The must see time lapse video below courtesy of Stone McCarthy [4]shows the distribution across the entire curve of the US marketable debt, as it was held by either the Fed, or the private sector over the past three unconventional monetary policy programs: starting in 2003 and concluding yesterday. In one short minute, this clip demonstrates very vividly how the Fed effectively took over the US bond market.
Some things to note:
- The reason why the Fed no longer holds any debt with a maturity under ~3 years is because of the "ZIRP through late-2014" language which means there is no point for the Fed to hold that debt. For all intents and purposes it is the equivalent of cash. Debt maturing between now and 2014 amounts to just under $5 trillion. Which means the Fed only has about $5.5 trillion in marketable debt with a maturity over 3 years to work with, and already owns about a third of it. It also means that as all the Fed's holdings in the under 3 year category are sold, Twist will have to be extended, and with it the ZIRP language to beyond 3 years - most likely 5 or so.
- What is very visible is how the Fed had no choice but to expand its SOMA limit holdings per CUSIP from 35% to 70%. Soon, once the Fed owns 70% of every longer-dated Cusip, it will have no choice but to again extend the maximum permitted holdings, this time to 100% as it gradually become the entire market.
If after watching this clip anyone still believes that the biggest bond market in the world resembles anything even close to fair and efficient or which would have clearing prices anywhere near to where they transact now, they may want to double down on the FaceBook IPO allocation now.
Initial marketable debt distribution by holders starting back in2003 when the first Fed monetary policy started:
[5]
And most recent.
[6]