Primary Dealer Treasury Coupon Holdings Drop To September 2011 Levels

While it is unclear why it happened, in the most recent week of Fed data, February 19, Primary Dealer holdings of Coupon securities tumbled by $21 billion, to just $2.3 billion. As the chart below show this is curious because the last time PD holdings of coupon securities was this low was in September of 2011, suggesting that in the middle of the month dealers were dumping coupon paper aggressively even though this did not impact the prevailing price of the various maturity buckets, considering the bond complex continues to grind higher in 2014 despite panicked warnings by the punditry that all Treasury holdings must be sold.

It is unclear what caused the recent divestment of coupon paper: according to Credit Agricoles' David Keeble "dealers appear to have mostly returned to the new low inventory norm that prevailed prior to Operation Twist and that has simply taken time to achieve again."

This plunge in coupons was however more than offset by a surge in Bill holdings, which rose from $19.7 billion in the week ending February 12 to $42.5 billion most recently, the highest Bill holdings since December 25.

One possible explanation is provided by Stone McCarthy:

The average value of dealers' overall Treasury coupon position fell to just $2.342 billion during the week from $23.436 billion the prior week. That is the smallest average Treasury coupon position since the week ended September 28, 2011.


Dealers' net long average Treasury bill position jumped to $42.491 billion during the week from $19.727 billion the prior week. Their average net long bill position had been jut $12.911 billion two week's prior, which was the smallest for bills since the week ended October 31, 2012. The drop was not unexpected, as Treasury had been paying down bills for weeks in order to position ahead of the debt ceiling deadline. The most recent position, on the other hand, is the largest since the end of last year, as Treasury has ramped up bill auctions in a major way since, including CMBs and we expect Dealer bill holdings will continue to reflect that over the next few weeks.

So was the Coupon holdings plunge just a weekly rebalancing as Bills were bought, or is something more peculiar going on? The last time Coupon positions were net short was during Operation Twist, and prior to that, during the Old Normal, in which all excess dealer capital was invested in equities and corporate bonds with net TSY short positions used as an interest rate hedge.

The only problem is that this time around there is no comparable jump in corporate holdings of IG or HY paper, and thus the drop has nothing to do with hedging IR risk, and if anything is or maybe was likely a liquidity play, to get out of more illiquid coupon paper and get into the "safety" of cash-like Bills.

Either way, keep an eye on this series: should the collapse in coupon holdings it may be a near-real time indicator of a phase change at least through the perspective of the Dealer community/