Here's Who is Selling Treasuries - 3/9/21

We got one of his usual insightful comments from Jimbo, Down Under in Oz, late last night. I wanted to share it with you, along with my comments below.

4 hours ago, Jimbo said:

THE SOUND OF ONE BOND BUYER CLAPPING

So the FED buys $180 Billion in treasuries a month.

It’s still not enough.

Too many private sector sellers unloading onto the FED.

When will the FED go “FULL BOND” ???

(Thats when the FED buys enough bonds to stabilize the ten year).

How much bond buying is enough???

And the MONEY question always is:

At what rate will the FED go FULL BOND.

Is it 2%???

Is it 2.5% ??? (The WW2 rate).

Jimbo – Agree with most of what you wrote except private sector sellers unloading to the Fed. There’s no evidence of private sector selling.

Also, on a technicality, total Fed monthly purchases are around $180 billion a month. Only $80 billion are direct purchases of Treasuries. $100 billion are MBS purchases.

But it’s all cash to Primary Dealers, so the effect is the same. The dealers can do whatever they want with that cash. They use some to buy Treasuries, along with more MBS or whatever else they want to accumulate in inventory.

It’s that second transaction, the dealers buying other stuff, that pushes the new cash into the market, where the sellers of those securities can then use that cash to buy more Treasuries. The result is that the Fed is either purchasing outright or indirectly funding the purchase of most new Treasury issuance via its daily purchases of Treasuries and MBS.

But are they also sellers, depressing the bond market?

No.

The US Treasury is the seller who is crushing the market. Yes, Primary Dealers are rotating their inventory out to the Fed, but buying more every week to keep those inventories stable. At this point, they are merely strawmen for the Fed. They’re broke.

Meanwhile, banks in total continue to accumulate more Treasuries as they’re issued.

Treasury holdings of other classes of investors are reported quarterly in the Fed’s Z1. The next report comes out this week for Q4 2020.

The data through Q3 shows that all investor classes except pension funds had significant increases in their holdings from the end of 2019 through Q3 2020. The drop in pension funds was slight and not material to the totals held by all investors.

Total investor holdings not including Fed holdings, grew from $16.9 trillion at the end of 2019, before the pandemic expansion of issuance, to $18.9 trillion at the end of Q3 2020. This includes bank holdings shown on the chart above.

So that means all classes of investors increased their holdings by $2 trillion in the first 3 quarters of 2020. The problem is that the Treasury increased supply by $3.6 trillion over that period. The Treasury is the 700 pound gorilla seller, the elephant in the room. It is issuing massive piles of Treasury dung, that will only grow larger over the next few months.

The Fed was taking down or financing an amount GREATER than Treasury issuance, from March through July last year. Then the Fed cut back to only funding 85-88% of new issuance.

That’s when the problem started. Investors kept buying. Only the Fed had cut back from buying or funding 100% plus of net issuance to 85-88%. That’s what fucked the Treasury market.

With the bond market crashing, the Fed will be back, this time with infinite QE.

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