Under Twist, The Fed Has Purchased 91% Of All Gross Issuance In Long-Dated US Treasurys

Tyler Durden's picture


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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Thu, 02/02/2012 - 13:26 | 2120460 swissaustrian
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Nationalized yield curve, bitchez!

Thu, 02/02/2012 - 13:31 | 2120486 GeneMarchbanks
GeneMarchbanks's picture

It's getting suffocating out there.

Thu, 02/02/2012 - 13:37 | 2120503 SteveNYC
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"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.

Thu, 02/02/2012 - 13:42 | 2120519 Matt
Matt's picture

It's a good thing the Fed is immune to accounting rules and can never be insolvent.

Thu, 02/02/2012 - 13:45 | 2120531 economics1996
economics1996's picture

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.

Thu, 02/02/2012 - 13:54 | 2120569 Bob Sacamano
Bob Sacamano's picture

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. 

Thu, 02/02/2012 - 13:55 | 2120579 Manthong
Manthong's picture

I think the big question is what percentage of the S&P has the Fed pruchased.

Thu, 02/02/2012 - 14:45 | 2120746 ratso
ratso's picture

The purchase of long dated paper prevents investors from suffering significant losses

Thu, 02/02/2012 - 15:18 | 2120881 hedgeless_horseman
hedgeless_horseman's picture



If 91% an A- then why are we still AA+ by S&P?  Are they grading on a curve?

Thu, 02/02/2012 - 15:34 | 2120930 lasvegaspersona
lasvegaspersona's picture

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...

Thu, 02/02/2012 - 14:29 | 2120702 financial apoca...
financial apocalyptic contagion's picture

+1 bob and thats why OWS will fail too much trust in socialism

Thu, 02/02/2012 - 19:03 | 2121529 blunderdog
blunderdog's picture

Well, at least the TEA Party's in Congress now, there's your revolution right there.


Thu, 02/02/2012 - 13:44 | 2120530 economics1996
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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.


Thu, 02/02/2012 - 16:53 | 2121218 seek
seek's picture

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.

Thu, 02/02/2012 - 13:50 | 2120552 kito
kito's picture

@stevenyc--preparation my friend, preparation..........

Thu, 02/02/2012 - 21:27 | 2121920 Buck Johnson
Buck Johnson's picture

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.

Wed, 09/19/2012 - 20:11 | 2813399 LongBalls
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"Finally, what happens to the Fed's balance sheet when interest rates start rising?". Not that anyone who is a member of fight club needs to be reminded; what this means is that our government has absolutley lost the little control over this countries economy is use to have. When the Private Fed presides over the economic nuke button, nothing any politician or judge or general or citizen has ANY control to get us out of this mess pain free. It's time people wake up to the reality. If we are meant to be a free society, the people will need to take control of the issuance of it's money the hard way.

Thu, 02/02/2012 - 13:41 | 2120517 economics1996
economics1996's picture

End the Fed.  Fucking bullshit.

Thu, 02/02/2012 - 13:51 | 2120557 blindfaith
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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.

Thu, 02/02/2012 - 14:00 | 2120599 astoriajoe
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The road to Roota?

Thu, 02/02/2012 - 15:18 | 2120617 Manthong
Manthong's picture

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.

Thu, 02/02/2012 - 21:10 | 2121890 Likstane
Likstane's picture

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.

Thu, 02/02/2012 - 15:11 | 2120858 pods
pods's picture

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.


Thu, 02/02/2012 - 14:59 | 2120808 Zero Govt
Zero Govt's picture

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

Thu, 02/02/2012 - 13:39 | 2120508 I Got Worms
I Got Worms's picture

What could possibly go wrong?

Thu, 02/02/2012 - 15:45 | 2120962 midtowng
midtowng's picture

None dare call it ponzi

Thu, 02/02/2012 - 13:29 | 2120461 Mr Lennon Hendrix
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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?

Thu, 02/02/2012 - 13:48 | 2120542 Falcon15
Falcon15's picture

Yep. A unicorn named Hope. The upside is IT SHITS SKITTLES!

Thu, 02/02/2012 - 13:27 | 2120462 Newsboy
Newsboy's picture

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.

Thu, 02/02/2012 - 13:48 | 2120543 Matt
Matt's picture

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.

Thu, 02/02/2012 - 13:55 | 2120575 blindfaith
blindfaith's picture


The payment will be the blood of your childern, one drop at a time.

Thu, 02/02/2012 - 14:09 | 2120628 Vincent Vega
Vincent Vega's picture

Matt, where does the Fed get the money to purchase all of the debt in this perfect closed-loop system?

Fri, 02/03/2012 - 09:06 | 2122578 Matt
Matt's picture

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.

Thu, 02/02/2012 - 20:23 | 2121761 mkkby
mkkby's picture

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.

Thu, 02/02/2012 - 23:44 | 2122128 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

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!!

Thu, 02/02/2012 - 14:18 | 2120666 s2man
s2man's picture

Nationalize the Fed.  Burn the debt.  Problem solved. 

Thu, 02/02/2012 - 13:28 | 2120470 fightthepower
fightthepower's picture


Thu, 02/02/2012 - 13:29 | 2120473 TruthInSunshine
TruthInSunshine's picture

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.

Thu, 02/02/2012 - 13:31 | 2120485 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

"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.

Thu, 02/02/2012 - 13:47 | 2120534 TruthInSunshine
TruthInSunshine's picture

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.

Thu, 02/02/2012 - 14:00 | 2120598 blindfaith
blindfaith's picture



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.

Thu, 02/02/2012 - 13:47 | 2120539 prains
prains's picture

I think what he meant was he would sell a kardaschian or two if he totally like had to

Fri, 02/03/2012 - 02:44 | 2122352 Nage42
Nage42's picture

_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!!"

Thu, 02/02/2012 - 13:55 | 2120578 francis_sawyer
francis_sawyer's picture

even viewed in the context of the worst of the Banana Republic terms

& yes we have no bananas!

Thu, 02/02/2012 - 13:29 | 2120475 Jlmadyson
Jlmadyson's picture

Last resort is a hell of a drug.

Pass it to the left Ben.

Puff, puff, ponzi.

Thu, 02/02/2012 - 13:40 | 2120509 Whiner
Whiner's picture

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.

Thu, 02/02/2012 - 13:47 | 2120540 economics1996
economics1996's picture

I am getting drunk for sure this weekend.

Thu, 02/02/2012 - 14:04 | 2120611 blindfaith
blindfaith's picture



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.

Thu, 02/02/2012 - 13:46 | 2120479 non_anon
non_anon's picture

i don't think Chubby Checkers expected the Twist to be this

Thu, 02/02/2012 - 13:30 | 2120480 The Axe
The Axe's picture

does this surprise anyone? they must!! and will continue in the future....its now impossible to turn away from this ...impossible


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