The Treasury had a very successful week. They sold a total of $109 billion of new coupon securities as follows:
2 year: $42 billion
5 year: $39 billion
7 year: $28 billion
The auctions went very well. By Friday evening interest rates on the ten-year had fallen from 3.75% on Monday to 3.5%. A very big downward move in yield given the large supply of coupons. Follows is a chart of the weeks trading in the ten-year. Note that the bulk of the drop in rates occurred after the release of the 7 year results on Thursday. From 1:30 on Thursday through the close on Friday it was just one gigantic money making opportunity for the primary dealers.
Treasury/the Dealers had some help from their friend, the Federal Reserve. On Thursday and Friday the Fed bought $29 billion of fixed coupons. Of that, $6.5 billion were direct obligations of Treasury, $23 billion was Agency MBS. The effect of these purchases was to provide stability to the broad fixed rate market. It worked very well.
Net net 27% of last weeks Treasury debt sales were offset with demand from the Fed. The Fed/Treasury strategy is clearly working, at least in the short term. The problem is that it can’t be sustained.
I think the timing of these Fed purchase constitutes Intervention in the market. This is not just a program of quantitative easing any longer. This is market manipulation. That never works for very long. And when the intervention ends (it must) the jump in rates will be breathtaking.