Deconstructing POMO As Fed Becomes The Second Largest Holder Of US Treasurys In The World

With today being yet another POMO day, it is only fitting to do the definitive summary of how the Fed's Open Markets Group distorts various asset classes with its liquidity ramps. So all those who doubt thet Fed has an impact on stocks, please look at the chart below. Incidentally, today is the day the Fed will likely overtake Japan as the second largest holder of US Treasurys. Recall that Japanese holdings of US paper were $821 billion as of July. Well, as of September 30, the Fed held $811.7 billion in Treasurys, and in the days following, there were two POMOs: one for $5.2 billion and one for $2.2 billion, bringing its total to $819.1 billion. Which means that if today's POMO operation, which launches imminently, is larger than $2 billion, the Fed will become the second largest holder of US paper in the world. And it won't stop there: China is merely $25 billion away. At a run rate of $10 billion in POMO purchases per week, the Fed will be the largest holder of US Treasuries in the world before the midterm elections.

Back to Pomo, where John Lohman has submitted all the narrative and data one needs to know why it is insanity to oppose Brian Sack.

The truth is stranger than fiction and here are a few numbers to prove it.  I’d like to think this data came from The Onion, but it didn’t (and anyone with access to W’s the Google’ and a calculator can prove it).

Brian the Sack’s website (here) lists POMO operations back to August 25, 2005 (yes, they were conducting POMO under the radar before announcing ‘an extension in maturities targeted’ in a bazooka waving move, a la Paulson style, in March 2009).  In sum, the Sack & Company have POMOed the market on 203 of the 1,334 trading days since (as of October 5, 2010).  As this is well more than the number of observations necessary for statistical significance (approximately 30) in order to draw conclusions about reality from a sample, we can draw some conclusions as to just how much the Fed is artificially chumming price levels in what was once a free market.

Now, I’m sure this is just coincidence.  It just so happens that POMO funds received by primary dealers “appear” to be ramping stocks and causing (dare I say short) selling in gold.  Only The Onion would post something as preposterous.  It’s also interesting to note the doucherious impact the Fed is having on yields.  Ironically, the Sack recently stated in a speech:

Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses.

Perhaps someone should tell Brian, Ben & Co. to mute Krugman and revisit the data (surely they have  the Google and calculators at 33 Liberty).  No, even professional BLS weasels couldn’t make this up (here and here).  Proving, yet once again, that the truth is stranger than fiction, especially in post-crisis capitalism.