Home > Main > Fed buys 10% of the “Float”: The Bond Vigilante capitulation is coming very soon

Fed buys 10% of the “Float”: The Bond Vigilante capitulation is coming very soon

January 17, 2011

Remember that post about buying Treasuries on December 13th? Looks as though it may have been very close to the bottom in Treasuries. The reason for this is the Fed started its huge purchase program. My idea was to sell the rumor, buy the news, simply because the Fed announced will be purchasing titanic amounts of Treasuries every day for the next 6 months. Here is an updated chart, with some nice circles to help identify the Fed actions.

Now we have more information on how much the Fed will purchase in January and February.  The feds new Treasury Purchase Schedule is up and you can takea look at it here.  Their fingers must get tired from entering so many buy orders.  My initial calculations were that the Fed would be purchasing the equivalent of 42,857 Treasury futures every day until July 1st, but that did not account for the additional purchases resulting from the Agency debt and Agency MBS principle payments.  The true purchases by the fed look to be even more than I originally calculated.

Tyler Durden had a funny photo of the Fed guys working in a little room without a Bloomberg Terminal.  He thought it was comical that they were working without a very important data source. But why bother with a Bloomberg?  There will be no information that will cause the Fed to hesitate when entering that buy order.  Just keep buying those Treasuries until the market closes, and then come in and do it again tomorrow.

When will people get tired of selling bonds to the Fed and start buying them right along side the Fed?  Very ,Very Soon.

Take this interesting chart from from Political Calculations (Via the Big Picture) , that accurately points out we have $13.5T of debt issued.  It also points out to the observant eye that at least 40% of this debt is owned by institutions that will never, ever sell it.   Add up China, Japan, U.S. Civil Retirement Fund, U.S. Military Retirement Fund, and the Social Security Trust Fund to get just over 40% of U.S. debt holders who will not be selling it any time in the next decade.

This 40% does not include the Oil countries, or any U.S. pension funds, or Brazil. The real number of unavailable U.S. debt is probably higher than 40%, but we can use this as a good start.

So to be realitic about the “float” of U.S. debt, we need to subtract 40%.  Cut that $13.5T down to $8.1T as the max available to purchase.  The Fed will be purchasing about 7.5% of the total “available” U.S. debt with the $600bn purchase program.  But, this 7.5% does not include the QE I purchases, or the extra purchases due to Agency payoffs of some sort.  The Fed doesn’t have to file a 13-D for this, but wowsa, this program is just huge. If we include the Agency MBS and debt, the Fed must be purchasing 10% of the available “float”!

Very soon, the BVs will figure out while their heart says “Sell”, their account says “Buy”. These people are not stupid – no they take their shots wisely.  While inflation seems to be rising very slightly, getting to 5% inflation will take years at the current pace.

I expect this crew to regroup soon and get with the fed program.  It is an easier trade, plus, they can actually push the price up ever farther. This would help them start a new round of selloffs later when the fed pauses its purchases – they can turn from net longs to net short very easily.

Look for the buying of U.S. debt to start in earnest in the next few days.

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