Posts filed under “Think Tank”

Is The Market About To “Undo” The Federal Reserve’s Purchases?



James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors.

Prior to founding Bianco Research, Jim spent time in New York as Market Strategist for UBS Securities, and Equity Technical Analyst at First Boston and Shearson Lehman Brothers. He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA).


Is The Market About To “Undo” The Federal Reserve’s Purchases?

  • – Vanguard to Use Floating Benchmarks
    Some index funds to use Barclays Capital float-adjusted bond indexes
    Several of Vanguard’s index funds will be switching to Barclays Capital’s float-adjusted bond indexes from the Barclays indexes that currently serve as the funds’ target benchmarks. According to Vanguard, the new benchmarks better represent actual liquidity in the marketplace and should help insulate Vanguard’s bond index funds from securities whose prices may be distorted by significant reduction in supply as a result of Federal Reserve buybacks.  The term “float” refers to the amount of a given security available for public trading; it excludes amounts such as those held by company insiders, affiliates, or governments. “We believe that float-adjusted indexes more accurately represent an investor’s opportunities in a particular market,” said Gus Sauter, Vanguard’s chief investment officer, in a release announcing the shift. “Whenever possible, Vanguard’s index funds will seek to track benchmarks that follow this best practice.”
  • Dow Jones – Vanguard Shifts Bond Index Due To Fed Buys
    The Vanguard Group plans to switch 12 of its bond index funds to benchmarks designed to exclude the hefty chunk of bonds the government has purchased through its buyback program. Other fund providers may follow suit. Eight existing and four proposed Vanguard bond index mutual funds and exchange-traded funds will switch to tracking the Barclays Capital U.S. Aggregate Float Adjusted Index and its sub-indexes by year’s end. Unlike the indexes now in use, the new indexes adjust for so-called float, or the number of shares currently available for trading, a practice more commonly associated with stock benchmarks that seek to disregard shares owned by governments, company insiders or corporations, which have no intention of selling. Vanguard says the new bond benchmarks more closely represent actual liquidity in the market, and thus should help insulate the funds from price distortions created by the Fed’s buybacks. The money manager says it expects no significant change in the risk attributes, including duration, of the bond index funds.Barclays – (July 30) Barclays Capital Announces the Creation of the US Aggregate Float Adjusted Index

    • A New Benchmark of the Dollar-Denominated Investment Grade Bond Market
      Barclays Capital, the investment banking division of Barclays Bank PLC and publisher of leading broad market bond benchmarks, today announced the launch of the US Aggregate Float Adjusted Index, a new benchmark of the dollar denominated investment grade bond market that excludes Treasuries, agencies and MBS held in Federal Reserve accounts. The new index will be published alongside the firm’s other leading indices, including the Global Aggregate, US Aggregate, Pan European Aggregate and Asian Pacific Aggregate. With an inception date of July 1, 2009, the new benchmark will offer investors a rules-based market value weighted index as a complementary alternative to the flagship US Aggregate Index, which includes agencies and MBS held in government accounts. The underlying constituents of the US Aggregate Float Adjusted Index will be the same as those of the US Aggregate Index, but net purchases and sales by the Federal Reserve will be excluded from the float adjusted index on a monthly basis, thereby reducing the market value weight of these securities. Sub-indices of the new index will also be available, including a US MBS Float Adjusted Index created specifically for mortgage investors.
  • Comment

    We discussed this back in May and June and said:

    The indexers are correct in including the MBS bought by the Federal Reserve as part of the float if they assume these securities will be sold back into the market once the economy improves. For now, this seems to be a likely scenario once the Federal Reserve wants to unwind its balance sheet.  See the story above as it sure implies the Federal Reserve is going to eventually see these purchases back into the marketplace.

    If, however, the Federal Reserve changes its mind and decides to hold these securities to maturity, then the float has been permanently reduced and the indexers have their weightings wrong.

    Apparently bond managers are now concluding the Federal Reserve is not going to sell their holdings acquired through their QE operations.  So, they are demanding the calculation of, and in the case of Vanguard, the adopting of  “float-adjusted” indices as their benchmarks.

    If this is the beginning of a trend, it has the potential to be a big deal. As the Federal Reserve buys, weightings in the float-adjusted indices fall (see the first table below).  Managers seeking to keep their weightings constant will then sell the same securities the Federal Reserve purchases.  Effectively this “undoes” the Federal Reserve purchases and defeats the purpose of the program.  In the end, it merely changes the ownership of securities and does little to push yields lower.

Category: Federal Reserve, Think Tank


The Final reading of the Sept U of Michigan confidence number was 3 points higher than expected at 73.5, up from the initial figure of 70.2 and from 65.7 in Aug. It’s at the highest level since Jan ’08. Both Current Conditions and the Economic Outlook rose from the preliminary report and from Aug. Of…Read More

Category: MacroNotes

SPX Top ?

For the past 42 years, Bob Bronson has applied a disciplined, analytical approach to understanding and forecasting capital markets and advising investment advisors. Through his rigorous analysis of capital markets and economic data and his background in mathematics and financial economics, he has developed a number of unique investment concepts and refined portfolio-management techniques that…Read More

Category: Technical Analysis, Think Tank

Durable Goods

August new orders of Durable Goods unexpectedly fell 2.4% headline vs a consensus rise of .4% and were flat ex transportation vs expectations of a gain of 1%. The prior month was revised a hair. Non Defense Capital Goods ex Aircraft, the core cap ex component, fell .4% after a 1.3% drop in July. Vehicles…Read More

Category: MacroNotes

Who? What? When?

Who? The Fed, the ECB, the BoE, etc, What? Unwind the large amount of policy accommodation. When? We don’t know but when the time comes whenever that might be. Fed Gov Warsh in the WSJ laid out what’s ahead for the Fed and said they will be aggressive in raising rates when the time comes….Read More

Category: MacroNotes

Aug Existing Home Sales and what happens next?

Existing Home Sales totaled 5.1mm annualized, 250k less than expected and down from 5.24mm in July. The chief economist placed some blame for the shortfall in closings relative to expectations on “rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process.” The NAR said 30% of…Read More

Category: MacroNotes

Government Spending is the Solution–Not the Problem

Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc and a Fellow with the Economists for Peace and Security ( He is a frequent contributor to the blog, Credit Writedowns, and the Japan Policy Research Institute (


Government Spending is the Solution–Not the Problem

Tens of thousands of people marched to the U.S. Capitol on Sunday, carrying signs with slogans such as “Obamacare makes me sick” as they protested the president’s health care plan and our so-called “out-of-control spending”. The marchers were chanting “enough, enough” and “We the People.” Others, channeling their inner Joe Wilson, screamed “You lie, you lie!” while waving U.S. flags and the now omnipresent images of Obama as Hitler, Obama as the Joker, along with the usual placards decrying the “march to socialism”.

And the reaction against the expansion of the state is by no means restricted to America.  According to the London Sunday Times, voters are overwhelmingly in favor of cutting public spending rather than tax rises to close the budget “black hole”. Sixty per cent want to shrink the size of the state to curb the £175 billion deficit amid mounting government disarray over the public finances.  Naturally, there is also growing support for this line of thinking in the financial community, despite having successfully received tens of trillions of dollars, even for deeply insolvent financial institutions.  The large banks and brokers lobbied for special treatment and got it.

To the extent that government spending is being used to prop up these economic zombies, I sympathize with the prevailing orthodoxy about wastage of our money.  However, the fasct remains  that the principle opposition to increased government spending is predicated on the simplistic notions about  fiscal activism. We need to get past the deficit myths and wrongheaded notions of “national solvency” so that we can move forward in other areas.  In the words of economist Bill Mitchell of the University of Newcastle, Australia:

“Within a modern monetary economy, as a matter of national accounting, the sovereign government deficit (surplus) equals the non-government surplus (deficit)…In aggregate, there can be no net savings of financial assets of the non-government sector without cumulative government deficit spending.  The sovereign government via net spending (deficits) is the only entity that can provide the non-government sector with financial assets (net savings) and thereby simultaneously accommodate any net desire to save and hence eliminate unemployment.”

A seemingly growing populist drive toward a return to fiscal orthodoxy follows a stream of similar pronouncements from Wall Street, the Fed, the European Central Bank, the OECD, all of whom are legitimizing a campaign against further public spending and mobilizing support for “exit strategies” as they confidently pronounce the end of the recession. Implicit is the view that somewhere along the line ongoing government involvement in the “free market” reaches a tipping point where fiscal “intrusions” no longer act as a stabilizing force, but serve to impede the natural tendency of the market to equilibrate to recovery. The major hypothesis is that anytime the government is involved in the economy, eventually things go bad.  But markets do not self-regulate in ways that avoid major financial upheavals and activist government is required as a counterbalancing force.

President Obama himself has legitimized this line of thinking himself, committing himself to the goal of “fiscal sustainability” (whatever that means) as a medium term policy objective.  He said as much last Wednesday again during his speech on health care.  Having failed to understand what got us into the crisis, and equally having failed to appreciate the extent to which government spending actually prevented an economic catastrophe along the lines of the Great Depression, our policy makers who are championing this move toward neo-liberal fiscal orthodoxy are almost certain to drive us into the next recession if they take these demands to shrink government too aggressively.
Deficit hawks fail to understand that not all debt is created equally. As James Galbraith, L. Randall Wray and Warren Mosler have argued, there is no legitimate analogy to be drawn about the budgets of the government, which issues the currency, and the budgets of the non-government sector (households, firms etc) which uses that currency. The former does not have a financial constraint and can spend freely whereas the latter has to “finance” all spending either through earning income, drawing down savings or liquidating assets.

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Category: Bailouts, Economy, Think Tank

Jobless Claims

Initial Jobless Claims totaled 530k, 20k less than expected and down from 551k last week which was revised up by 6k. It is now at the lowest level since early Jan not including the July distortions. Continuing Claims fell by 123k and was 45k below estimates BUT those that are receiving Emergency Unemployment Compensation rose…Read More

Category: MacroNotes

jobs, Housing and the Fish That Saved Pittsburgh

Following yesterday’s negative outside day in the S&P’s (trade above the prior day’s high and close below the prior day’s low and sometimes a technical short term reversal sign), the market faces the two major big picture issues that our economy has, jobs and housing. Initial Jobless Claims are expected to total 550k vs 545k…Read More

Category: MacroNotes


The FOMC statement was little changed relative to the August meeting. The data “suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased.” They follow with the caveats of strained household spending due to “ongoing job losses, sluggish income…Read More

Category: MacroNotes