A couple of revealing charts from the Fed’s Flow of Funds data.   Both show net flows into Treasuries by creditor type and the Federal Government’s borrowing during each quarter.   Note, the quarterly data is annualized.

The first chart illustrates how QE2 flushed domestics out of Treasuries and effectively funded 63 percent of the budget deficit in Q4.  The Treasury is prohibited from directly selling bonds to the central bank, but effectively finances the government through POMO.

Given that a large portion of the Rest of World category are central banks recycling BOP surpluses,  it’s likely that 90 percent of the U.S. budget deficit in Q4 was funded by central banks.    You think this may have anything to do with what’s happening in the commodity markets?   That is, the central banks’ printing presses providing the fuel for speculators?

Furthermore, we ask: who is going to finance the U.S. budget deficit when QE2 ends, especially at a sub 3.50 percent 10-year Treasury rate?  Bill Gross knows!


(click here if charts are not observable)

Category: Fixed Income/Interest Rates, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Is This Why Bill Gross Dumped Treasuries?”

  1. PDS says:

    After press reports all last week that Gross had gone to zero weight in Treasuries…which interestingly he did not publicly confirm or deny….he admitted on CNBC that he was still long $20bil in short duration Treasuries late in week……why are there no written disclosures on screen when he’s on?

  2. globaleyes says:

    The world’s largest bond fund has zero U.S. Treasuries and that’s noteworthy in itself.


    Fact: The U.S. Treasury market is the world’s largest capital market.

  3. PDS says:

    Because BR….PIMCO is one of CNBC’s biggest advertisers!!…that’s why…and when it comes to full/true and plain disclosure…PIMCO’s Bond King and subordinates are exempt!!!….go figure….answered my own question

  4. Central banking has essentially become welfare for a parasitic class and a prop for politicians (some naive, some corrupt) busy destroying any hope for good government.

    Useful investment may occasionally occur but this is purely accidental and of secondary importance to the core activity… shoveling an increasing share of wealth and credit to a happy-go-lucky global group of whizbang idiot savants having a ball engaged in zero-sum gambling… where none of the players are allowed to actually lose.

  5. curbyourrisk says:

    Barry, I would like to thank you for adding a link for those who cannot see the charts. Mny bloggers don’t do that. Here at work, they ar highly restrictive as to what you can see through graphics…I keep telling them it is necessary for me to do my job as I am an information hound,

    UNFORTUNATELY, for some reason, thsoe charts are blocked there as well…I think it is the whole wordpress thing. Sometimes, they block the dumbest things.

    Thanks for trying.

  6. anonymous says:

    The Bill Gross link is well worth reading, conclusion: the end of QE2 will require much higher yields to attract interest in Treasuries.

  7. rip says:

    Thanks for reminding people that QE2 is funding commodities speculation by insiders in a rigged market.

    Free profits. You too can be a billionaire. Just be a big guy with access to the money spigot.

    The rest of you? Lots of luck.

  8. Greg0658 says:

    I’ve got this open window and a thought – hope I don’t knock the flower pot off to the sidewalk below .. watch’g that cashTV this morning – (shouted) why is Japan in such financial woes – but it sounds like lots of stuff in world production is gonna come to a screech’g brake now ? sounds like a big thumb of casholla.

  9. RobHoo says:

    QE is going to be very tough to get out of without repercussions. BG is just making a smart play that it will not end smoothly. Wouldn’t it have been easier to place the big banks into receivership in 2008 than go through all of this backdoor bailout crap?

  10. Greg0658 says:

    ps – that cashTV – I watch like a U2spyplane – and because you all make it Real-realTV – unlike shows similar to “The Young & the Restless” (not sure thats still on – was a lunchroom must at a job years ago)

  11. JimmyDean says:

    Long YCS, odds Japan will print a lot of money are high, IMHO.

  12. mad97123 says:

    Jim Rickards believe the FEd can continue buying treasuries by rolling over 750 billion in maturing principal.


    The reason is that the size of the Fed’s balance sheet is now so vast that the reinvestment of principal payments from the existing assets will be enough to monetize a large portion of the Federal deficit without having to increase the total size of the balance sheet. The Fed’s balance sheet is to the bond market as Thomas Hobbes’ Leviathan was to society – a monarch beyond the capacity of its subjects to change. Apart from the obfuscation of words like “stocks and flows” coming from Brian Sack at the New York Fed and Ben Bernanke, there’s nothing hidden going on, it’s just a matter of math. The key fact is that while the Fed will not expand the balance sheet, they will not let it shrink either. Keeping the balance sheet unchanged means reinvesting the entire maturing principal on the existing assets. And when the assets are big enough, that reinvestment becomes enormous. This is what is behind the talk of “stocks and flows.” When the stock is large enough, it is the flow.

  13. Greg0658 says:

    like right now on cashTV talking about the full moon tonight (well next 24hrs) – not seen in 80 years (closest moon tide pull) – compounded with the rise in earth temperatures (fact heat expands) so watch out Ring of Fire .. oouuoouuoouu … and a witching Friday weekend .. oouuoouuoouu

  14. Joe Friday says:

    Gross thinks yields are down because the Fed is purchasing treasuries, so when they stop, yields must therefore rise:


    But if yields are down because we are in a liquidity-trap, that is not likely to change in three months or so.

  15. DeDude says:

    The problem is that everybody in the private market knows that treasury rates are artificially low and will go up pretty soon. So nobody will purchase them until the rates have increased sufficiently for people to think that we “are there”. In the mean time people are parking their cash in commodities creating a speculative bubble that is very bad for the economy. Ultimately we have to ask ourselves if the artificially low rates created by QE2 did more good than the speculative bubble in commodities it created did bad. Unless the Fed lose their nerve and comes with a QE3 we will first have a pop in the bond bubble followed immediately after by a pop in the commodities bubble.

  16. RW says:

    I’m strongly inclined to doubt there are enough commodity contracts out there to park even a fraction of the cash looking for a home and commodity markets are too volatile to attract money looking for safety in any case. Low carry costs fostered by ZIRP are certainly fueling those markets but while that adds $Yen and $USD carry trade to the overall govt bond demand picture I don’t think it adequately explains it.

    When 5-year treasuries are returning a negative rate but their auction is still heavily subscribed that argues for a different interpretation of the larger picture IMHO: Insufficient low/no-risk assets given the level of demand.

    Bill Gross plays in a very different sandbox from the individual investor with risk/reward calculations to match and even if I didn’t believe he was talking his own book I’d still have to think very carefully before following his lead; i.e., treasuries are unlikely to return much going forward but ROI is not the only reason for their acquisition.


  17. DeDude says:

    That is a very good point. In Q2 of 2010 “other domestic” purchased >$300 Billion and they purchased almost nothing in Q4 of 2010. If all that money had been poured into commodities we would have had a much larger bubble. I think some of it went there, and most of it somewhere else (less risky than commodities). It is always a balance between the need/desire for returns and the fear of risk. Right now treasuries are purchased almost exclusively by the Fed and by “rest of the world” (other governments) and only because they have to. If we are to believe the presented data nobody else are purchasing treasuries. Neither would I, knowing that the end of QE2 would mean an almost guaranteed loss in my investment. The money from “other domestic” currently not put into the (risky) treasuries is being pushed up the traditional risk gradient (lowering yields on corporate bonds, so that some corporate bond investors move higher up the traditional risk gradient etc, etc,). After QE2 is done there will be at least a minor snap back in all asset classes, and those that are in a bubble may have a nasty surprise.

  18. Mike in Nola says:

    The question keeps being asked about who will buy treasuries and why they will demand a higher rate after the end of QE2.

    No one seems to be asking who was buying all those treasuries before the announcement of QE2 and why they were buying when rates were lower.

    My theory is that before QE2, things weren’t looking so great for equities which meant lower returns in equities and treasuries looked better. Instead Bernanke announced he wanted to pump equities, encouraging a shift from low-yield bonds to equities. If the pump gets taken away, the situation could easily go back to pre-QE2 days. An example was this week when markets crashed and treasuries were bid up significantly.

  19. socaljoe says:

    I’m not sure how much other central banks really care what treasury rates are. I bet a lot of buying takes place to keep the dollar strong with respect to their own currency in an effort to support their exporters and employment. They are lending their customers money so they can continue to purchase their goods.

  20. psmith03 says:

    This has been one of the more instructive posts that I’ve seen in the blogosphere in a while. Why is that?

    If you look at the above chart, starting in Q3, you effectively see that from this time forward, silver and gold start their movement. The chart tells the tale of a commodity bubble forming with domestic money flowing into commodities due to the Fed pushing out domestic money.

    So if QE2 ends, we are likely looking at silver down sub $20. Even when you factor in robot trading and margin calls in this MENA-Nuk environment, we are going to see a substantial decline.

    This is a good post.