Home > Main > Fed to buy the equivalent of 42,857 bond/note futures every day until June 30th, 2011

Fed to buy the equivalent of 42,857 bond/note futures every day until June 30th, 2011

December 22, 2010

Fed Employees prepare to back up the truck and accept delivery of Treasury Bonds and Notes

Just a quick FYI: The Fed will be buying lots and lots of Treasuries over the next few months.

$600bn of Treasuries is the equivalent of 6,000,000 futures.  I estimated 140 trading days because the Fed Started Dec 15th or so.

6,000,000/140 = 42,857 futures every day.

Most trading is short term.  Positions for many traders are exited by the end of the day. Even the ones that are carried overnight are frequently for short term hedging or trading.

The “true volume” – or the amount of volume that is real hedging or long term positions – is a fraction of the total volume.  I’ll call it 25% for the 10 year.  Current volumes in the 10 year are running around 800,000.   That is 200,000 contracts a day in “true volume”.

If we consider 60% of the Fed purchases to be in 10 year equivalents, we will have roughly 26,000 futures every day on the long side.  That means the Fed is will be buying about 13% of the total real volume every day on the long side extra for the 10 year for the next 130 trading days.

The current open interest for the 10 year is 1.3M.  If the Fed purchased 10 year futures, held them to expiration, and then took delivery, it would add about 1.6M to the open interest in the 10 year.

It just seems to me like people are vastly underestimating the power of this purchasing program.  “Sell the rumor, buy the news” is the scenario most likely to happen with QE II.

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