Tuesday, December 4, 2012

QE Quandary for Investors: Shortage of Treasury Bonds?

News at Bloomberg/Business Week on a potential upcoming "shortage" in US Treasury securities as Bloomberg asserts here that the Fed intends to purchase Treasuries at a rate equivalent to 90% of all new net US Treasury bond issuance.

From Bloomberg:
The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.
I do not follow Bloomberg's or JPM's logic here as based on their projected annual net total of $1T of new Treasury securities to be issued next year, that equates to about $80B/month of net new issuance.  90% of that rate is about $72B/mo. which is well in excess of the Fed's current purchase rate of $45B/mo.

Also, as the Fed has not indicated that they intend to expand their Factors Affecting Reserve Balances by the creation of new reserves, all the Fed can be doing, net, is just purchasing newly issued US Treasury securities with balance sheet factors that have been made available by Treasury redeeming securities previously held by the Fed.

The Fed's total Factors Affecting Reserve Balances haven't changed in the last 6 months; neither has the Fed's total holdings of US Treasury securities.

As long as the Fed is not expanding the total amount of UST securities on it's Factors Affecting Reserve Balances report, the Fed cannot logically be buying net new US Treasury securities, but rather, "rolling over" balances made available by redemptions or sales of it's own shorter dated securities.

So Bloomberg/JPM analysis looks misguided and potentially damaging to investors; or I am unawares of a new Fed policy to expand it's Factors Affecting Reserve Balances.

Seems like Bloomberg/JPM are not aware of Mike's recent reporting on the fact that the US Treasury routinely issues 10's of $Trillions of total US Treasury securities every year.

Bond Investors: Beware!

1 comment:

Mike Norman said...

Now Bloomberg turns bullish on bonds due to this shoddy analysis and supposed shortage? Makes me want to short Treasuries!