The Fed Buys Last Week's Treasury Notes

Hello Chris,

Astonishing. Thanks, as ever, for your fantastic investigative work.

DavidC

 And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers.  They'll have to do something with all that freshly minted  cash.....

Ouch!

Could someone please make the markets conform to my personal beliefs? Thank you.

Holy cra*! Besides PM and physical foreign currencies what other vehicles are good for protecting against a dollar debacle?

Jeff

Thanks Dr Martenson, I think other articles have had titles like 'US Treasury Auction Fails' but this is the proof in the pudding.  And the pudding's gone bad!

Thanks so much.  I had suspected there was something fraudulent happening, now it's plain to see!

The Fed also bought another big old pile of Agency Debt today.

Thu 8/6/2009 3:07 PM

New York Fed purchases $19.2 billion net ($19.2 billion gross) in agency mortgage-backed securities

You know, because things are looking so good.

That makes today your average, regular $26.2 billion dollar day of thin-air money injection ($7 + $ 19.2).  To put this in context, today's fresh money operation, alone, would have been 88th on the list of yearly total output on the world GDP listing.

Why bother running a whole country when you can just print up an entire GDP in a single day?  Sooner or later folks are going to lose the subtle connection between dollars and sense.

Chris, All,

I think the bigger issue is the Fed's buying of GSE debt and securities. 

Even after all the recent long term Treasury buying, the Fed still has ~ $100 billion less in Treasuries on its balance sheet today than it did at the start of the mortgage crisis two years ago.   At the end of July 2009, the Fed had ~ $683 billion in Treasuries vs. ~ $352 billion in July of 2008 vs. ~$786 billion in July of 2007.   It's important to note that the mix of Treasuries on the Fed's balance sheet has changed from almost all short term bills, to about 2/3rds bills (short term) & 1/3rd notes (longer term).   Most believe the Fed moved to longer durations to keep long rates down.  I hold a different view.  I believe the Fed moved to longer term notes to prevent yields on short term bills from going negative as they did during the peak of the financial panic/meltdown.  I also don't believe the Treasury is having any difficulty selling debt.  Demand for Treasuries, especially Treasury Bills is very high.  I believe the Fed is simply replacing the Treasuries it sold during the peak of the crisis. 

If you want to see the face of monetization you need to look at the Fed's GSE debt and securities purchases.  Since the end of September 2008, the Fed has exchanged > $650 billion in freshly printed federal reserve notes (cash) for GSE mortgage paper.  Believe me when I tell you that at this point, the Fed IS the mortgage market.  And mortgage paper is the conduit that the Fed is using to flood the banking system with money.   And remember, the Fed has announced their intention to purchase $1.25 TRILLION in GSE paper.  Talk about a helicopter drop! 

BTW, the Fed's purchases of GSE paper are very likely illegal.  Per the Fed's CONgressional charter, the Fed is only allowed to purchase investments backed explicitly by the U.S. Gov't.  GSE paper is issued with an explicit warning that it is NOT backed by the U.S. Gov't. 

We are witnessing the biggest bailout and wealth giveaway in history.    

I just passed this great post on to Zero Hedge. They loved it!!

http://www.zerohedge.com/article/feds-ust-pomo-pyramid-scheme-exposed

This news is not new. I wrote about this a couple of days ago here ... http://financialsense.com/fsu/editorials/2009/0804.html

and followed up that article yesterday ... http://www.ronpaulforums.com/showpost.ph... and this morning ... http://www.ronpaulforums.com/showpost.ph...

Brian

Hello Brian,

Welcome to Chris's site and many thanks for your links. It's fantastic that through the work of the likes of you, Chris, Karl Denninger, Tyler Durden et al that this information is coming out.

To me, as a reasonable and rational adult (I hope!), the most important thing is that we have access to the information so that we can make our minds up on the basis of the facts rather than the sugar-coated 'everything is OK' pap we are being fed by the pewors that be (one can't help feeling that by their actions, they are showing how absolutely petrified they are)!

DavidC

Thanks David.

You make like the predecessor to that article as well, "Fed Exit Strategy?" ...

http://financialsense.com/fsu/editorials...

Brian

 This was picked up by Zerohedge and tweeted to the whole world.  You should expect lots of traffic.

I commented on his board (he had over 70 comments in ten minutes) and suggested that those folks might take a look at the Crash Course.

Chris said:

"They didn't even wait a full week!  A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using "primary dealers" and "POMOs" and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public. "
 

Chris, the Fed cannot buy these treasuries outright from the Treasury at auction. The Fed cannot participate in Treasury auctions because it has no authority to lend to the Treasury. I discuss this here ... http://financialsense.com/fsu/editorials/2009/0804.html   

The Fed can only participate in an auction to the extent that it elects to replace any maturing treasuries in its portfolio. If the Fed elects to do this, this amount shows up in the "SOMA" line of the Treasury Auction Results report as it is replacing maturing debt and does not add to issued and outstanding debt.

Brian

 The zerohedge article citing CM's excellent investigative work on this report has been cited over at iTulip by one of their major-league community members.  

Methinks if this keeps up the profile of this site (and Chris' work) is going to pop to a much larger audience...

I'll be stupendously psyched when I see Chris on The Daily Show in October...(crossing fingers for luck)...

VIVA -- Sager

Hi Sager,

It's to be hoped! I'll have the recorder set!

DavidC

Hello Brian,

Re Post 11 - thanks, very interesting. Juggling with knives?

DavidC

Super work/read Chris.

It was also picked up on Karl Denninger's site. (Wonder if he'll be explaining this to Dennis Kneale when he is on CNBC next.)

Take care

Karl Denninger picks up Chris's investigative work and also ZeroHedge

http://market-ticker.org/archives/1304-B...

.

As gonegolfin posted above, Section 14 (b.1.) of the Federal Reserve Act states that the Fed can only purchase treasuries from the open market except for rolling over expired issues.

 www.federalreserve.gov/aboutthefed/section14.htm

It seems that if there was an excess amount of Fed purchasing in the open market, it would have dropped the overnight Fed funds rate toward zero. It did not. The overnight rate has been steady at 17-18 basis points for over a week. Before the auctions in question, the rate was actually lower.

The overnight rate shows nothing out of the ordinary as far as Fed monetization. However this does not mean that the Fed is not finding another way to show increased demand for the auctions.

-dan

I can not connect the dots, I am not that sophisticated on these matters. So, help me out.

 “And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.”

 What is the evidence the Fed. bought 47% ?   What is the chronicle of the events?  Thanks.

"It seems that if there was an excess amount of Fed purchasing in the open market, it would have dropped the overnight Fed funds rate toward zero. It did not. The overnight rate has been steady at 17-18 basis points for over a week. Before the auctions in question, the rate was actually lower."

deflationdan,

The Fed payment of interest (0.25%) on reserves held on deposit with the Fed is putting a floor under the Federal Funds rate. The reason that the federal funds rate is trading a little below 0.25% is because certain institutions that participate in the federal funds market (Ex. Fannie, Freddie, etc.) are not eligible to receive interest on their deposited reserves. Hence, they are offering their reserves in the open market for less than 0.25%.

Brian

http://alhambrainvestments.com/blog/2009/07/30/7-year-treasury-auction/

7 Year Treasury Auction

Posted by Joseph Y. Calhoun, III

The 7 year Treasury auction, unlike the 2 and 5 year earlier this week, is said to have gone well:

NEW YORK (Dow Jones)–Treasury prices jumped Thursday afternoon after a successful seven-year auction soothed investors and dealers burned by two disappointing Treasury note sales earlier in the week.

Treasury prices rose across all maturities after the $28 billion sale, the final auction in a record $115 billion offering of Treasurys this week.

The auction drew the most interest from large institutional investors, including foreign central banks, of the three note sales this week. This demand, known as the “indirect bid”, accounted for a robust 62.5% of the offering, compared with the 67.2% bid seen at the last $27 billion seven-year sale in June and an average bid in the low-to-mid 30% range.

The new notes were awarded at a yield of 3.369%, a bit below the 3.396% yield seen just before the sale, a sign of good demand. Bids totalled $78.59 billion, or 2.63 times the amount on offer, compared with 2.82 at the last sale and an average this year of 2.40.

Maybe it had something to do with this:

NEW YORK (MarketWatch) — The Federal Reserve Bank of New York bought $6.496 billion in Treasurys maturing between 2012 and 2013 on Thursday, its latest operation in a program intended to keep a lid on borrowing costs. Dealers submitted $20.308 billion to the central bank to buy. The amount purchased was roughly the same as at the Fed’s last buyback in this maturity range. Treasury yields remained higher on the day, pushing prices down, ahead of the government’s sale of 7-year notes.

The Treasury pushes them out the front door and the Fed buys them at the back door. Not exactly a long term plan….

What is key is CM has documented what many here and other web sites have concluded for weeks (if not months).

Add data from this Chris post to this thread...offer within weeks (if not days) it is now impossible to say the emperor (I.e. US Gov't) is wearing clothes when he's not.

This post is now referenced in numerous web sites...it will get to (if not already) many key decision-makers in many countries (i.e China, Saudi Arabia, etc).

So...how long will it be before all US Treasury demand collapses ($100 Billion auctions scheduled next week) and what will happen then?

I think we know...any takers?

FWIW...just reinforces my view we will experience one or more significant financial events before the end of year.

Finally...wouldn't it be worthwhile to discuss what and how this will unravel?  Lets stop looking down at our feet as were walking.   Submit as a scientist and manager, how this happens is somewhat predictable (I've described this in my diary the past several weeks as the "capitulation phase").

Nichoman 

This is an extension of what happened on March 13th. 

On Friday China questions the “full faith” of the U.S. dollar. What this means is they will not bail out the U.S. with non-stop purchasing of Treasuries, the blood of the financial body.

On Sunday Bernanke does the first national interview a Federal Reserve chairman has ever done in 96 years. He says everything is fine and we’ll be back to business as usual by the end of the year. Then on Wednesday the Fed announces they will buy Treasuries until the end of days. So…

1. China warns about the financial stability of the U.S.
2. Bernanke goes on national television
3. Says he’s from Main Street, just like you and me
4. Then boldly lies about the economy

Three days later…

• FOMC announces a final push of a desperate crisis management plan
• U.S. dollar sees its 3rd biggest one-day decline ever
• Fed is now matching all of China’s $1 trillion in Treasuries

For more details on the mechanics of this and the potential dangers:

Our Engineered Meltdown: End of the Beginning

Chris,

Great find, thank you.

"And oh, by the way, don't expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers.  They'll have to do something with all that freshly minted  cash....."

Doesn't this lack of demand for Treasuries suggest that most, if not all, of the Fed's handouts have flowed into all other asset classes on the hopes that the economy has rebounded? I would view this as an opportunity to buy into the Treasury market.

Goldman Sachs' Incredible Trading Returns are Literally Unbelievable

Golman is a primary dealer. Do you think there returns have anything to do with the fed and the Primary Dealers shuffleing the money around?

.

Thanks Brian. I forgot about the rickety floor.

However, I do not see why folks are so surprised at the Fed's actions. They have been jawboning the longer term treasury market for many months promising to purchase these longer dated issues in the open market. Now they are doing it.

In fact, Ben Bernanke in 2002 submitted this as a possible deflation prevention measure. He referred to the Fed's actions in WWII when they purchased longer dated treasuries in order to keep the government's borrowing costs down.

As long as the government hopes for a trickle-down effect by supporting the financial system at the expense of the economy, these measures will do nothing to stop deflation.

-dan

This post has over 9000 reads in what 8 hours? 

Dr. Martenson,

Its great to see you get the traffic that your excellent work deserves.

Kudos!

You go, Chris!  Excellent report, and congratulations on the coverage you're getting!

Nichoman wrote: 

"... it is now impossible to say the emperor (I.e. US Gov't) is wearing clothes when he's not.

This post is now referenced in numerous web sites...it will get to (if not already) many key decision-makers in many countries (i.e China, Saudi Arabia, etc).

So...how long will it be before all US Treasury demand collapses ($100 Billion auctions scheduled next week) and what will happen then?

I think we know...any takers?"

I'm wondering the same thing, Nichoman!  My spidey-senses are certainly on higher alert.   The thing keeping this illusion going is that the mainstream doesn't "see" what's going on (and don't want to get their boat rocked either).  But what happens once they do get a good look at what's going on behind the curtain?  Once the illusion is gone, it's gone. 

Whether or not this story contributes to breaking, the illusion for the general public, it certainly makes me want to take a harder look at whether I've done all I could/should to be prepared, and to speed that up!

No doubt that the Fed announced well before the purchase program commenced on 3/25 that it would be purchasing treasury debt, specifically long term treasury debt. This is not the surprise. I have been covering this in writings for some time. But there is a difference between 1) the Fed going into the open market to expand its balance sheet by buying treasuries (this is not an atypical operation even in non-crisis years ... but the volume in $ is certainly atypical) and 2) the Treasury auctioning large amounts of debt and the Fed immediately subsidizing that auction (which is what they are doing). This is the closest thing to the Fed lending directly to the Treasury/Government that there is without actually doing it (it is also more innefficient in that it costs the taxpayers more). And this is disallowed by the Federal Reserve Act for obvious reasons. I think it is clear that they are working closely with the primary dealers (providing them backstop assurance) to ensure that these Treasury auctions not only are not disappointing (as perception is very important here), but that they look pretty good (especially at the long end).

Brian

... and the followup video

http://market-ticker.denninger.net/archi...

Brian

Here's another posting of Chris's report quoted via the zerohedge article, at: http://wallstreetblips.dailyradar.com/story/the_fed_s_ust_pomo_pyramid_scheme_exposed/

Here we go!

What part of this sentence from the FOMC March 18, 2009 press release did you ignore at the time, forget about, or do you not currently understand:

"Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."

http://www.federalreserve.gov/newsevents...

Heh! Gee! Right out there for all to see!  A conspiracy in plain view!

Let's do some math. $300 billion divided by 31 weeks equals... ~$10 billion/week.

Heh look! Your CUSIP 912828LDO is for ~$8 billion.

Ya don't think that this was part of, you know, the Fed's previously announced scheduled purchase of, you know, long-dated Treasurys to cap rates on the long end of the curve, do ya?

Debt Apocalyse, I don't think you understand the point that Chris was trying to make.  The 5 year auction was a complete DUD.  The next day they had to auction the 7 year notes.  And they got to make it look good after the disasterous 5 year auction. 

Primary dealers HAS to bid on every auction.  But there's no requirement on what kind of bid to submit.  If they bid low, the auction will be seen as a complete failure.  So the fed has to engineer an auction success.   Bernanke probably asked PIMCO's Bill Gross to bid high in exchange he's take it off Gross's books fast.  And a few days later that's exactly what happened.

Yes, the fed has already announced a $300 billion monetization campaign.  That's ongoing and has been happening.  Nobody is suprised by that.   What people here are jumping all over is the fact that they are blatantly trying to cover up WEAK auction results.   

There's a difference between doing a preannounced monetization vs asking the primary dealers to bid high so that they can flip the treasury 5 days later.

 BIG DIFFERENCE.

George Orwell

Thanks Chris for explaining this game behind the scenes that ordinary folks like me wouldn't know about otherwise.  So how long can this game be sustained before it can't work, and what is the most likely outcome? - I read the possibilities in Brian's articles noted above.  What actions should we ask of the Fed instead and what actions should be taken to protect ourselves?

Thanks Chris for explaining this game behind the scenes that ordinary folks like me wouldn't know about otherwise.  So how long can this game be sustained before it can't work, and what is the most likely outcome? - I read the possibilities in Brian's articles noted above.  What actions should we ask of the Fed instead and what actions should be taken to protect ourselves?

Good question, Woodman.

The other thought that occurs to me is that since this info is so damning and is parsable by folks like Chris, one might wonder when it will stop being available say, like the M3 figure.

SG

Hello Brian:

Super job, I saw that. Both you and Chris did a great job, I should also mention that Nate pointed this out a little while back - his wasn't an indepth with Committee on Uniform Security Identification Procedures indentifiers, but he did point out that the PDs were the "buyers".

I think the greatest thing is that:

1. the truth is getting vetted out
2. it is making the rounds at blogs that have an incredible amount of heavy traffic

Take care, and super reads on the articles!

Well said Davos!

Thank you,

Cat

Chris,

I just wanted to congratulate you on your eagle eye. Someone above linked to my similar post from last week, but I missed the fact that the Fed was buying the newly issued notes this week. I've done a followup post now:

http://alhambrainvestments.com/blog/2009/08/06/the-circular-flow/

Keep up the good work.

Joe Calhoun

Alhambra Investments