Friday, June 12, 2009

Federal Reserve Open Market Operations: June 12

The chart below indicates the Fed's YTD open market treasury purchases. Roughly $32 billion in bonds/bills has been bought since the last update 2 weeks ago. The chart below can be traced back the Federal Reserve of New York's website here.

More notable were the Fed's open market operations around and on the days of the fateful 10 and 30 yr USTs this week. Recall, on June 10th was the abysmal $19 billion auction for 10 Yr Treasuries while June 11th saw a surprisingly strong $11 billion in 30 Years. Pulling the NY Fed's OMO data for these days yields the following results:

As the data indicate on the day of the $19 billion in 10 Yr UST, the Fed was concurrently bidding on almost $11 billion (of which $3.5 billion was accepted) of what most likely were 10 years: more than 50% of the full Treasury auction. Furthermore, the day before, the Fed purchased $7.5 billion in 3.5 - 5 years after submitting nearly $30 billion in bid requests. This is the same day that $30 billion in 3 years Treasuries were auctioned off at 1.96%. Has the Federal Reserve been keep the clearing price conveniently low by purchasing comparable trasuries on or near the days of critical auctions? Open market purchases seem to indicate that is in fact the case.

In summary - last week's bond market exhibited unprecedented volatility: spreads between USTs and agencies fluctuated drastically, prices were all over the palce, the Fed was concurrently conducting OM purchases as the Treasury was auctioning off bonds in the primary market... cats and dogs living together, etc... And keep in mind total activity this past week was under $100 billion. There is still well over $1 trillion in bonds to be autioned off this year alone. If anyone is foolish enough to predict just what will happen with the long bond, the 2s10s, T-bills, etc. by year end, please speak up.

Well, I will take one stab: the irony is that while Zero Hedge is in the near-term deflationist camp (at least in principle), the supply of bonds will likely be the technical factor that determines price levels over the next 6 months, more so than economic outlook. As such, we expect volatility to persist, and the curve, especially the long dated stuff, to widen, even as household net worth continues plummeting (or as a result of). Inflationists, will, of course, read into this as an inflationary sign and buy every barrel of oil they can find while screaming bloody inflation as CNBC reverberates it to the moon and back since it jives with exactly what the Administration is hoping: that Joe Sixpack goes out and maxes his credit card just like in the good old days. But the last is not and will not be happening... So the conundrum continues. (The only thing certain is death, taxes, and that JP Morgan will forever be gunning those pesky 5k SPY blocks.) Sphere: Related Content
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