Banks, The Fed and the "Taper"

A lot has been made recently on the reduction in the monthly Fed purchases of Treasury Securities. The Fed purchases can be found on their web site at the Tentative Outright Treasury Operation Schedule.

Fed Treasury Securities Purchases by Month (in billions): 

December 2013 was the last month of $45 Billion in purchases. Starting in January 2014 the Fed purchased "only" $40 Billion and then reduced to $36 Billion in February. For May, the Fed anticipates purchasing just $24 Billion.

After peaking at 3.02% on December 31, 2013 the yield on the 10 Year Treasury Note went straight down in January and fluctuated between 2.60% and 2.80% until the recent break below 2.50%.

While a lot of factors go into the pricing of Treasuries it did surprise a number of observers that rates went down so quickly in January 2014 considering the Taper was just getting started. 

Interestingly, Banks (mostly the large ones) began ramping up their purchases of Treasury securities during the 1st Quarter of 2014. 

Bank Treasury Securities Purchases by Quarter (in billions): 

The $237 Billion is up from $193 Billion the prior quarter - a $44.58 Billion increase or an extra $14.86 Billion per month. Also note the $32.96 Billion jump from 2013 Q3 to Q4 - this was an extra $10.99 Billion per month. Collectively, banks have added an additional $77.54 Billion over two quarters.

The next table details that just 3 banks made up $40.36 Billion of the total $44.58 Billion 2014 Q1 increase.

InstitutionUST 2013 Q4UST 2014 Q1IncreasePerc
Bank of America6,189,000,00026,894,000,00020,705,000,000334.55
Wells Fargo474,000,0006,334,000,0005,860,000,0001,236.29


Citigroup added $13.79 Billion while Bank of America once again went all in and added $20.70 Billion. While Wells Fargo's $5.86 increase is not as large as the other two it is surprising in that WFC has never held more than $2.23 Billion in UST. Apparently, JPMorgan Chase did not get the memo as they actually decreased their Treasury holdings $1.67 Billion (22.42% reduction).

So, on one hand we have the Fed talking "Taper" in 2013 Q4 and beginning to actually taper in January 2014. Meanwhile, the banks start ramping up their purchases in 2013 Q4 to the tune of an extra $11 Billion per month and then going into overdrive during the actual taper taking their purchases up to an average of $15 Billion extra per month.

Combined Monthly Treasury Purchases (banks are an average monthly of the quarter gain):

Viewing the Fed and the Banks as one entity we see that very little actual tapering is going on:

Fed & Banks Net Combined Monthly Treasury Purchases (in Billions):

The question begs as to whether this is coincidence or rather a function of the largest banks coordinating with the Fed in net aggregate Treasury purchases. 

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