Indirect Monetization by the Fed, Apparently

[D-Mack]

Re: Indirect Monetization by the Fed, Apparently

Ok, on second thought .. isn't this just a part of the feds 300B well announced plan to purchase treasuries?

But buying nearly half of it,while claiming everything is rosy, is still smelling fishy to me

"Anecdotally, it seems like we're getting pretty good support from foreign buyers," said Steve Van Order, fixed income strategist at Calvert Funds. He added that gauging foreign demand has been made more difficult due to a recent change in how the Treasury categorizes indirect bids.
http://money.cnn.com/2009/07/31/mark...ion=2009073116

[D-Mack]

Re: Indirect Monetization by the Fed, Apparently

more stuff

The main reason why central banks are generally not allowed to buy government debt in the primary market is that the central bank is supposed to buy assets at market prices (to protect its ability to re-sell them when it chooses to tighten monetary policy without depleting its capital and therefore its independence from government). Although the Fed does buy treasuries at auction, it does so only to roll over its existing holdings. So when the Fed buys a large proportion of a new treasury issue from the primary dealers very soon after the auction, it raises the question of how meaningful the auction process actually was in determining a fair market price for the bonds. And, as Chris Martenson notes, the apparently successful sale of a larger volume of treasuries to the private sector gives the impression that demand remains robust despite the massive increase in supply.

http://www.chrismartenson.com/blog/d...august-8/23831

The startling conclusion: $32 billion of Treasury Bonds spread across 7 CUSIPs, were purchased by the FED within 10 days of their initial auction and allocation to primary dealers. The amount purchased by OMOs represents an average of 32.4% of the total allocated to primary dealers in the respective auctions. Furthermore, almost two thirds of total OMO Operations for bonds issued in 2009, or $62 billion, affects Bonds issued within 30 days of the OMO purchase. These purchases account for a total average of 29% of the total amount allocated to primary dealers. While one may make the argument that on the run bonds are preferred on average by the Fed for purchasing and by the primary dealer community for selling, the data presents a marked skew in the Fed's desire to monetize very recently issued Treasuries.

The key questions remain: allocations to primary dealers in 2009 Bond auctions is an undisputed majority (55%) of all auctions - this is troubling due to the the recent change in the definition of indirect purchasers as well as the markedly reduced interest of foreign buyers such as China and other indirects, for US Treasuries. Could a reason for the Chinese lack of appetite be due to the fact that while primary dealers represent not just a majority of all Treasury purchases, that these dealers may also have an implicit understanding that come hell or high water for auctions that lack indirect interest, the Fed could potentially make any dealers whole on purchases and subsequent sales at a loss such as the highlighted CUSIP 91282LD0 example (explicitly, at a loss for taxpayers who have to fund the primary dealers shortfall, in this case the difference between 99-26 and 99-07)? Would the Chinese be interested in playing in a rigged playing field when indirects are potentially impaired vis-a-vis direct purchasers? Furthermore, is Bernanke pulling a Clinton and while claiming under oath the he is not monetizing debt, he is effectively doing just that on well over $30 billion in Treasuries, which the Fed acquires within 10 days of issuance? And lastly, is the rapid uptake by the Fed a means to goose up auctions which have a potential likelihood of failure: the 7 Year in question came hot on the heels of a 5 Year that for all intents and purposes was quite close to a failed auction? Absent an implicit backstop, which everyone knows the Fed is very keen on making these days: as the SigTarp demonstrated, to the tune of tens of trillions of dollars, what is the likelihood the 7 Year would have fared as well as it did, had not the primary dealers really stepped up, for reasons known and unknown.
http://www.zerohedge.com/article/ope...and-statistics

[blazespinnaker]

Re: Indirect Monetization by the Fed, Apparently

I dunno. . this has been said in a few quarters and I have to agree with it.

Isn't this just the very definition of Quantitative Easing? I think the fed has been claiming that they'd be doing this and they're doing it. What's really so surprising here?

Also, the sudden spurt of spending isn't that weird either. Did people expect them to dole it out in a predictable amounts? If they did that, traders would just walk all over the fed.

I think the question really worth asking, is what happens in September? Do they extend the program or do they stop? And if they stop, what happens?

Considering what's happened with Cash For Clunkers, I think I would not be surprised to see them extend the program, even it is done surrepititously.