Year To Date POMO Summary And Fed Frontrunning Update: Here Are The Bonds To Buy And Flip To The Fed Tomorrow

With 6 more POMOs coming up in the next three weeks, and an avalanche more if the Fed does in fact announce QE2 in 13 days, attached is a summary of all bond repurchase activity undertaken by Brian Sack's FRBNY team, and also provide Morgan Stanley's estimate of which CUSIPs are most likely to be on the Fed's most wanted list in the upcoming weeks and years. Attached is also a specific list of bonds that are most likely to be bought by Brian Sacks in tomorrow's 2013-2014 monetization.

Below is the summary of all 2009/2010 OMOs by maturity bucket in absolute and relative terms:

Not surprisingly, and as we have pointed out in the past, the Fed has a soft spot for monetizing the "belly" with the bulk of purchases in the 5-7 Year bucket. Very little historical monetization in the long end may explain why the 10-30s steepness is breaking records every day. We believe the Fed will soon be forced to move ever right on the curve, as SOMA and other liquidity limitations leave it with no choice. Of course, should the Fed announce a $1.5 trillion monetization, the resulting purchase of well over $2 trillion in USTs (especially if the Fed is forced to bid up as many of the questionable MBS securities it needs to to keep BofA and others solvent), it will have no choice but to i) remove the SOMA 35% limitation and ii) buy everything across the curve as it becomes available.

Next up, is a detailed look at specific issues which the Fed has bought so far as part of QE Lite:

Looking into the future, Morgan Stanley estimates the over the next 12 months the Fed will see $306 billion in MBS and $47 billion in Agency refis, which will open up at least $370 billion in additional UST purchase capacity in addition to anything QE2 announces. As we have noted before, we believe that should rates tumble, which will happen if the Fed is forced to bid up the 10 and 30 Year aggressively, this number will be much larger.

And for those looking at a hint what Bill Gross is buying currently (in addition to MBS which he is now seeking to put back to BofA, and soon Wells, JPM and Citi), here is a look at the cheapest bonds by bucket currently available, together with current SOMA fill levels. The bonds at the top of any given bucket are those most likely to be monetized:

Saving the best for last: tomorrow's POMO will focus on bonds between 2013-2014. Here are the bonds most likely to be bought:

  • 1.750% of 4/15/2013
  • 1.375% of 5/15/2013
  • 1.125% of 6/15/2013
  • 0.5% of 10/15/2013
  • 0.75% of 09/15/2013

Buy these today for a flip to the Fed tomorrow. Don't forget to apply a few million turns of leverage.

source: Morgan Stanley