Under Twist, The Fed Has Purchased 91% Of All Gross Issuance In Long-Dated US Treasurys
One of the salient questions asked of Bernanke by Congress relates to a Kevin Warsh oped in the WSJ, in which he said the following: "Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder. As a result, the administration and Congress make tax and spending decisions—with huge implications for our standard of living—with heightened risks around future funding costs." This is arguably the question that dominates Fed policy making under the Operation Twist doctrine, in which the Fed buys up long-dated paper and sells Short dated (under 3 years), the second leg of which however is completely irrelevant, as the Fed has already guaranteed ZIRP until 2014, in essence confirming that Twist was nothing but a stealth QE3 as we have claimed all along, as the Fed's ZIRP4EVA policy effectively offsets any and all short-dated sales. Needless to say Bernanke's response was irrelevant. However, here is the most jarring statistic. As Barclays showed a few days back, under Twist, the Fed has monetized virtually all, and specifically 91% of all gross issuance in the 20-30 year maturity bucket. In other words, Warsh is absolutely spot on, and once again we are left with an artificial market in which it is only the Fed that defines the UST curve shape by molding the long end. What happens when Twist ends? Will the 30 Year collapse? What happens when there is no explicit back stop to the long end? Is this the reason why Bill Gross yesterday said that he fully expects much more check writing by the Fed for the next '12, 24, 36 months." And how can it not: we don't have a market of rational players any more - the entire market is merely one irrational player, whose biggest counterparty incidentally, the ECB, is beyond broke. Finally, what happens to the Fed's balance sheet when interest rates start rising? Holding a portfolio with a duration greater than it has ever been, the DV01 is currently well over $2 billion (i.e. a $2 billion loss on every basis point increase in rates). And rising.
h/t John Lohman
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Nationalized yield curve, bitchez!
It's getting suffocating out there.
"Finally, what happens to the Fed's balance sheet when interest rates start rising?"
The (unintended?) consequences of Bernanke's actions over the past few years will ensure that the Fed can NEVER leave the market, so long as it exists. It is all-in, and can not possibly be extracted in any way, shape or form without causing some unforseen string of catastrophes.
By getting as involved as he did, Bernanke has assured us that at some point the whole thing must come down. But, all things must end and this system is no different. What is worrisome is knowing this, yet being unsure of the timing.
It's a good thing the Fed is immune to accounting rules and can never be insolvent.
The Fed will be insolvent when the OWS protesters get half a brain and move 4 blocks north to the NY Fed. Hang em high, five at a time.
OWS has fond affection for government - the more, the better. So they are a little reluctant to go directly after their Savior and Provider upon whom nearly all should depend - the US Federal Government.
I think the big question is what percentage of the S&P has the Fed pruchased.
The purchase of long dated paper prevents investors from suffering significant losses
If 91% an A- then why are we still AA+ by S&P? Are they grading on a curve?
The fed now has a sacred duty to buy whatever it takes to keep short term interest rates low. They promised they would. If buying all that stuff that it takes to keep rates low also happens to fund the government, well that is a happy coincidence isn't it. Everybody wins....oops... except savers...oh and any sense of reality left in the markets...oh and any one who dares bet on what 'should' happen in a real capitalist system....so just about everybody wins....just behave and play along...
+1 bob and thats why OWS will fail too much trust in socialism
Well, at least the TEA Party's in Congress now, there's your revolution right there.
/snarc
The Fed and the US Federal Governemnt is all in. The Federal governemnt will explode when this inflation we are suffering;
1. Becomes official.
2. Forces interest rates to rise.
Game over. Remember 1991 and the USSR? Washington DC 2018.
Yep, but it could happen as early at 2015.
I'm seriously considering starting a personal lobbying effort at my state legislature to prime them to shut down any nazi power grab when the time comes, I'd much rather have crooks within driving distance taking over.
@stevenyc--preparation my friend, preparation..........
Your correct, when will it happen and how badly. They can't get out because of the fear of rising rates and failed auctions. They can't stay in because it warps the curve and distorts the market, what can they do. They either pull the plug themselves or allow some unforseen action (black swan) do it for them.
End the Fed. Fucking bullshit.
HOW?????
If and when (don't hold your breath) Ron Paul ( or someone who subcribes to his end the fed) gets in an office of importance, the system will be so dependend on the Fed that to end it means EVERYONE including thoses holding PM will be in a state of civil and societial collapse. This monster knows what he has done, and is doing, and every politian in the USA and around the world knows this....and they ARE NOT stopping him. Even China has no intention of stopping the play in the middle of act 1..... they just like to cough out loud when Ben and Timmy are on stage.
The road to Roota?
The only way out is out..
When enough people recognize that everything they posess that is attached to a counter-party, from real estate to cars, to stocks, bonds, savings, checking etc. is a government and bank siphon of their very life and liberty and then delever and liquidate to a sufficient degree.. it's the only way to break government/banking death grip on society and freedom.
Hell yeah man-panty. Quit supporting the 'money' lenders. Don't borrow a dime. Put all your excess into metal or tangible assets. The usury kings can't keep playing if there is no usury. The inflation game can be played as long as people keep using the play money. If you borrow 'money' with vig attached, then you have no where to complain except to yourself. When the taxes become unbearable, the people will stop paying and hopefully string up the government/banker piss-bags.
Some of us see the evil in this system and would like to bring it down in time for our progeny to actually experience what freedom is.
pods
Hard to suffocate a Zombie Economy, it's not actually breathing (see Japan)
...it just needs fresh blood, from the productive economy.. it's called taxation
When the productive are bled dry Blowjob Bens days are over ..it's always about the good people, never about the suckers like Bernanke, Bumma and Timma
What could possibly go wrong?
None dare call it ponzi
This is the last resort, which would mean we are at the end of the....resort. Luckily the Tresurie will sell debt and the buyers will pay to own it. Brilliant. What's next? Will they sell me a unicorn?
Yep. A unicorn named Hope. The upside is IT SHITS SKITTLES!
The assumption at the top appears to be that the monetary regime will end before the debts become payable.
Borrowing from a future, where your creditors will not be paid, is good, as long as it can last.
If the Fed is able to acquire all of the outstanding debt of the US treasury, then they can default and no one loses. It's a brilliant plan, really.
Or rather, they won't need to default since 100 percent of the revenue from the interest payments will get turned into the Treasury. A perfect closed-loop system.
The payment will be the blood of your childern, one drop at a time.
Matt, where does the Fed get the money to purchase all of the debt in this perfect closed-loop system?
The comment was really meant sarcastically. It's more of an intellectual concept, like a perpetual motion machine; in theory, its possible, but most people realize it cannot actually work.
I've been saying this for a while. I don't understand why ZH still frets about what happens when the fed sells their portfolio. They never will. What difference does it make if you have losses, when you can just print yourself more? They'll just keep the ponzi financing of the US going for as long as it lasts.
It won't end until there's an inflation event. Right now that's not happening because deleveraging is happening as fast as printing. When the deleveraging winds down, we are toast. Even the massive US deficit can double and re-double, so long as the fed can keep rates at 0.
Deleveraging is just beginning. Trillions and trillions of dollars/euros/various fiat to pay back won't be. It will be highly deflationary in the short term as defaults add up quickly. Implosion bitchez!!
Nationalize the Fed. Burn the debt. Problem solved.
FUCK YOU BERNANKE!
That's gotta be just an epic balance sheet the Fed has, even viewed in the context of the worst of the Banana Republic terms, given record low long maturity tnotes, MBS, toxic REIT sludge of every denomination, and everything else in Maiden Lanes I through XXXXVIII.
"Trillions of MBS" said Bernanke.
Trillions and trillions of liabilities, but it is balanced, and "if we need to we can sell assets". What are those assets?
Bernanke just said he would "sell", or rather lease, gold. He just said it.
I sure hope U.S. taxpayers (i.e. debt serfs) don't have to somehow make good on the Fed's balance sheet obligations in case they aren't able to...and all...
<really, really naive shrug>
Oh well, the Superbowl is on this Sunday. So at least we have that.
Here is the secret...no fiat currency can survive without the full faith of the users.
In the end we will do something like Brazil or we will all be eating eachother....and I don't mean in a loving way.
I think what he meant was he would sell a kardaschian or two if he totally like had to
_Tradeable_ assets.
All those people they will be interning into FEMA concentration camps can be harvested.
The indians and chinese have gold...
FEMA has kidneys, livers, and hearts...
buyer, mee[a?]t seller!
I can see the slogan now: "We've got the "heart" to buy your gold!!"
even viewed in the context of the worst of the Banana Republic terms
& yes we have no bananas!
Last resort is a hell of a drug.
Pass it to the left Ben.
Puff, puff, ponzi.
Twist it' Bennie. Twist and shout. When the external market starts moving up those short term notes you will wish you had sold those suckers the long bond. Where you gonna get the money? Go back to your tenured chair at Princeton. Nobody in the faculty lounge will eat with you then, you poor lizard.
I am getting drunk for sure this weekend.
No, actually everyone at Princeton will want to take him to lunch and get some tips.
You are dealing with a bunch of Narsists, Ben is the King.
i don't think Chubby Checkers expected the Twist to be this
does this surprise anyone? they must!! and will continue in the future....its now impossible to turn away from this ...impossible
ALERT***
Off topic,but check out the 1 year lease rate on silver...!!!! Kitco silver lease rate chart...,.view and puke.
Just got lowered to 000000
Silver is gonna get wacked...
Thanks for the heads up.
You're right the lease rates are falling. The 1 month lease rate is now negative. Does this mean silver will be weak for Feb? Don't much about how this affects price movements.
http://ftalphaville.ft.com/blog/2011/05/26/577336/what-do-silver-lease-rates-have-to-do-with-fund-redemptions/
freebies for all cbs!!!!
Hate to bring this up, but George Bush fixed the system when it instituted the order that banks ( JPM et al) do not have to cover their shorts when they are underwater. They can ride them out to a better day.
So someone is playing with the market and we know it ain't the Hunt Brothers.
So everyone still believes they can play a fair game?
If you think its rigged you can hedge accordingly as well.
Yes Johnny, what is capitalism? Capitalism is an archaic economic method that was once practiced before the Goldman Republic
For capitalism any man would give his only begotten son. Also his freedom and wealth.
you sure know your shit
We can ask Rudy Von Havenstein.. but he died the very month the German Mark died in November of 1923. Shucks.
Picking up 60% of the 20-30 TIPS. Hummm.
"Bernanke's response was irrelevant"
Facts over bullshit. The simple beauty of not even acknowledging the spin.
Why will interest rates raise at anytime in our lifetimes?
No money (besides fiat) combined with the golden rule "Don't fight the Fed", ensures that unless the Fed raises them, there are no players to drive up rates.
Zero to Infinity.
Really?
You are crediting the esteemed Fed & Chairman Bernanke with way too much ability to fight global market forces over anything exceeding a short (from a relative historical perspective) time frame, IMO.
Time, she's the keeper of all truths, and reveals all.
DV01 = $2B....so if Paul Volcker rode in on a gleaming white steed it would only cost the Fed $2T?
Right on. Teacher when I grow up I want to be a bond vigalante.
If you recall, Summers and Rubin wanted Volcker to go across the street to Faragate Square and feed the pigeons. Obama agreed, and then I saw the light, there would be no fixing anything.
Question? How much more of the short end can the Fed Reserve sell? Operation Twisted MF Global I believe ends in July. What then? Maybe they begin to naked short sell the short end. Hell if you're going all in stupid why not screw it up beyond all recall. These guys are insane and they are doing nothing to prove otherwise.
Whatever happened to that Fed put writing story?
This is the end game. Print and buy any and all existing debt in the world. At the end of this the FED will own the debt of Europe, the debt of the US, and the debt of any emerging country.
They will not even ask for any return on it. Return's matter not. It's all 100% bad debt. In return for buying the debt the FED will control all the banks. They will buy what the FED says and sell what the FED says.
This is the new market. Dow 13,000 - S & P 1400 it doesn't matter.
The FED is now deciding all fundamentals. No good stocks or bad stocks. No sectors, no nothing.
The FED is all in on a credit system of the governments. All governments that they like will have unlimited capital. All that they don't they will try and squeeze out.
From time to time they will create crashes to stick it to the unions and others with pensions. But basically they are now firmly in control.
Even if someone got in control and kicked the FED out. It would plunge the global economy into a long term great depression. The world is now damned if it does and damned if it doesn't.
The long term great depression is coming either way. The FED is banking on no one wanting to pull that trigger in the forseeable future. Until then is plenty of phony money at the top while the little guy gets squezzed by inflation of real products and energy.
RobotTrader better hope Bernanke likes LULULEMON
Parasites can't kill the host and still survive.
This is why i have been dismayed by the market action in Gold and especially Gold stocks... it was obvious this was a QE3... WHAT THE HELL HAPPENED IN 2011 ?
I hear our markets are highly manipulated. Especially for competitors to the dollar I imagine.
At least the BoE QE is limited to 70% of any issue :s
for now...
"If we need, we can sell assets", that worked out fine in May 2010 when Ben sold a few billion of MBS.
Imagine what the market will do if(WHEN) Ben has to sell ,or stop buying, tens and hundreds of billions of paper.
Bernank is going to sell the Red Roof Inn (at a steep loss, given they intentionally paid 500% more than its FMV for it) and that should allow them to flatten the curve some more.
hOW WILL BEN RAISE CAPITAL WHEN LONG END SHITES THE BED?....O YEAH PRINTING PRESS ...FORGOT..
"what happens to the Fed's balance sheet when interest rates start rising?"
Uh, absolutely nothing. The concept of "loss" and "equity capital" are meaningless to an entity which can and does create money at will. They are not bound like us mere mortals.
Socialism takes many forms and this is the most acceptable form to US Voters
It's only acceptable because nobody understands the whole picture or even many of the smaller parts of it.
To celebrate that, existing faces on Mnt. Rushmore will be replaced with FED chairmans faces.
Tyler - it's been a while since you updated your charts/graphs of the Fed's balance sheet. Will you post an update? Thanks Man.
DV01 isn't really the whole story, this isn't a linear problem. So the Fed has to raise, incurrs losses, prints up money to cover those losses thereby expanding the monetary base driving up commodity prices, thereby applying further pressure to yields, thereby.....And what of the Treasury? Rates increase, the public owns the short end, borrowing costs exponentially issuance follows, further depressing price/spiking yields...Yields can never again recouple with reality, a free market would be terminal.
I wonder if the Chairsatan is simply out of ideas or a sadomasochist?
This is all great for the USA..but what about China..or somone else that has to use our currency because for now it is the worlds currency.....are they just going to sit baack and take the currency hit.....I don´t think so....that is why they are buying gold and silver...more than we know...because one day..they will dump their treasuries..Ben will have to buy them...send gold and silver to the moon as they buy up everthing they can...then call a summit and introduce the new world currency....something like that...and guess what...the rest of the world will jump on it in a heartbeat....and the USA will be speechless....and very very dangerous place to live....as society will fall apart....
1) why the bernank is an idiot.
I look at tlt as a bellweather. since credit has implied that stocks have a long way to fall I haven't moved as I should into risky assets.SNCE HE WANTS PEOPLE TO DO THIS, IT ISDEFEATING HIS PURPOSE. BUT MAYBE i SHOULD IGNORE IT AS AN INDICATOR. ALSO SPEAKING TO A FRIEND WHO IS A BOND TRADER TWO NIGHTS AGO.THEY BUY BIG BATCHES WHEN YEILDS RISE, AND THEY ARE THE ONLY BUYER. END the fed.
2) last time yeilds were held down people moved into risky assets for return, this of course cause all kinds of distortions and underpricing risk, leading to financial crisis. he's doing it again.
one thing you gotta love about the fed, is that they fit the definition of insanity by einstein. keep doing more of the same and expecting a different outcome.
also why the fed can neveer raise rates, because the loss on their balance sheet would be huge. he's such a horses ass.
Bonds, BND, traded lower on higher stocks, VT, VSS. Hopes for securing Euro zone debt sovereignty, and hopes of Greek debt sustainability, gave rally to International Corporate Bonds, PICB, and World Government Bonds, BWX, through rising world currencies, DBV, and Emerging Market Currencies, CEW. The charts of currencies looked topped out. I expect fears of EU debt contagion to arise, and that investors will recommence competitive currency deflation, with the result being a disinvestment out of stocks, EWX, EMFN, EMMT, EMIF, and deleveraging out of commodities, DBC. As currencies fall, world government bonds, BWX, and emerging market bonds, EMB, will fall lower. How much longer TLT, EDV, and ZROZ will stay high, I do not know. The Interest Rate on the US 10 Year Note, ^TNX, closed at 1.84%. The flattner, ETF, FLAT, traded lower, evidencing a flattening 10 30 US Treasury debt yield curve which is seen in the chart of $TNX:$TYX, trading lower,yet the rally in US Treasuries, TLT, EDV and ZROZ is clearly over as their charts show a topping out pattern. Mario Draghi’s LTRO facility and the EU Leaders’ debt brake turned back the hand of the bond vigilantes today.
Santelli obviously a fan, because he just quoted this post on CNBC.
"Private investors are crowded out of the market when the Fed shows up as a large and powerful bidder..."
One may not crowd out buyers that do not exist.
I sleep so soundly at night listening to the lulling sound of Helicopter Ben flying over head fighting the good fight.