the future my friends!! Be a good American, buy bonds. If not, you're a damn dirty terrorist...

jomama's picture

i don't know but it really pisses me off.  two weeks i bought 100oz. and the price crashed 10 bucks. 

now tomorrow is fiat payday and the price goes up two bucks!

it's a goddamned conspiracy, i tell you.

i_fly_me's picture

Someday, you are going to remember how you once bitched about a $10 drop in virtual Ag and giggle.

Hephasteus's picture

Or when it first started crashing and went down to 8 bucks an ounce at one point but nobody could get ANY of it for less than 10. It's hard to be jealous of people NOT being able to buy silver at 32 right.

Honey Badger's picture

I think that the words "U.S. taxpayers" could be replaced with "U.S. dollar holders" because the debasement of the currency (money printing) is the only "solution" and this impacts all dollar holders, not just U.S. taxpayers. 

karzai_luver's picture

Never forget, EVERYONE KNOWS , We made money on the bank bailouts, they proved it in the p/l doc they released!





made money???? what a twist on a phrase - hahahahaa


it's a small club but without KY it don't matter much!






DaveyJones's picture

and they're six times more efficient at selling bullshit

disabledvet's picture

Look Mr. President! Zero Hedge is trying to destroy Christmas again! Now let me change that word "collusion" to "cohesion"..."voila la! It's all good people! Move along!

Barnaby's picture

Spooooky. That graph looks a lot like the Sears Tower.

NotApplicable's picture

What'chu talkin' about, Willis?

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Don't give the CIA any ideas!

The Axe's picture

Cider in my ear  http://www.youtube.com/watch?v=d8Wvgs9q3js    if some many bankers want a piece, they know the fix is in.....