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Is The Fed's Balance Sheet Unwind About To Crash The Market, Again?
Almost six months ago we discussed the dramatic shifts that were about to occur (and indeed did occur) the last time the New York Fed tried to unwind the toxic AIG sludge that is more prosaically known as Maiden Lane II. At the time, the failure of a previous auction as dealers were unwilling to take up even modest sizes of the morose mortgage portfolio was the green light for a realization that even a small unwind of the Fed's bloated balance sheet would not be tolerated by a deleveraging and unwilling-to-bear-risk-at-anything-like-a-supposed-market-rate trading community. Today, we saw the first glimmerings of the same concerns as chatter of Goldman's (and others) interest in some of the lurid loans sent credit reeling. As the WSJ reports, this meant the Fed had to quietly seek confirming bids (BWICs) from other market participants to judge whether Goldman's bid offered value.
The discreteness of the inquiries sent ABX and CMBX (the credit derivative indices used to hedge many of these mortgage-backed securities) tumbling with ABX having its first down day since before Christmas and its largest drop in almost two months. The knock-on effect of the potential off-market (or perhaps more reality-based) pricing that Goldman is bidding this time can have (just as it did last time when the Fed halted the auction process as the market could not stand the supply) dramatic impacts as dealers seek efficient (and critically liquid) hedges for their worrisome inventories of junk.
The underperformance (and heavy volume) in HYG (the high-yield bond ETF we spend so much time discussing) since the new-year suggests one such hedging program (well timed and hidden by record start-of-year fund inflows from a clueless public which one would have thought would raise prices of the increasingly important bond ETF) as the market's ramp of late is very reminiscent of the pre-auction-fail-and-crash we saw in late June, early July last year as credit markets awoke to the reality of their own balance sheet holes once again.
The ABX index (the credit derivative index that would be closest to hedging the positions that other dealers will face a re-mark-to-market on should the NY Fed sell at a below market-price to Goldman) shown in black on the chart and HYG (the high-yield bond ETF which has become incredibly liquid and trades at almost double the volume of just a year ago currently) shown in orange are at very similar levels to the last NY Fed auction that was halted for lack of demand (or unwillingness to extend balance sheets). The green ovals show the market's performance of each is also notably similar with a significant ramp into the auction in the hope of encouraging risk-on appetite (Goldman aren't dummies).
Interestingly this time, we have seen very little (if any) high-yield issuance as demand appears to have dried up almost entirely (or been crowded out by impressive distressed yields in European sovereigns for those willing to extend and pretend). Investment grade issuance has picked up into this ramp though concessions remain high (lenders want their pound of flesh to flip or garner liquidity premia).
The point is - while stock markets are rallying, financials are rallying, and homebuilders are rallying (as we are told again and again that the bottom is in housing), helped perhaps by the huge surge in M2 recently, just as they were in June of last year (XHB - the homebuilder ETF rallied almost 9% leading up to the failed auction, XLF - the financials ETF rallied over 6%, and the S&P rallied almost 7% in that month alone), credit markets are far less enthusiastic (and downright dismal today in the most liquid and closest hedges) and the last time the New York Fed tried and failed to unwind even a small amount of the Maiden Lane II book, when the markets weren't facing anything like as big a fundamental (EU recession, China slowing, US recoupling) and technical (huge supply overhang from European issuance and lagging financial and non-financial calendars - especially high yield) headwinds, we saw a very significant sell-off in the two months following (the red arrow above and below).
It appears that we have some new metrics to monitor on a daily basis instead of the now-secured EUR-USD basis swap and BTP yields and this time, its a little more tricky to manage all the way up and down the credit quality spectrum of liquidity as dealers rush for any and every liquid hedge from PrimeX, ABX, CMBX, HY, HYG, IG, and LQD they can get their hands on...
Perhaps as we somewhat sarcastically noted in June, the post QE2 timing of the June failed auction and its impact could have been the ammunition to set up a QE3 infusion...and now with almost 10% rise in the USD since August (and obvious impact on US company earnings already) perhaps its time to hit the reset button, print, and devalue a little to juice Q1 earnings which are seeing downgrades galore.
Charts: Bloomberg
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Long TBT(or whatever derivative of your choosing) and Long Gold
Smoke a blunt, pop a xanax and chill.
Investing is common sense.
This will be front page on ZH soon.
Here's a article on FOMC discussions, circa 2006, and wow, these imbeciles take imbecilism to a new level:
Inside the Fed in 2006 - A Coming Crisis, and Banter - NYTimes.com
By BINYAMIN APPELBAUM Published: January 12, 2012WASHINGTON — As the housing bubble entered its waning hours in 2006, top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers.
The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was “rising through the roof.”
But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy, according to transcripts that the Fed released Thursday. Instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.
“We think the fundamentals of the expansion going forward still look good,” Timothy F. Geithner, then president of the Federal Reserve Bank of New York, told his colleagues when they gathered in Washington in December 2006.
Some officials, including Susan Bies, a Fed governor, suggested that a housing downturn actually could bolster the economy by redirecting money to other kinds of investments...
...
***“It’s embarrassing for the Fed,” said Justin Wolfers, an economics professor at the University of Pennsylvania. “You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets.”
“It’s also embarrassing for economics,” he continued. “My strong guess is that if we had a transcript of any other economist, there would be at least as much fodder.”...***
Some officials, including Susan Bies, a Fed governor, suggested that a housing downturn actually could bolster the economy by redirecting money to other kinds of investments...
Hmmm....
Did President Obama really use the "B" word?
I thought only Dr Paul used the "B" word.
Referring to raising the national debt ceiling, something to the effect of, "and to keep the country from going BANKRUPT"?
Tell me the President didn't use the "B" word?
"and to keep delay the country from going BANKRUPT"?
Fixed it.
We are utterly bankrupt, but our ability to print is infinite, so we can continue to deny the obvious, exactly what they did when they said a 50% haircut on Greek bonds was not a default.
Yes, and as I noted on TheMetalsReport.com, the situation is far more explosive and complex now than it was back in 2006.
This article, and the one Truth in Sunshine posted, are the dynamic duo top articles for the year. They show TPTB don't know as much as they think they know, and that they are now trapped in a cage of their own making.
I used to think these guys said stupid things because they wanted to mislead us. We now have confirmation they say stupid things because they are indeed stupid.
Psychopathic. Not the same. But similar outcomes.
+1,000,000
TBT ? Yeah let's use the most complex derivative ETF in existence to hedge a derivatives implosion... Have you actually read the prospectus on that bad boy ? I think it says on page 29, "the underwriters are heretofore allowed to steal all investor money". Good luck with that.
Besides a failed auction, we know what happened to gold last time the chart looked like that. Yep, long gold.
They need an excuse to print. Bottom line, the Fed is protecting the banks. QE is the only guaranteed method to lwervreal rates and narrow spreads.
Reverse Robinhood - TAKE FROM JOE SIXPACK, GIVE TO THE BANKS.
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Who cares. Let the banks implode already.
In other news, that retard Stephen Colbert is running for president.
This shit would be funny if it wasn't real.
Colbert's nearly as funny as that daily show.
outstanding ZH
Jeez ZH, how short are you?
The Right String, Baby, But the Wrong Yo-Yo
http://www.youtube.com/watch?v=mHMj0oZY7MA
When this all collapses, I'll just take advantage of the torch and pitchfork bubble.
Long hickory and iron.
It will never be allowed to collapse to the levels it needs to! Ad infinitum.
Their lives depend on it.
Hmmm, the largest player on the Planet prints its own money and strongly suggests convenient and economically beneficial rule changes that suit their positions........Oh yeah, you need a couple of fucking economists to tell you what the future will bring!!!!!!
http://www.youtube.com/watch?v=VEPEPYXcVZk
OURstinkingOBorOShhhiiit ...mad cow.
Denny Crane.
http://www.youtube.com/watch?v=r3n4qPpL8T0
One of things I like best about ZH is the insight it affords into the credit universe. Thanks, Tylers.
Looks like Ben's ABX and other toxic bailout sludge going to be Marked to Fantasy and held on the balance sheet forever. Else he's going to have to fess up that he bought shit at caviar prices and his supposed billions of bailout profits to Treasury are really billions of losses.
The Fed's balance sheet is so toxic and putrid it makes fuku seem like a freshly douched vag.
No, there is another possibility. They devalue the dollar, peg to the SDR, and peg the SDR to gold. Then they ramp gold prices to the moon and print like crazy. The result is you take a haircut and they get a balanced balance sheet.
Devaluation is coming, all at once, all over the world...soon.
so this is what happens when there is real market transparency? everyone realizes the composition of the krap everyone is holding that is marked to fantasy and freaks out.
The world sucks ass.
Bernanke will find a way to protect his rich buddies and save the stock market.
Thank God women still have tits.
And we're pretty much powerless to do anything about it.
The whole process is frustrating.
The money-changers are in charge of the temple.
...heard a horror story about short sheeting at Camp Sella JumpAAA-Bungalow Atzero. The parent's tried taking the owners to Court for broken feet but, the Court tossed the case, do to the Waver.
http://fnn24.com/?p=37178
CHF Peg to be removed?
Talk that SNB is set to raise the peg again to 1.3000 from one corner, with the other rumour that it’s going to be withdrawn!.
Either way there are bids to the tune of 500+ million euro’s on the EBS at 1.2090 ahead of barriers reported at 1.2075 and 1.2050 .
Just bundle Maiden Lane into anything and pledge it as a collateral to the ECB. I hear they'll take anything.
Thanks for the tip! I have a BIG credit card payment due to Chase on Monday and I almost threw out the diaper pail full of Pampers from the baby's nursery.
That means I can go out to the Mall and get more Chase Points to get a Free Trip to Europe!
POOP TO POINTS! It's the New "Mark to Market!"
A quick word to Zero Hedge readers from the people in charge.
You don't have the education, upbringing, connections, manners, appearance, and good taste to ever become one of us.
In fact, you'd probably need a book the size of the yellow pages to list all the unfair advantages we have over you.
That's why we're so relieved to know that you still continue to believe all those silly fairy tales about "justice" and "equal opportunity" in America.
Of course, in a hierarchical social system like ours, there's never been much room at the top to begin with. Besides, it's already occupied by us — and we like it up here so much that we intend to keep it that way. But at least there's usually someone lower in the social hierarchy you can feel superior to and kick in the teeth once in a while. Even a lowly dishwasher can easily find some poor slob further down in the pecking order to sneer and spit at. So be thankful for migrant workers, prostitutes, and homeless street people.
Always remember that if everyone like you were economically secure and socially privileged like us, there would be no one left to fill all those boring, dangerous, low-paid jobs in our economy. And no one to fight our wars for us, or blindly follow orders in our totalitarian corporate institutions. And certainly no one to meekly go to their grave without having lived a full and creative life. So please, keep up the good work!
You also probably don't have the same greedy, compulsive drive to possess wealth, power, and prestige that we have. And even though you may sincerely want to change the way you live, you're also afraid of the very change you desire, thus keeping you and others like you in a nervous state of limbo. So you go through life mechanically playing your assigned social role, terrified what others would think should you ever dare to "break out of the mold."
Naturally, we try to play you off against each other whenever it suits our purposes: high-waged workers against low-waged, unionized against non-unionized, Black against White, male against female, American workers against Japanese against Mexican against.... We continually push your wages down by invoking "foreign competition," "the law of supply and demand," "national security," or "the bloated federal deficit." We throw you on the unemployed scrap heap if you step out of line or jeopardize our profits. And to give you an occasional break from the monotony of our daily economic blackmail, we allow you to participate in our stage-managed electoral shell games, better known to you ordinary folks as "elections." Happily, you haven't a clue as to what's really happening — instead, you blame "Aliens," "Tree-hugging Environmentalists," "Niggers," "Jews," Welfare Queens," and countless others for your troubled situation.
We're also very pleased that many of you still embrace the "work ethic," even though most jobs in our economy degrade the environment, undermine your physical and emotional health, and basically suck your one and only life right out of you. We obviously don't know much about work, but we're sure glad you do!
Of course, life could be different. Society could be intelligently organized to meet the real needs of the general population. You and others like you could collectively fight to free yourselves from our domination.
But you don't know that. In fact, you can't even imagine that another way of life is possible.
And that's probably the greatest, most significant achievement of our system — robbing you of your imagination, your creativity, your ability to think and act for yourself.
http://www.youtube.com/watch?v=ArSLNJNUEIM&feature=related
Nice chain email copy and paste, you "cunt burp".
Make sure to edit out nigger with [n-word] when you post it in the comment section at Huffpo. Don't want any heads to explode over there.
We call em fanny farts over here......
It s a copy and paste from scroogle, i read this post and felt it was relevant to the comments posted.
Nigger word is fine in the right context, and no its not referring to obama per se, so keep your knickers on.
(Dear) people in charge
Many people think they are superior, being part of an "elite".
The problem with you is not your ice cold (mad) pussy.
Face it : the whole world knows you're just a bunch of senile impotent dumb men.
Evidence 1 : Koichiro Gemba is everywhere in the news this morning. "We don't care both your sanctions and Iran".
BTW, Thank you for robbing me. That was not too painfull, hopefully???
Crash, collapse, crisis, meltdown! Nothing happens.
The Fed needs to start unwinding its balance sheet ASAP. The QE3 talk is complete nonsense. The fed will be shrinking, not expanding in 2012.
It's too late for austerity. It was too late for that path a year ago. If you think there is any political will to stop spending, you are not paying attention. The Fed's balance sheet IS the ECB. You are making a logic based assumption based on what you would do. If you were in charge, would you have done anything the Fed has done recently?
They don't think like you and have boxed themselves in a corner. They have to devalue the dollar AND print.
Great news from Europe: Euro Strengthens as Italian Bonds Advance, ECB Says Credit Crunch Averted
http://www.bloomberg.com/news/2012-01-13/euro-set-to-end-five-week-decline-after-ecb-says-credit-shortage-averted.html
Told you so: "they" always keep the show going on. US economy goes better. Auctions will succeed today. #WhatCrisis?
I thought the Fed never, ever, ever had to unwind anything ever...
Go big (balace sheet) or go home, right?
the ECB's is now bigger
there must be some 'tit for tat' trans-Atlantic competition between Bernankenstein and Count Dracula on who can pile up the most toxic shit on their balance sheets
Sold Eur 0.779 bln of 4.25% July 2014 BTP, yield 4.29% , cover 2.276
Sold Eur 0.971 bln of 4.5% Aug 2018 BTP, yield 5.75% , cover 1.606
Sold Eur 3 bln of 6% Nov 2014 BTP yield 4.83% (vs 5.62%) , cover 1.218 (vs. 1.364)
O/T - FT Alphaville - Goldman on metal pawning
A 100 point selloff in ES will trigger an epic breakout in bonds and USDX.
http://finviz.com/fut_chart.ashx?t=ZN&cot=002602&p=d1
http://finviz.com/fut_chart.ashx?t=DX&cot=002602&p=d1
"Resource" stocks are likely to suffer the worst from such correction, as usual.
Consumer Discretionary will be unfazed, as usual.
The pummeling will continue until physical silver holders capitulate and sell their silver to JPMorgan.
http://fnn24.com/?p=37232
Italian auction disaster again.
But, LookingWithAmazement says it was Great News From Europe. Yeah, they got <5% interest, but demand was very low.
bid to cover is way too low
Italian auction: bid-to-cover was fair. Yields declined. Not really a disaster. The question is: what happens when the LT ECB money runs out?
ECB will step in to force banks or buy them directly. After all it's just the law not allowing them to do so - who cares?
answers: 1) depends what Oncle Ben has done by then; 2) new LRTO; 3) extensive use of soccer-skills to kick the can further down - in doubt, nr. 1) applies
no such thing as something new under the sun - no such thing as a free lunch
Does ZH ever sleep?
No.
They put Viagra in their coffee... so someone or something is always up.
Does the Fed sleep? Do TPTB?
No.
Do the Markets ever sleep? When it finally get's shot with a tranquilizer dart it will go to bed. Dow and Dollar are defying gravity IMHO.
LTRO can only act as market crack for so long, gotta come down sometime.
OT: Can anyone explain why copper and baltic dry are diverging? Both are said to be early indicators for the world economy/trade. Who's right then? Dr Copper or Mr. Baltic? Does one only represent what investors wish and the other is reflecting reality or is it just a "broken market"?
http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm#copper
Big talk from the Liesman on another QE....he must have got a memo this AM to start selling it to the sheeple...keep an eye on those treasuriy redemptions.....if it goes slowly ..that is what the Fed wants...they know they will be the final owner of ALL treasuries in the future...they just want it slow and steady...if it becomes a panic..a week timeline event...that is when the panic spreads to the rest of the world .....I think the black swan event will happen and it will be a big overnight dump that the Fed will have to cover...
This article makes no sense. Why would the Fed care about unwinding its balance sheet when it acquired this stuff with magic money? Besides, selling this stuff decreases the money supply and will take liquidity out of the economy. It is the opposite of QE and surely will tank the market.
took me several reads to start to understand this, but well worth the effort, now, so thxz, tyler!
Tim Geithner is fucking hilarious isn't he?
Joined at the crony hip with ben bernanke who also didn't see the crisis coming.. and these 2 morons are in the 2 most senior finance posts in American Govt
Why does America need enemies (or terrorists) when they've got 'friends' like these at the helm
Please tell me what "Austerity" looks like. I wan't to puke.
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