2013/05/31

Operation Deceit

 Do you remember Operation Twist Redux from the Fed?

It seems to me that the Fed just launched another Op, but kept silent about this one. They let Goldman Sachs announce it on behalf of them.

Let me explain: I think Fed has an ever growing appetite for long-term US Treasury, as explained previously (la géoéconomie des Bons du Trésor U.S., in french). Previously on Desperate Fed, they swapped their short-term UST to buy long-term ones. Let see the graph for the shares of UST with different maturities held by the Fed since 2003:

U.S. Treasury held by the Fed, by maturity slice  [blue: maturing in over 10Y; red: over 5Y to 10Y; green: over 1Y to 5Y; orange: over 3M to 1Y; violet: over 15d to 3M; grey: up to 15d] over U.S. Treasury (all maturities), in %, lhs; purple: 10-Y UST yield, rhs; updated weekly

This replacement of short-term treasuries by long-term bonds has begun since december 2007. After Operation Twist Redux, no very short term treasuries remained, and medium term 1Y to 5Y maturities were historically at their lowest (22%). Swap must end, and Fed should buy LT treasuries on the secondary market... but the others current UST holders do not want to sell them because of the always declining yields since 10 years (means price is up). 
The largest UST holders are currently :
  • Rest of the world -- Official institutions : 34.5% of UST shares (in notional value)
  • Fed (not including SSTF special issues) : 14.4% 
  • Rest of the world -- Private investors (i.e. foreign hedge funds) : 13.4%
  • Household sector, not including Savings Bonds -- (i.e. domestic hedge funds, private eq. funds) : 7.4%
  • Money market mutual funds : 4.0%
  • State and local gov. : 1.9%
What better to do then, but to deceit private investors (funds) to make them sell their UST? 
If we follow the new trend in yields since some days (graph below), UST prices are down and this will make the portfolio managers uncomfortable at the end of the second quarter; GS gently advice them to sell before being hurt. But... who will buy them if many obey, except the Fed and its primary dealer banks who know what's behind this move? 

UST yields for different maturities since 2006; updated daily

Let's wait until the end of Q2 (or Q3, depending on the success and duration of this Op) and have a look then on the TREAST graph of maturity slices to verify my hypothesis: shares of long term UST should have increased. And yields will decreased again.