2s10s

Fed Is 4 Times More Efficient At Selling Government Bonds Than The US Treasury... With A Taxpayer-Funded Twist

Something curious happened today. As we pointed out earlier, for the first time as part of Operation Twist, the Fed, instead of buying bonds in the open market, actually sold bonds: a departure for Bernanke, and only the first time the Fed has practically rebalanced its portfolio since the first Operation Twist 50 years ago. In essence, by dint of its adjusted mandate, the Fed became the Treasury - what proceeded at precisely 11 am was the announcement of a sale of $8.87 billion in bonds with maturities from January 31, 2012 through July 31, 2012, bonds that were sold not by the traditional issuer of bonds, but by the Fed. Granted no new money was raised by the US in the process, but it was still a curious development. What was far more curious was the staggering turnout by the Dealer community, which indicated an interest for, wait for it, a whopping $242.6 billion in bonds!  Said in conventional terms, the Bid To Cover was an unprecedented 27.3, or there was $27 in demand for every $1 of bonds finally sold by the Fed. Why is this worthy of bolding. Because, in a traditional Treasury auction, the Bid to Cover by the Dealer community is far, far lower. In fact, as the most recent 52 week Bill auction demonstrates, there was $89.5 billion in Bids for $14 billion in bonds allocated to Dealers, or a 6.4 Bid To Cover. Said otherwise the Fed is about 4.3 times more efficient at finding buyers than the Treasury. How is this possible? And should the Fed take over Treasury in all future bond sales? Nope: the answer is that this is nothing but yet another taxpayer funded gift to the (recently expanded by 2 Canadian banks) Dealers. Let us explain.

Citi Follows Bank Of America In Instituting Debit Card Fee, $1.9 Trillion In Deposits At Risk

When we reported that Bank of America will be the first bank to institute debit card fees we made the following less than insightful observation: "The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this, and from a game theory perspective, everyone has to do it, or nobody will do it." Well, Citigroup, which had no other choice, has just decided to follow in BofA's footsteps, which i) proves there is indeed a collusive move of desperation by the bank cartel, which in a normal country would see at least a statement from Eric Rip Van Holder, and ii) our thesis about America's impatience with petty theft - they are more than ok with grand scale larson such as that by the Fed via shadow inflation and currency devaluation, but when it comes to paying up an additional $5/month, well, just look at Netflix, which instituted a $6/month price hike two months ago... and is now fighting for survival. As for the exemption requirements, they will likely be the same as Bank of Countrywide Lynch's: either have a mortgage with the TBTF behemoth, or have $20k in a deposit account - both which will likely not be much of a help to 90%+ of the bank clients. The biggest problem is that suddenly at risk are $1.9 trillion in deposits - $1 trillion at BofA, $866 billion at Citi. While the financial crisis did little to dent the banks' deposit buffer, it will be highly ironic if it is an act of the banks themselves that begins the great bank run that resets it all...

Boycott Bank Of America Which Is About To Institute A $5 Debit Card Usage Fee

Just when we thought we had seen every imaginable form of stupidity out of Bank of America, they go ahead and stun us all over again. The latest shock is that starting next year, the repository of hundreds of billions in underreserved (apparently the SEC finally figured out what was obvious to Zero Hedge readers since October 2010) toxic Countrywide mortgages, instead of shoring up capital, will do the opposite and start charging anyone with a debit card $5 a month fee for said card usage. Needless to say, this is obviously a collusive attempt by all the big banks, who are so desperate to generate some revenue (with the 2s10s flatter than at any time in the past 2.5 years) they are willing to drive away millions of paying customers. The problem is that the bulk of depositor clients will simply walk away from Bank of America (which had $1,038 billion in deposits as of June 30), and any other institutions that piggy back on this (and from a game theory perspective, everyone has to do it, or nobody will do it), and instead pull cash out of any and all checking and time deposit account forms. As a result, the key buffer that big banks have had during the entire financial crisis, cash from deposits, is about to disappear. This comes at a time when every US bank is fighting tooth and nail against Basel III implementation which forces banks to have more not less tangible capital (read cash, up to and including deposit cash). Alas, doomed for failure such idiocy can only come out of the US banking system which should have long been insolvent and replaced, but instead the Fed's policy of intercontinental Moral Hazard continues to encourage such "survival of the anti-fittest" decisions with pride. It goes without saying that we urge any and all of our 5 million monthly readers to pull any funds they may have from Bank of America in retaliation for this insanity.

2s10s, 30 Year Yield Pancakes As Bernanke Sets Off On Bank Carry Trade Deathwish

Congratulations Ben: you succeeded in getting the 30s to a near record low level (and by far the lowest for 2011) , which also means that the entire curve will soon be flat as a pancake, killing Net Interest Margin, aka curve carry for the banks, momentarily. Good bye Bank of America. Have fun riding that bear market rally with no financial leadership for the next several years.

Market Snapshot: EUR Strong But Everything Else Weak As Europe Closes

A turbulent session in Europe ended on an ugly note as broad equity markets closed near their lows, credit spreads near their wides, and financials gave up all their rumor-driven gains. EURUSD, however, managed a spikey end to the day, popping its head back above 1.37 after trending generally weaker all day.

Market Snapshot: Bipolar Market's "Lithium" Moment Hits Minutes Before Close

Another day, another roller-coaster ride in US equities as every other asset class was relatively well-behaved. We lurched from headline to headline all day long - up on some hope of a 'deal', down on news that nothing was achieved, up on 'progress', down on a revisit in October - but the lurches were much more evident in US equities than in FX, credit, TSYs, PMs, and commodities. These other markets were not dull by any means but did not exhibit the absolute schizophrenic paranoia that equities did and this was critical in getting a handle on trading today as with 30 minutes to go, equities tore back down from Friday's highs to reconnect with several fair-value models across broad risk assets and the credit markets (highlighted in our earlier European close snapshot).

As The Shadow Banking System Imploded In Q2, Bernanke's Choice Has Been Made For Him

With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the "Twist" is already guaranteed, as is an IOER cut, per Goldman's "predictions" and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman's hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of "credit money." Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke's choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America's TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama's second term goodbye.

Primary Dealer Treasury Holdings Surge At Fastest Pace Since Summer 2007 Market Peak In Anticipation Of Twisting, Market Dump

Back in the summer of 2007 two important things happened: the market hit an all time high, and the smart money realized what was about to happen (following the subprime and the Bear hedge fund blow up, it was pretty clear to all but Jim Cramer) and bailed out of stocks and into bonds, with Treasury holdings of Primary Dealers soaring at the fastest pace in history. Well according to the Fed, in the past few months Dealer holdings of Treasurys due in more than a year have soared by a whopping $90 billion, from a $75 billion short on May 6 to a $15.1 billion long on September 7. As Bloomberg reminds us, "the last time dealers bought bonds at such a rapid pace was between July 2007 and September 2007, as losses on subprime mortgages began to infect credit markets and the central bank unexpectedly cut interest rates." Also, as noted above, all hell was about to break loose. So what explains this surge in Dealer bond holdings? Well, expectations for said hell breaking loose all over again is one reason, as is the imminent announcement of Twist, QE3+, and who knows what else Bernanke has up his endless sleeve that will make the 2s10s as close to inverted as possible, putting Bank of America permanently out of business. To quote from Bloomberg again, "The problems are endless” for the economy, William O’Donnell, head U.S. government bond strategist at RBS Securities Inc., a primary dealer, said in a Sept. 13 telephone interview. “What will surprise people is how long this period lasts of very, very low rates.” Judging by leading market indications, perhaps people will not be surprised after all.

As Bank Of America Implodes, Is MBIA A Volkswagen-Like Short Squeeze Candidate?

When it comes to playing the endspiel for Bank of America, there are two binary outcomes: A) either the stock goes to zero in a slow, painful bleed, accompanied by periodic mega squeezes on headlines such as Buffett taking another bath; or B) the stock surges following some substantial government bail out and a quick and painless resolution of the mortgage putback litigation, the robosigning debacle, and somehow the bank finds a way to make money in an environment in which the 2s10s is about to tumble to record lows following the "Torque." As is well known, our personal belief is that all signs point to A) however with limited upside (one can only double their money by shorting) and a constant threat of short squeezes (hence unlimited downside), especially with the stock as depressed as it is and in this massively rigged and centrally planned market, puts a perpetual damper for those who wish to short the name to death. Which brings up an interest tangent: is there a way to profit from the collapse in Bank of America in a mirror image situation, i.e., with unlimited upside and limited downside? The answer is yes, and it very well may be in the form of MBIA, where as we indicate below, the upside may not only unlimited semantically, but practically as well, courtesy of shades of that most epic moves of 2008: that of the short squeeze in Volkswagen stock. Is there a chance that MBIA, with its 27 million short interest, and its 98% long institutional ownership could be the next Volkswagen? Perhaps. Read on.

Hilsenrath Speaks: "Fed Prepares To Act"

Anyone who may have been harboring doubts that the Fed will pull yet another economically destructive policy out of its bag of genocidal tricks on September 21 can now relax. Jon Hilsenrath has spoken, and while we don't know just what form QE3 will take place (as a reminder any form of duration extension, and hence, artificial risk shit can be reduced to the broad definition of Quantitative, or otherwise, easing), he does give us a menu of three options: i) Operation Twist, as first discussed by Zero Hedge back in May, ii) a reduction in the Interest on Overnight Excess Reserves (IOER) from 0.25% to something... lower, a move that would wreak havoc and completely destabilize money markets, and iii) more jawboning -  a step the would merely make existing promises, such as the ZIRP through mid-2013 even less effective. Bottom line: like it or not, in two weeks we all do the twist.

The Chart That Shows QE3 Failed Before It Even Started

While it is all too clear that a year from today, right about the time QE4 is gearing up for deployment, QE3 will have had absolutely no impact on the economy (in the upside case; the downside case would imply millions in job losses primarily in the financial sector courtesy of record low 2s10s and even lower Net Interest Margins, aka Carry Trades), just as QE2 ended up doing nothing not only for the US economy but for the stock market as well, what is somewhat disturbing is that the only primary purpose of Operation Twist, namely the lowering of 10 Year bond yields in order to make consumers "weathier" through cheaper refis, has already failed. Presenting Evidence A: 10 Year Treasury Yields (inverted axis where lower yields are plotted higher) and the MBA Refi Index, which today dropped by 6.3%, the third week in a row, sending the Refi index to 3169.4 from 3915.5 in the beginning of August. As the chart makes all too obvious, the correlation between the two series has been as close to 1 as possible... at least until talk of QE3 via Operation Twist not only picked up but was made virtual fact through Wall Street's wholehearted acceptance of more monetary easing. What has happened recently is a substantial break between dropping yields and increasing refinancings. It thus begs the question: if an ever flatter 2s10s curve, the explicit objective of Op Twist which has gotten priced in in the past several weeks, has no impact on the housing market currently languishing in a historic depression, then just why is the Fed focusing on lowering long bond yields even more?

Charting SOMA Twist: Here Is What The $55 Billion In Monthly POMO Purchases Will Look Like Starting Shortly

For anyone still confused what Operation Twist is (covered here first about 4 months ago), here is SocGen's Aneta Markovska, charting just what the flawed duration extension will look like (as a reminder, unless the 2s10s is steepened, and at that substantially, we may as well bury the banks: nobody is taking on new mortgages now regardless of where the 10 year is, just look at weekly MBA numbers. However, to make sure the US banking system expires, just flatten the curve completely, and it is game over for NIM). In a nutshell, SocGen believes that the Fed will dump $420 billion worth of 1.5-4 year USTs and use them to purchase bonds with a maturity longer than 4 years - ideally, this would be 20 Years (yes, they would need to be reinstated, and this is our view, not SocGen's) and 30 Years, and sell the 10 years. But since the Fed has zero practical world experience, one can only hope, knowing full well the end result will be yet another TARP to bail out the banks. From SocGen: "The next step from the Fed will almost certainly be for more easing and it will almost certainly be duration extension. The only question is September or November? Prior to the August employment report, the market was split 50/50 on the timing of the announcement. The report pushed the odds in favour of September which is our central scenario.We estimate that at the upper limit, the extension could amount to as much as $420bn in duration purchases, which would make it comparable in size to QE2. However, the Fed may not announce the full amount up front but instead give a monthly run rate and reevaluate at each meeting. Matching the previous run rate, we would expect the Fed to do roughly $55bn per month. This could take the Fed as far as April 2012, at which point inflation should have receded enough to put QE3 back on the table." We are not too sure just who will buy the 1.5-4 year bonds at current yields, but certainly some greater fool than us does and always will exist. What is important, is that dry powder for about $55 billion in POMO recycling will suddenly allow the banks to flip assets to greater fools yet again. As to whether this will work, like last year, we very much doubt it, especially since everyone will be buying gold and crude.

Forget The Twist, Here Comes Operation Torque: Presenting Morgan Stanley's Complete Moral Hazard Profit Guide

While we often pick on Morgan Stanley's Jim Caron (the same guy who year after year after year keeps predicting the yield on the 10 year will soar, and not just soar, but soar for all the wrong reasons, such as bull steepening and what not), has just diametrically changed his tune, by bringing us, drumroll please, Operation Torque. To wit: "Policy makers in both the US and Europe get back to work in September, and this month will be rife with deliberations on stimulus and market support policies. In our view, a duration extension to the Fed's SOMA portfolio is an optimal policy tool to engender easing. This can initially be done through extending the duration of reinvestments from MBS and agency holdings but may ultimately culminate in selling shorter-duration USTs in its SOMA portfolio in exchange for buying longer duration assets (‘Operation Torque’, as we at Morgan Stanley have dubbed it)." Why 2 Years? Because as per the August 9 FOMC statement, we know that there will no rate hike for the next 2 Years, and hence no duration risk. Which means that the Fed can sell an infinite amount of paper into a mid-2013 horizon without worrying about demand destruction. And by doing so it will, as we have been predicting since May, expand the duration of its portfolio, in the process pushing investors into risky assets for the third time in as many years. But there is a twist...

Podcasting The Charts That Matter Next Week: The Continuing Case For A Weaker EUR

Over the past x months, one thing has become all too clear in FX land: the EURUSD must stay rangebound between 1.40 and 1.50, even though as Goldman's John Noyce presents in his latest "not-for-retail" packet, the fair value of the European currency continues to be higher than where it should be. Whether this is a simple case of the tail wagging the dog, whereby the ECB and China are terrified of the downstream effects should the European currency trade under the psychological barrier of 1.40, is unclear. What is clear is that every country in the world has skin in the game, and is forced to keep the EUR in Goldilock rangebound territory: not too low to spook European investors, and not too high to accelerate the German double dip. Some other risk assets correlations observed include the AUD vs 2 year swap spread basket, the VIX vs the S&P, and lastly, on the until recently massively overstretched CHF. Noyce tops it off with some technical perspectives on US govvies and the 2s10s, which is once again diving, although unclear if due to a bullish or bearish flattening.

Buffett Bailout Of BAC Sends Stock To Early August Levels, Changes Nothing

The Buffett bandaid move, coming 48 hours after Buffett's conversations with Obama, and which also comes oddly enough just 24 hours before Bernanke was expected to announce QE3, succeeds in temporarily sending the stock back to early August levels. It also succeeds in sending the financial sector higher, which as we explained yesterday is the main reason for why the 2s10s had to be steepened, so as a result Operation Twist now can go back to its original formulation of broad 2s30s flattening and result in purchases of bonds across the board. As for what to expect with this surprising move out of Omaha? Absolutely nothing. The $5 billion in cash, unlike Buffett's investment in Goldman, will be laughably insufficient, considering that the bank's mortgage exposure is in the tens of billions, while its litigation liability is another $20-30 billion. This does nothing to change our thesis that BAC will need to come to the market again and again to raise capital. However, as this "raise" confirmed, BAC only has access to private investments: we hope Buffett has very deep pockets to keep doubling down. The other news to come out of this - Paulson will be saved with another deus ex machina and will not need to sell his gold or GLD holdings, removing the liquidation overhang from spot gold. The only good news out of all of this: the taxpayer bailout of Bank of America, when it comes, will be $5 billion less.