We’ve updated our chart illustrating the Fed ownership of the U.S. yield curve.   We’ve also included the percentage of total maturities the Fed owns in each year from the April 2011 data and December 2010 data.   Most of POMO buying since December has taken place in the 7-9 year maturities.  In December, for example,  the Fed owned 13.4 percent of the bonds maturing in 2019 compared to 31.6 percent today.

We’re with the conventional wisdom of no QE3, no massive flight to quality, or a miracle long-term budget agreement.  We therefore expect continued upward pressure on interest rates.   We recently posted our Flow of Funds analysis showing that the Federal Reserve and foreign flows effectively funded 100 percent of the U.S. budget deficit in Q4 2010.  Interest rates need an upward adjustment to attract new non-official buyers, which could also put a short-term lid on commodities, in our opinion.   We’re on the same side as the Bond King.

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Category: Federal Reserve, Fixed Income/Interest Rates

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.

17 Responses to “Chart of the Day: Fed Ownership of the Yield Curve”

  1. Greg0658 says:

    “We’re on the same side as the Bond King.” .. I heard he sold everything – don’t you have to own a note to sell it in the future (if the printing presses stop) .. and if you don’t own notes – you must own stuff (or those corporate notes under those corporate rules)

    (me) I’m sorta kicking myself for owning stuff these days – like books & tapes & chairs & tables & pictures & cameras & computers & aquariums & land line instruments (you all would put me in that 70% consumer class) .. so your welcome – I got the game late in life … lucky for me I have a healthy siberian husky and a little red wagon too (wait I need a mule – they eat grass)

  2. cjcpa says:

    I read the Hussman article. as I do weekly, mostly.

    He does a convincing job of laying out the situation with expanded money supply, and liquidity preference and the resulting consequences of a rise in interest rates.

    This is really a question for BR- How does that math reconcile with the ideas at CalcRisk, and here, that there can be no inflation without increasing wages. I understand that. And Yellen says Transitory.

    So, to attempt to reconcile it myself, is the resulting inflation according to the liquidity preference going to happen, but be a one-0ff or ‘transitory’ (but yet lasting) adjustment? I.e. as people try to dump their dollars to get something else, that demand will push prices up… of everything but houses, until we all settle at a new point on the curve with more dollars invested in other things, and less cash. Thus, a transitory adjustment will occur. Stuff will cost more in dollars. Dollar will therefore buy less, and look like inflation. But there will not be an inflationary spiral b/c of slack labor markets.

    Or – there will be inflation, but there won’t be.

    Obv, my head spins as I try to connect the dots, as it were.

    cjc in pa.

  3. holulu says:

    What higher interest rates would do to Gold & Silver ?

  4. dead hobo says:

    Flight to safety should follow end of debt monetization when market corrects. Money has to flow somewhere and the pattern capital preservation will continue without regard to the long term consequences. Afterwards, rates will rise. This should be the last predictable e flight to safety. After flight to safety ends, rates will certainly rise and equities will return to a stock pickers place of business, unless a new significant money dump occurs. Then it will be another liquidity play.

  5. rustum says:

    Taibbi new article.

  6. knownothing says:

    i’m a long time listener, but a first time poster. sorry about the cliché.

    i’ve been grappling with this question for a while. between the maiden lane purchases, and QE1 and 2, etc, when the federal reserve receives money for a payment on a bond, are there any rules governing what the fed has to do with that money?

    obviously, if the fed sits on these receipts, it could act as a potential avenue for a absorbing excess money supply in the future. whether they do that remains to be seen. OR can they legally use that money in POMO? what i don’t get, for the life of me, is how you count that in terms of money supply?

    sorry, if the question seems pedestrian. i’m just some little guy trying to make sense of it all.

    i’ll take my answer off the air.

    by the way, thanks barry (and everyone else) for all the food for thought.

    knownothing

  7. socaljoe says:

    I tend to agree… however… I have learned to never underestimate the stupidity of the investing public. If there is a sell-off in risk assets, will they seek shelter in the “safety” of US treasuries. A reflex learned from 30 years of conditioning is hard to overcome.

    I also wonder about the central banks of countries which depend on exports to the US. They may be concerned with domestic employment and social unrest more so than with the investment merit of their US treasury purchases.

  8. VennData says:

    No “…or a miracle long-term budget agreement. ..” you say?

    If you just raise everyone’s taxes to ninety percent of their income, but put it off twenty years, the numbers work!

    Oh, and that’s what’s going to have to happen if we don’t raise taxes pretty darn soon. I vote we get them back to the Clinton-era rates when the economy boomed and we paid down the deficit, before the US drank the Bush Kool Aid that got us into this mess (and others.)

  9. KJ Foehr says:

    @ knownothing

    “i’ve been grappling with this question for a while. between the maiden lane purchases, and QE1 and 2, etc, when the federal reserve receives money for a payment on a bond, are there any rules governing what the fed has to do with that money?”

    The questions you pose are good ones and much more difficult than you imagine, IMO. I wonder if anyone really knows the answers.

    Here is my layman’s guess: Rules? Ha! Ben can do whatever he wants to with the interest receipts and any other money he has or creates.

    The Fed chairman has been described by some as the most powerful man in the world. This appears to be not far from the truth. He holds the power to influence presidential elections with monetary policy, to create money at will, and to levitate enormous asset markets with that money. He wields the power of deflation and inflation, and essentially controls the throttle of the economy of the USA and indirectly the ROW as the USD is the world’s reserve currency and its value has profound effects on commodity values (it appears).

    The former Goldman CEO, Hank Paulsen had to ask Congress for the $700B in TARP bank bailout funds. But Ben didn’t ask anyone for permission to print whatever it is, over $1T I think, in QE funds. And that is just the last in a series of unprecedented actions he has taken since he first learned that the subprime mortgage problem was not contained (sardonically speaking – I believe he knew there was big Trouble right here in good old USA long before then, as did Greenspan before he jumped the sinking ship). So he has proven he can do what he wants, print money, “loan” it to whomever he wants to, and probably destroy it, if and when he ever gets to the point of being able to reverse course (unlikely anytime soon, IMO.)

    The effect on the money supply of interest receipts? I don’t have a clue, and don’t watch it. Others here probably have thoughts on that. What is clear is there is mucho dinero being pumped into the economy. What is less clear is where it is going, can it be stopped, and will it ever be reversed. The interest collected though IMO, is peanuts in this massive monetary policy experiment.

    My question has been, what will he do with the many $100s of billions in Treasuries? Eat them? Sell them? Is he bound by law to sell them or not? And if so, when and to whom? And what will be the impact of selling them on rates and the economy? Not good, I expect. I predict he sleeps on them for a very long time; perhaps his successor will be the one to decide what to do with them. At that point they might be burned in the Fed’s basement furnace when noon is looking. A few $100 billion now and a few hundred billion later, and in a while they have all disappeared. The money he created however has not.

    (BTW, nobody answers my questions here either — those that know ain’t talkin, and those that talk don’t know, I guess. You got to do the research yourself it seems or just keep wondering and asking…)

  10. KJ,

    w/o an Audit, or a series of, continuing, Audits, this: “Rules? Ha! Ben can do whatever he wants to with the interest receipts and any other money he has or creates.” –might, as well, be the Case.

    also, most of these: “those that know”, tend to think that ‘staying Quiet’ gives them an edge..

    too bad, they haven’t, fully, thought that out..

    but, at the EOD, this: “You got to do the research yourself..” is, never, a bad Policy (unlike QE, QE II, + n…)

  11. ht02135 says:

    look at market ownership as maturity extends -> shrinking market ownership.

  12. Bill Wilson says:

    I wonder if the next year will look much like the last. QE2 ends, asset prices fall, QE3 begins. That seems a little too obvious.

  13. KJ Foehr says:

    @MEH

    Yes, that is further proof of the Fed’s supreme authority. They are beyond the oversight of anyone apparently. But that gives them the independence to do what needs to be done outside of political influences, or so the theory goes. But I always wonder just how independent of the administration’s influence they really are, especially regarding presidential election cycles.

    I am not a libertarian, Fed hater myself, but I do listen to their arguments and see some merit to their principles. My problem is I usually see some merit in both side of a debate! I do not fit into either right or left, and being in the middle, as we know, is about the same as being nowhere. Where does a mostly fiscal conservative, but socially liberal person who mostly agrees in principle with government helping people but disagrees with the current design of our welfare and entitlements system fit into our right left dichotomy, I often wonder.

  14. blackjaquekerouac says:

    you’re agreement with “conventional wisdom” makes no sense. if treasuries “continue to be under pressure” what possible reason would the Fed have to stop monetizing the debt? unless of course you believe the Fed when they say the reason for their success is that the stock market is higher which of course is a bald face lie. more to the point with a huge chunk of europe’s gold in the USA’s pocket due to the massive bailouts of two hugely bankrupt European financial institutions and an entire Japanese economy on the brink of collapse due to the greatest industrial catastrophe in human history and i think any sane person could be forgiven for regarding the jettisoning of QE now as anything but conventional thinking let alone wisdom.

  15. Permabear says:

    The Fed is currently buying around 70 percent of Treasuries being issued according to most estimates. The liquidity that the Fed is injecting in the economy, through their asset purchases appears at least to be contributing to the stock market run as well as commodity rise. No one really knows what the consequences will be of the end of QE2. The last time that QE1 ended, stocks tumbled and the economy sputtered. My view is that the economy is totally dependent on QE just as a drug addict needs their fix. My prediction is that QE3 will be implemented by the end of the year.

  16. KJ,

    as you understand, this http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=value+of+Critical+Thinking is, indeed, Key.

    and, as may as well be noted, much has been devoted to delineating the false dichotomy of the “Left-Right”, so-called, ‘Political Spectrum’..

    here: “…Where does a mostly fiscal conservative, but socially liberal person who mostly agrees in principle with government helping people but disagrees with the current design of our welfare and entitlements system fit into our right left dichotomy, I often wonder…”

    simply, if We were within the structure, provided for by the Constitution that, ostensibly, governs us, then, the answer would be easy: “In one of the several States (whose Government’s policies most mirror your own desires)” — the benefit of a Republic.

    but, now, as you do, one should wonder..

    We should get back to simpler conceits, maybe, then, We’d see that the choice is, really, between Individual Liberty v. Totalitarianism (still/again) ..

    w/that, the FedRes is powerful force of/for Totalitarianism..

    http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Federal+Reserve+Totalitarianism

    LSS: ‘they’ need us, far, more than We need them..it’s, quite, long past time that it be brought to heel..
    their Record, by any measure, has been atrocious –costing way too much, to too many, for the benefit of far too few..at the min.

    http://mises.org/store/Money-Banking-and-the-Federal-Reserve-P269.aspx?gclid=CPGbhpvNmagCFcTd4AodxX3qDQ
    ~~
    and, as a, total, aside..
    http://evolvify.com/darwin-epigenetics-false-dichotomy/

  17. andrewp111 says:

    KJ Foehr, the Fed is a government owned corporation. At the end of each fiscal year, the Fed pays 94% of its profits back to the Treasury, and the other 6% goes to the member banks. With the Fed owning the T-bills, the Treasury is essentially paying interest back to itself. That is what is meant by “printing money”.

    Of course, if the Fed takes large losses (like if it sells T-bonds after a sharp interest rate rise or if banks default on loans from the Fed), the interest paid by the Treasury goes in to fill that hole and there is no profit.

    Since its creation, the Fed has never failed to make a profit.