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Fed Forces Primary Dealers To Buy Ever More Short-Dated Paper As Corporate Bond Holdings Drop To Decade Low

Tyler Durden's picture


Earlier today, Bloomberg came out with an article titled "Dealers Declining Bernanke Twist Invitation" in which the authors make the claim that "Wall Street banks are increasingly choosing to hoard their U.S. bonds rather than sell them to the Federal Reserve as speculation grows that a slowing economy and global financial turmoil will only make them more dear." As the argument, Bloomberg points out ever lower Bids To Cover in the near-daily sterilized POMOs that the Fed conducts as part of Twist, which actually is a meaningful if very volatile argument and which may be far more impacted by how much money the New York Fed is letting banks skim off the margin in daily POMOs as ZH has discussed previously.  More impotantly, BBG notes the record holdings of Treasury bonds by Primary Dealers (something we too did a month ago). It even goes on to quote 'serious people' - "People are not willing to sell Treasuries" said Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $89 billion in fixed-income assets, in a June 28 telephone interview. "The data in the U.S. doesn’t look as good. The labor market has lost momentum. There will be more upside left in Treasuries despite the low levels of rates." All this would be correct if it wasn't for one small detail: the distribution of UST holdings within the Dealer inventory.

As we have repeatedly shown, once one looks at just what Dealers hold, the story flips diametrically. In fact, according to the most recent Primary Dealer data released by the FBRNY (as of June 27), of the $106 billion in Dealer Treasury holdings, a whopping 78% are in the 3 Years and under category, in other words precisely what the Fed is selling to the Dealers per Twist!

That Dealers are then unable to offload this ZIRPing inventory (because as is well known all paper up until 3 Years has largely negative real rates) actually solidly refutes the story's thesis: Dealers are more than happy to play Twist, but nobody else wants to buy what the Fed sticks Dealers with. Hardly an indication of ravenous demand for US paper.

Indeed, what Bloomberg should have done is look at the proportion of paper 3 Years and above historically held by Dealers to get a gauge of just how much demand there is for Treasurys. And at 22%, this is about as good as it has been, especially when one considers the net $10.6 billion short position in 6-11 year paper which is the largest since April 25.

What is perhaps most confounding, and what completes the picture, is that as the Fed has forced Dealers to buy up more and more sub-3 year paper, PDs have been forced to find a release valve elsewhere, and sell securities to make room for all this ZIRP paper. That somewhere is corporate bonds, which as the second chart shows, is at $60.9 billion, or the lowest total since May of 2002. One can argue that the Volcker rule is making holding on to corporate paper prohibitive but since Volcker rule is nowhere close to implementation that would be disngenuous.

What the PD rotation out of corps and into TSYs certainly does do, however, is to reduce liquidity in the bond market as dealers no longer have cash (non-CDS paper) in stock, pushing bid/asks to the widest they have ever been (as Citi's Stephen Antczak recently explained phenomenally well in the June 1 paper titled Bid Wanted! Coping with Market Illiquidity).

In other words, all that Bloomberg has shown is that as the Fed's Twisting continues, its secondary effects on the market continue to deteriorate an already collapsing liquidity infrastructure, until at the end TSYs will be the only product that has any liquidity left to it, forcing everyone to become a bond trader, and shortly thereafter, vigilante.

As an apendix for those curious, here is a summary of all bond sales conducted by the Fed in 2012: total of $274 billion in short-dated paper sold. The Fed sure doesn't seem to be having a problem with any of these sales.

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Mon, 07/09/2012 - 10:55 | 2598651 hedgeless_horseman
hedgeless_horseman's picture



Trees don't grow to the sky.  When the yield rally finally comes, it will be epic,

Mon, 07/09/2012 - 10:57 | 2598658 veyron
veyron's picture

Or it will continue ad-infinitum ...


Just sayin, its a possibility

Mon, 07/09/2012 - 11:24 | 2598712 Dr Paul Krugman
Dr Paul Krugman's picture

The odds of euro crackup are increasing by the day, and with no sense of urgency, it could be sooner than later.  Here the U.S. Federal Reserve and Treasury have a sense of urgency, if minimalistic, to keep rates low.  As Treasuries are the most liquid investments in the world, it is important for them to keep their value.  So the Federal Reserve mitigates the problem by continuing Operation Twist.

No one is forcing the banks to buy short dated treasuries.  This is purely based on demand.  Bills are a safe haven because Europe will not take the bull by the horns and finally implement a package that can solve their problems.  Bernanke too should understand that a euro crackup would spill over to our shores.  This is why the Federal Reserve should use their policy tools to implement another round of stimulus and bond buying. 

Keep rates low, and keep prices up.  This is the only way, and our only hope to get out of the recession in the U.S., and what appears to be a looming depression in Europe.

Mon, 07/09/2012 - 11:29 | 2598724 TheCanadianAustrian
TheCanadianAustrian's picture

THIS is the gold medal example of an excellent troll. MDB, RobotTrader, and other troll wannabes, take notice.

Mon, 07/09/2012 - 11:53 | 2598783 BankruptBanker
BankruptBanker's picture

BUT BUT BUT gold is worthless. People ought to give paper medals from now on.

Mon, 07/09/2012 - 11:30 | 2598727 surfersd
surfersd's picture

Gee Paul what is that package that will save the Euro. France lowers its retirement age to 60 and Italy says that taking one week from their three months of vacation will improve GDP by 1%. Germans must love hearing that from their southern neighbors. What happens when Treasuries start to lose their value, think the liquidity will still be there?


Mon, 07/09/2012 - 11:37 | 2598742 jimmyjames
jimmyjames's picture

Keep rates low, and keep prices up.  This is the only way, and our only hope to get out of the recession in the U.S.,


Typical clueless Keynesian-

Keep prices high and out of consumers reach so that spending is channeled into necessities only and keep rates low so that savers get no return on savings and then be stupid enough to believe that will improve the economy-

Mon, 07/09/2012 - 11:42 | 2598751 tocointhephrase
tocointhephrase's picture

As Treasuries are the most liquid investments in the world.


Tyler, where is that upside down triangle (the one with Gold as the most liquid)? I Still have a problem with that diagram too, as Silver does not appear below Gold which imho is THEY MOST LIQUID ASSET!

Mon, 07/09/2012 - 12:28 | 2598865 Zero Debt
Zero Debt's picture

You may be looking for "John Exter's inverted gold pyramid"

Mon, 07/09/2012 - 12:38 | 2598890 tocointhephrase
tocointhephrase's picture

Bingo! Thank you!

Mon, 07/09/2012 - 12:15 | 2598826 LMAOLORI
LMAOLORI's picture


Keeping rates low is killing savers and social security. I respectfully disagree with you on Operation Twist and your liberal ideology on spending but I do agree with you that the Euro Crackup/Depression is increasing. I COMPLETELY DISAGREE with you about the Fed if anything the Fed is increasing the chances of a Depression in the U.S. and further the Fed is doing obama's bidding by monetizing the debt.

The LIBOR Scandal Is a Sham Engineered by Central Banking Elites?

Well That Didn't Work (European "Rescue")

Are the Odds of a Euro Crackup Increasing?

Mon, 07/09/2012 - 12:23 | 2598850 Let The Wurlitz...
Let The Wurlitzer Play's picture

Paul, the Euro comming together was the problem NOT the crack up - its has just taken a while to realize.  The best thing that can happen long term is for the Euro to break up.  The Euro spill over has already started dimwit - where have you been.  Also  we are  already in a depression, even that dumb as joe biden realizes this, we are just starting to get to the worst part now.

As far a short term treasuries are concerned they are a bit better than 97% of corporates, I would also stay on the short side of the treasury curve if I wanted to mitigate risk (if I was an institutional investor).


Mon, 07/09/2012 - 10:57 | 2598661 LawsofPhysics
LawsofPhysics's picture

Yes, as in epic destruction.  No way the Fed won't start WWIII now.

Mon, 07/09/2012 - 10:56 | 2598655 LawsofPhysics
LawsofPhysics's picture

...because corporations are people too...

Apparently ben cannot force those "people" into treasuries like he has with all the 401k people.


End the damn Fed and repudiate the bogus debt already.

Mon, 07/09/2012 - 11:05 | 2598689 Zero Debt
Zero Debt's picture

Treasuries are people too

Mon, 07/09/2012 - 10:57 | 2598663 l1b3rty
l1b3rty's picture

Why wasn't there a financial collapse? Because its about power, not money...


Mon, 07/09/2012 - 11:36 | 2598675 LawsofPhysics
LawsofPhysics's picture

Power and control.  All eCONomies are indeed local and becoming more local by the second as the Fed loses both at the local level.

Mon, 07/09/2012 - 10:59 | 2598667 Cognitive Dissonance
Cognitive Dissonance's picture

"Indeed, what Bloomberg should have done is look at the proportion of paper 3 Years and above historically held by Dealers to get a gauge of just how much demand there is for Treasurys."

Bloomberg, like all mainstream media, does what it's told to do......which is mostly to look the other way and to try to get us to do the same thing.

The Mockingbird is alive and well.....thank you very much.


Mon, 07/09/2012 - 11:34 | 2598736 whoopsing
whoopsing's picture

Atticus Finch was wrong ? ;)

Mon, 07/09/2012 - 10:59 | 2598670 CitizenPete
CitizenPete's picture

It does make a difference, the rules will be changed to fit the crisis, as if there where no rules.  As the Printer of Last Resort (backed by a government and banks that are corrupt to the marrow of their souls) all booboos can be papered over by the Fed at any time. 

Mon, 07/09/2012 - 11:03 | 2598682 LawsofPhysics
LawsofPhysics's picture

LMFAO!!!  Go ahead, paper away, my commodities porfolio and physical assets will be extremely greatful.

Fucking bring it!!!!!   LMFAO!!!!!

Mon, 07/09/2012 - 11:01 | 2598677 midgetrannyporn
midgetrannyporn's picture

all the bigs do very shoddy reporting.

Mon, 07/09/2012 - 11:03 | 2598681 sudzee
sudzee's picture

NIRP - putting a "good till " date on money.

Mon, 07/09/2012 - 11:03 | 2598683 Zola
Zola's picture

How interesting that this chart looks just like the TLT...

Mon, 07/09/2012 - 11:03 | 2598684 Cursive
Cursive's picture


In other words, all that Bloomberg has shown is that as the Fed's Twisting continues, its secondary effects on the market continue to deteriorate an already collapsing liquidity infrastructure, until at the end TSYs will be the only product that has any liquidity left to it, forcing everyone to become a bond trader, and shortly thereafter, vigilante.

This won't be the first time the government crowded out private investment.  The central planner medicine is definitely worse than the disease.

Mon, 07/09/2012 - 11:13 | 2598697 Doubleguns
Doubleguns's picture

This won't be the first time the "FED" crowded out private investment.  The central planner medicine is definitely worse than the disease.


Fixed it for ya.

Mon, 07/09/2012 - 11:23 | 2598719 Cursive
Cursive's picture


There wasn't a "FED" in the USSR.  Central planners always fail and the "FED" is but one shape of the social pathology that is central planning.

Mon, 07/09/2012 - 11:25 | 2598720 Dr. Engali
Dr. Engali's picture

And why is the Fed printing? It couldn't possibly have anything to do with the government having to fund a 1.3 trillion dollar deficit and crowding out private investment could it ?

Mon, 07/09/2012 - 11:15 | 2598702 bigwavedave
bigwavedave's picture

Could be time for Bill Gross to get short again. And have his other arm cut off.

Mon, 07/09/2012 - 11:23 | 2598717 Rainman
Rainman's picture

About 2 years ago, Econophile predicted a 1% 10-year ....and we thought he was smokin too much JGB !!

Mon, 07/09/2012 - 12:11 | 2598816 NotApplicable
NotApplicable's picture

Not me! I still stand by my call of sub 1% 30yr. (eventually)

It just takes some time to flatten out the yield curve.

Simply put, it's the only "exit" they have from the current system. Meanwhile the banks kill the govs, while the govs kill the banks (and any other entity that depends upon a financial system to function). Just wait until all of those "cash-flush" corps can no longer earn money on bonds, but have to try and create real wealth that has a sustainable demand. Then it gets really fun.

As long as people continue to accept bank notes as payment for goods and services, this will not cease.

Oh, and vote.

Mon, 07/09/2012 - 15:16 | 2599508 Solon the Destroyer
Solon the Destroyer's picture

And as these rates drop, and you're right they will, the resulting capital destruction in the real economy will devastate growth and thus tax receipts, further pressuring deficits and central banks.

The bond vigilantes don't realize that yet, and are willing to continue lending the Government even more rope, but eventually data will confirm the deflationary activities of the Fed and the entire financial system will hang itself from the nearest debt tree.

And it will be Game Over... not only for the government bond market, but also anyone looking to buy physical gold. Coz those worthless little debt chits won't buy you a single gram no matter how many wheelbarrows you own.

Buy your gold NOW.  While the idiot system still thinks irredeemable currencies have value.

Mon, 07/09/2012 - 11:27 | 2598722 asteroids
asteroids's picture

Just imagine what will happen if interest rate spike 1-2% anywhere along the curve. Short dated paper becomes worthless. Long dated less so but in danger. No wonder they aren't selling. What a mess.

Mon, 07/09/2012 - 11:31 | 2598731 bigwavedave
bigwavedave's picture

One of these days China is not going to show up at an auction, just for laughs or more likely just to send a message. Maybe they already did it a while back and all this ZIRP and Monetization is the result / punishment.

Mon, 07/09/2012 - 11:53 | 2598780 Dr. Engali
Dr. Engali's picture

The Chinese are the new primary dealers. With direct access to the treasury they can buy longer dated paper then flip it to the fed. They make money on the spread. It's a great game of Three card Monte.

Mon, 07/09/2012 - 12:39 | 2598898 Zero Debt
Zero Debt's picture

The masterstroke of the planners was to create game rules and man the gaming table in a manner that purports a plausible illusion of potential losses at the top.

Mon, 07/09/2012 - 11:37 | 2598743 Arnold Ziffel
Arnold Ziffel's picture

I wonder if the Chinese are worried seeing all this happening while they hold a ton of Treasuries and no end in sight?

Mon, 07/09/2012 - 11:50 | 2598779 LawsofPhysics
LawsofPhysics's picture

The Chinese, along with the other BRICs have bee n selling for quite some time.  They all are buying physical commodities.  Part of the reason oil and gold prices remain where they are.

Mon, 07/09/2012 - 11:56 | 2598789 eclectic syncretist
eclectic syncretist's picture

They are already moving away from Treasuries and investing more in gold and oil.  they are just doing it as quietly as possible so that they don't get front-run or have the price put up on them.

Mon, 07/09/2012 - 12:31 | 2598872 chdwlch1
chdwlch1's picture

The Chinese see this happening and, in my opinion, are a large part of the current 'Twist' dynamics.  I'd love to know how much 3+ year Treasuries the Chinese currently hold. The 'end in sight' for the Chinese could very well be 2-3 years when all of their 'Twisted' longer-dated Treasuries expire.

Mon, 07/09/2012 - 11:56 | 2598790 Shizzmoney
Shizzmoney's picture

The Chinese are going to end up like the dude in the red suit:


"These are IOUs, sir.  Just as good as money.  See this?  That's a $275,000 car.  Miiiiiight wanna hang on to that one!"

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