The Week in QE New – Fed TOMO and POMO
All was quiet on the Fed QE, TOMO, and POMO front last week. Fed QE New saw a decline of $0.69 billion. TOMO overnight and 14 day term repo loans to Primary Dealers were down by $16.4 billion to “just” $213 billion. But the Fed bought $15.7 billion in T-bills, notes, and bonds from dealers. That’s higher powered money because the Fed is actually cashing out the dealers. TOMO is just a loan to enable them to carry their fixed income inventories without having to liquidate at a loss.
And boy they took some losses last week.
The rest of this report is an excerpt from this Liquidity Trader report.
In the Beginning The Fed Said, Let There Be QE New
The initial operations in QE new were strictly repos- overnight or term loans to Primary Dealers. These are called TOMO – Temporary Open Market Operations.
At first, the dealers didn’t trust that it would last. Or they were under so much pressure from the tsunami of Treasury supply that they were coping with, they kept selling stocks.
But then the Fed introduced a program of large purchases of Treasury bills. That was in addition to the existing program of buying Treasury coupons to replace the MBS they were losing from the SOMA (System Open Market Account). Their MBS portfolio shrinks as mortgages are paid off in the normal course of business.
When the Fed buys securities outright, that’s called POMO, or Permanent Open Market Operations.
Fed POMO and Stocks with QE New – Railroaded
When the Fed announced that program, voila! Railroad tracks between the S&P 500 and POMO.
Note that TOMO, while irregular, is also still trending up. As of November 8, QE New outstanding has grown to $314 billion since its inception on September 17. By my back of the envelope arithmetic, that averages $183 billion per month. That’s about 50% more than old QE at its peak. But most of that was in the first month. The pace is likely to level off at $80-120 billion per month, to keep pace with Treasury issuance.
But, clearly, the Fed is in panic mode.
Is it any wonder?
Since the inception of QE New on September 17, the Treasury has issued $312 billion in net new paper. The Treasury issues $312 billion and the Fed buys or finances $314 billion.
Must be a coincidence.
How do you spell “monetization” anyway?
But there’s a problem. While stocks and short term money rates have cooperated, bonds haven’t. As I write this on Friday afternoon. The 10 year Treasury yield stands at 1.93. It has broken out of a big base pattern. On October 8, a week before the Fed started its new POMO program on top of the TOMO and the existing modest POMO, that yield stood at 1.51.
Something is obviously amiss.
A breakout above 2.0% would be a disaster. I will be watching this and reporting to you as it goes.