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Fed Extends Twist Through End Of 2012, Prepared To Take Further Action, Market Unhappy
As always, Goldman Corzined anyone who listened to its call that an epic QE is coming. Fed did the worst possible outcome for risk- merely extended Twist, just as the credit market predicted it would 3 weeks ago:
- FED SAYS IT IS PREPARED TO TAKE FURTHER ACTION `AS APPROPRIATE
- FED TWIST EXTENSION TO SWAP $267 BLN OF TREASURIES BY END 2012
- FED TO SELL OR REDEEM `EQUAL AMOUNT' DEBT DUE 3 YEARS OR LESS
- FED TO BUY TREASURIES DUE IN 6 TO 30 YEARS AT `CURRENT PACE'
- FED SAYS EMPLOYMENT GROWTH `HAS SLOWED'
- FED SAYS INFLATION HAS DECLINED, REFLECTING OIL
- FED REITERATES ECONOMY `EXPANDING MODERATELY'
- LACKER DISSENTS FROM FOMC DECISION
This means that soon Primary Dealers' entire balance sheets will be filled with the entire inventory of Fed 1-3 year bonds. Market not happy. Full June statement here.
Full April-June statment redline.
The New York Fed announces more details on what will be bought:
On June 20, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to continue through the end of the year its program to extend the average maturity of the Federal Reserve’s holdings of Treasury securities. Specifically, the Desk was directed to purchase Treasury securities with remaining maturities of 6 years to 30 years and to sell or redeem an equal par value of Treasury securities with remaining maturities of approximately 3 years or less. The continuation of the maturity extension program will proceed at the current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012.
The FOMC also directed the Desk to continue reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities (MBS) in agency MBS, and to suspend, for the duration of the maturity extension program, rolling over maturing Treasury securities
into new issues at auction.
Purchases of Treasury securities for the maturity extension program will be distributed across five sectors using the same approximate weights that have been used in the purchases to date:
| Nominal Coupon Securities by Remaining Maturity* |
TIPS**
|
|||
|
6 – 8 Years
|
8 – 10 Years
|
10 – 20 Years
|
20 – 30 Years
|
6 – 30 Years
|
|
32%
|
32%
|
4%
|
29%
|
3%
|
*The on-the-run 10-year note will be considered part of the 8- to 10-year sector.
**TIPS weights are based on unadjusted par amounts.
This distribution could be altered if market conditions warrant.
A combination of sales and redemptions of Treasury securities will be conducted to match the amount of purchases over the program. Sales of Treasury securities will take place in securities maturing between January 2013 and January 2016. Securities maturing in the second half of 2012 will be redeemed—that is, allowed to mature without reinvestment—since redeeming maturing Treasury securities has a nearly identical effect on the portfolio as selling securities that are approaching maturity. Once the maturity extension program is completed, the Federal Reserve will hold almost no securities maturing through January 2016.
The Desk will continue to publish a tentative schedule of operations for the following calendar month on or around the last business day of each month. The schedule will include the anticipated amount of redemptions, purchases and sales to be conducted, operation dates, settlement dates, security types (nominal coupons or TIPS) to be purchased or sold, the maturity date range of eligible issues, and an expected range for the size of each operation. The next schedule of operations will be released on Friday, June 29.
All other program details remain the same at this time. Additional information on the program’s structure can be found in the revised Frequently Asked Questions for the Maturity Extension Program
* * *
Finally, and again, this is what happened after the Fed disappointed last time around:
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Guys/Gals You may all be missing the point if the debt side economists are correct.
1) Banks print money every time they give a loan out, with no limit except that imposed by the reserves imposed by the Federal Reserve
2) Economic growth depends on real salary growth plus credit growth. When credit growth is faster than GDP growth you get into a bubble, to maintain the bubble credit growth accelerates. This happens until it collapses on itself when actors aren't able to pay interest on loans. It is all about cash flows. Capital is just an accounting gimmick.
3) We are still in the economy of the post 2008 credit collapse. We experienced a minor bubble until now due to the credit growth acceleration created by the successive rounds of QE and government subsidies and bail outs, plus the coordinated central bank actions and LTRO en the EU.
4) What we are experiencing in the normal GDP growth without help from credit growth. And that is here to stay.
5) Inequality in China and India is orders of magnitude what it is in Europe and USA. But the low end is slowly improving in quality of life.
6) Inequality in EU and USA will worsen a LOT, middle class will dissappear if it doesn't react, and history says it won't. And Obama is preparing in case it does. Think tanks know this very well and that is why so many laws enabling arrest of Americans in American soil without due process are in the books already, plus the drone business.
7) The unit cost of labor in the USA and EU is a lot higher than India and China, due to automation and other technological wonders the quality of labor is no longer that important. It is more important the consistency and dedication of the labor force (i.e. slave camps like in China where people are so desperate to scape that they commit suicide).
8) The reasons for the higher cost of labor in US and EU are structural. Read higher mortgages to pay, higher cost of health care, higher cost of city services, higher cost of child care, higher cost of retirement savings, higher cost of education and College, higher cost of transportation (due to disperse infraestructure, roads, highways and cities that were designed for people to own and drive a car), with bare minimum mass transportation, cost of labor unions, worker protection rights, inequality rights, discrimination rights, sexual harassment rights, environmental control costs. The list is long and nearly inexistent in other places.
Therefore as the cash streams due to interest payments collapse one by one under the weight of the distortions created by the missunderstanding of how the economy has really grown, and how the standard of leaving of structurally non-competitive economies and societies (EU & USA as prime examples) has been maintained (it was maintained by acceleration of credit growth faster than GDP). Leaders worldwide are faced with an impossible to solve situation, short of the Henri Kissinger solution for this type of problem *****!!!!!*****
Have good dreams!
Until next time,
Engineer
Economic situation bad, market up ... why do you say it is unhappy? Sure it could be up 200 pts if Ben had said I will print more but he knows better. He will do it. He will simply not talk about it. No one on earth has the right to audit the Fed anyway.
Love this headline from Yahoo Finance. Ah yeah right. More like Fed extends "Twist" Program to keep whole thing afloat. We all know the U.S. is sunk if god forbid interest rates are allowed to go anywhere near market rates.
I had sorta the same reaction - reminded of the old definition of insanity.
Like Twist 1 worked so well last year, let us do it again. Besides, there ain't much else left except LASP or print directly, and that pisses some people off and there is an election coming and we can't be called political and -
sheeeit.
Uncle Ben is all boxed in and nowhere to go as G-20 concludes with phoney smiles and nada, zip and ought for direction.
Breaking news!!! Markets now happy. Sports and weather on the 8s and 20s on the hour
Who the hell listens To GS? They have puppets in EU governments and a good proportion of Fed top men are ex Goldman yet they get this wrong. Is their 'advice' to their 'clients' coded somehow? ie, do the opposite of what we say publicly.
Ben "beat that horse" Bernanke, beating it again.
So the Fed is going to sell billions more short term bonds with shitty coupons, who do they think will buy them? last year, 61% of all federal debt was monitized. The buyers are drying up. I guess the Fed can always print some money and buy them from themselves, maybe create Maiden Lane Partnership #67492378398 to do it through.
Why does anyone even bother buying *any* bonds? They are quite the scam.
http://dollarskeptic.com/2012/06/01/7-reasons-inflation-protected-bonds-arent/
BNN guest says next step is BB will buy MBS. Free mortgages for everybody.
The market will be very unhappy if it figures out there will be no QE until at least after the election (http://bit.ly/N9GLe9).
BTFD?
Weak, very weak. Even China has a bigger stimulus package (2 trillion yuan) than the almightly United States (a mere 267 billion dollars).