Treasury Market Rigging: John Jansen vs. Tyler Durden

There was an interesting and useful little dustup going on in the blogosphere Friday. Tyler Durden, who writes Zero Hedge, had a post that accuses the Fed and Treasury of conspiring to rig the market for Treasuries. John Jansen, the author of the highly respected Across the Curve blog, responds to the accusation in an uncharacteristically strong manner.

Durden, as is his wont, grabs hold of a single data point and with no supporting evidence extrapolates it in order to put forth his conspiracy theory:

The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed’s immediate prompt monetization of a large part of the directs’ balance.

It is truly a sad state of affairs when the Fed has to manipulate public and media perception in this way, and has to cover up for the complete lack of interest in US Treasuries.

Jansen is a rock solid veteran of the bond markets who writes a sober and always informative blog about daily activity. Having traded on behalf of both the Fed and Wall Street banks, he finds the charges absurd and points out that they represent nothing out of the ordinary:

I am not sure where to begin here. A blogger named Chris Martenson wrote a story which alleges that the Federal Reserve System is secretly monetizing the debt. The Zero Hedge Blog links to the story and describes it as a phenomenal piece of investigative reporting. The story also received coverage at the high profile left wing/progressive blog the DailyKos. The author there was nearly apoplectic.

The story is that the Federal Reserve in its Open Market Desk intervention today purchased $4,750,000 of the recently issued 7 year note.

The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.

So to complete the operation quickly and cost effectively, they would opt to buy that issue. Pretty neat and surgical and quick.

I guess I am not so good at marketing myself as I wrote about this on April 2, 2009. So there is absolutely nothing unique or special about today’s transaction by the Open Market Desk.

Jansen also called Durden to task for what appeared to him to be a fundamental misunderstanding of who issues debt on behalf of the government:

The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”.

Some will counter that the distinction is one without a difference but in discussing such an esoteric topic and in presenting oneself as expert on that topic one should get the facts absolutely correct. So to make the egregiously incorrect statement that the Federal Reserve issued those bonds should be a warning signal that the author has waded into an area where he lacks some expertise regarding fundamental and elemental facts.

One of John Jansen’s readers pointed out that the phrasing of Durden’s piece actually implied that the Treasury issues debt but acts as the Fed’s puppet. Jansen admitted in his comments section that he may have erred in his interpretation and apologized for the comment in his post. He may not have needed to do that.

The second comment that appears on Durden’s post reads as follows:

“by Andy Dufresne
on Thu, 08/06/2009 - 16:06
#28223

T., the Treasury issues the bonds, not the Fed:

“that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases”

not picking on you, just saying…”

A minor point perhaps but it would appear that if Andy Dufresne was quoting from the article, Mr. Durden may have altered his original post after the fact. Not good form at all if that’s what occurred.

The larger point here is not so much Mr. Durden’s penchant for conspiracy and hysteria but the fact that such behavior does little to advance a general understanding of what is truly happening. A lot less of trying to find a spy behind every tree and more of the solid sort of reporting and analysis that Mr. Jansen provides would go a long way towards making the blogosphere a more respected and trustworthy part of the media.

More here (Jansen), here (Durden) and here (Naked Capitalism’s Take).

Update: here.

Comments

[Scott Croly:]

The above three comments are accurate. While, in tactical and technical, narrow and detailed analysis, there may be some lack in appropriate textual application regarding bonds as a financial instrument, the evidence over the last nominal supply side cycle (particularly the last 8 year retail cap -- 1920s similarity), certainly in context, is clear. To wit, -$20 Trillion USD, reasonable average of public and private sector debt, 11/2008; nominal market price level prevailing over real economic value; tremendous equity/earnings divergence, domestic and worldwide; two sides of the same coin, USA: equity/entitlement, a vacuum there between -- and nature abhors a vacuum. We, the line/field/streets citizenry, protect, sacrifice, purchase for the world; watch that! (As in leadership, entitlement -- bad faith, relative to L/F/S US citizenry, USA DoD personnel quality). For reasonable predictive mechanism, see TNX vs DJIA, back to 1962, on Yahoo! and others; all sorts of Machiavellian posssibilities therein. (Apprisal: Fall, '09 potential). Some of us called 'em (events) a priori (trade them).

Aug 09 10:07 AM

[Glen L.:]

"Jansen is a rock solid veteran of the bond markets who writes a sober and always informative blog about daily activity. Having traded on behalf of both the Fed and Wall Street banks, he finds the charges absurd and points out that they represent nothing out of the ordinary"

And so, he is a completely unbiased and trustworthy reporter, in contrast to Durden and other contrarian bloggers?

Give us a break, Lindmark.

Aug 09 10:32 AM

[sethmcs:]

Like the Wizard of Oz someone has to be behind the curtin pulling the levers to achieve results. Don't you want GDP growth? Don't you want low interest rates? Don't you want senior citizens forced into the market in search of yeild? Don't you want the Dow to 12,000+? Please ignor the man behind the curtin.
Good job Tyler. Conspiracies do make entertaining reading.

Aug 09 10:36 AM

[Glen L.:]

I will add that I have no opinion on the accuracy of Durden's piece - of course he may be wrong. But this specious attack on bloggers in general is uncalled for. Anyone who knows and cares about honest reporting knows that the blogosphere is adding an indispensible element of honesty, and doing wonderful work, in stark contrast to the mainstream media with its army of pathetic political hacks, corporate shills, and lazy, third-rate reporters.

Aug 09 10:36 AM

[CautiousInv...:]

The Chris Martenson story is interesting and resulted in much bandwidth being used in the blogosphere to report and divine the story.

Recently there was a Treasury auction which included five year and seven year Treasuries and the auction was completed though it was reported that investor interest was not that great.

Weeks later and in a different venue, the NYFed in conducting routine FR Open Market Operations.....in which they buy securities to inject money into the system and sell securities to withdraw reserves from the system......purchased 48% of the seven year Treasuries issued weeks before at the Treasury auction.

This would appear to be at the edge of what is legal, but given recent events and the slimy nature of the finanical cabal ruling events in our lives it would be very tempting to believe the entire series of events was discussed, if not planned, and the broke/dealer at the original Treasruy auction was actually masquerading as the Fed.

Taking this to be the case, it would simply be backdoor monetization of debt in complicity with Treasury and the broder/dealer(s).

Aug 09 10:47 AM

[Lilguy:]

Tyler tried (again) to make his point in a blog piece today, but it seems to prove the contrary. He did a tremendous amount of data accumulation on T-bond sales this year, showing a total of $1.1T POMO transactions. After you cut away all the verbiage from his ensuing dissection of that number (lots of tables and graphs), what you come up with is that about 3% of the POMO's sales meet his criteria (losses on short turnaround sales) resulting in a "massive" (sarcastic comment) of $600 million YTD. Hell, I could do better than that, and I'm broke. Moreover, he doesn't account for the other 97% of the transactions--cudda eased, cudda shrunk money supply. Who knows?

Bad analysis accompanied by over-the-top verbiage. It's too bad, because Tyler DOES hit on some important points periodically, such as flash trading. He could do so much better if he tried.

Aug 09 10:55 AM

[skwestorange:]

Verdict: Jansen and by extension Lindmark are both way out of line in attacking Tyler's knowledge of the T market based on silly reasons. Tyler deserves a bit more respect than that.

Aug 09 11:01 AM

[Dave Wrixon:]

So the fact that the Fed has been rigging the market for just about as long as anyone can remember makes it all right does it?

Sorry, but the World is getting a bit tired of this bullshit.

Aug 09 11:07 AM

[athena:]

How long can you borrow from your Visa card to pay for your Amex bill?

Aug 09 11:22 AM

[Gardener:]

Sorry but inflation is monetization of debt.

Aug 09 11:52 AM

[The Geoffster:]

I'm not much of a conspiracy theorist, so I'll stick with the facts. The dollar has lost @93% of its value since the Fed's creation in 1913. The Fed has not proven to be a reliable steward of the nations money supply, but it has contradictory goals of promoting full employment while keeping inflation in check. Politics insures the promotion of the former at the expense of the latter. The current debt picture coupled with the notional 23T in guarantees makes it all but certain that the Fed is monetizing; albeit, stealthily.

Aug 09 12:29 PM

[NotChicken:]

IN REGARDS TO: "The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.
So to complete the operation quickly and cost effectively, they would opt to buy that issue."

If the primary dealers know that the Fed is going to be in the market for the distorted rates the Treasury is offering, Tyler is correct to write about this whether the unethical behavior/crimes happen before or after the auction.

Aug 09 01:23 PM

[Mr. Ed, Jr.:]

"Durden, as is his wont, grabs hold of a single data point and with no supporting evidence extrapolates it in order to put forth his conspiracy theory"
"Jansen is a rock solid veteran of the bond markets who writes a sober and always informative blog about daily activity"

So....Crazy blogger vs. "rock solid veteran"....

I still prefer to start my day at the crazy blogger's site.

Aug 09 01:51 PM

[Tony Daltorio:]

What does anyone expect the "solid veteran Jansen" to say --- "that I have no morals and worked for years ripping off the public and making my Wall Street masters rich." Of course he is going to defend business as usual on Wall Street.

Aug 09 02:01 PM

[mpower:]

Treasury issues bonds.
Fed buys same bonds.

Is Jansen suggesting that this less-than-covert transaction is NOT de facto debt monetization?

Durden and other digital journalists continue to piece together a nasty, corrupt puzzle (privately owned MSM refuses to cover) that is beginning to outweigh the capacity to cover-up and protect the guilty.

Funny how the MSM attempts to belittle digital journalists by referring to them as "bloggers", as if the term were somehow negative. What's funnier is how the market increasingly regards digital journalism as their primary/best source of real news, while ratings for traditional MSM outlets plummet despite their pathetic attempts to broadcast evermore irrelevant garbage.

Broadcast news agencies are competing for a shallow, shrinking pool of reality TV viewers (zombies), while productive citizens with a few brain cells are online - reading Tyler Durden @ Zero Hedge.

On the credibility scale, bloggers>MSM.

MSM have nobody to blame but themselves. Just plan the funeral already. The bloggers will outlive Charlie Gasparino, Dennis Kneale, Larry Kudlow and all the other corporate whores.

MSM RIP.

Aug 09 04:07 PM

[stocknerd:]

More posted remarks smarter than the FED and the market. Wow, you guys shouldn't be posting here you should have your web site pouring forth wisdom. You all must be rich too. Wow.
ANY post with the end of capitalism, or the Chinese are smarter, or hyper inflation is upon us, or my favorite, gold going to $2000 is wrong.

Aug 09 04:56 PM

[halamok:]

There have been also other cases,where the blogger "Tyler Durden" seems to use sensational journalism to lure visitors to his website. For example,as recently as a week ago,he posted an article on SA,where he basically makes the completely wrong assumption "the rise in stock market value has to be matched by a similar reduction in money market funds". Then he uses this ridiculous assumption to back up his claim,the Fed was behind the recent rise in the stock market!?

The question is,whether he really lacks basic understanding of how financial markets work,or whether he intentionally spreads false informations to obtain publicity.
People sometimes forget,those blogger earn their money based on the traffic their websites generate,and it is much easier to attain traffic by posting sensational,although obviously wrong articles,than by boring "nothing wrong here" articles or no articles at all.

Aug 09 06:09 PM

[conceptwizard:]

Tyler Durden has given light on a variety of issues that we followers of him would never have been aware of. If there has been a mistake made then that what what it was a mistake. I have made them and so has everyone elae here. And by this I am not saying he made one just the simple fact that the multitude of positive information coming from Zero Hedge in a world where truth is misconstrued by media machines and political BS does an amazing job of keeping the players honest. The powers that be use every tool in the shop to keep things from us we need people like Tyler and the Fight Club crew to do what they can. I for one herald Tyler for his hard work.

Aug 09 09:02 PM

[Pat Shuff:]

Things like minimal fact checking, rush to print, unsubstantiated claims are damaging to credibility in any media. It must be a heady, emotionally and psychologically altering experience to be strapped on and launched skyward in a pyrotechnic display of celebrity, seeing one's actions reflected in headlines, effecting debate and regulatory changes, in short altering history in small ways. The talk of the town. It is the rare individual who can successfully hang on to that wild ride, easily mistaking the fuse-lighting spark of original creative genius for something other. The jealousy and envy of fellow gossipers also mistaken, great talent being a gifted trait that evidently more possesses than is possessed.

The commentariat fancult at ZH, in squelching dissent from dissent, attacking those who would beg to differ, ironically shadow the movie's evolving plotline.

Aug 10 07:08 AM

[coldcall:]

I'm starting to think John and Tom protest too much. Okay so Tyler may have made some errors in his piece but the fundamental issue concerns this debt monetization.

I'm starting to think John Jansen opened up on Tyler because he being the "bond guy" should have made a noise about the shameless circular racket involving the government and primary dealers.

I like reading John's blog but I have noticed he is loathe to rock the boat, and no doubt, he cant make these sort of claims because his network of contacts are the Treasury dealers and the commercial bond market.

Or thats how i read this whole mountain out of a molehill.

Frankly Im more concerned about how we have all been ripped off by the greatest financial scam in all of history - and its almost a distant memory now.

Aug 10 09:28 AM