Fed Manipulation: Adding to the Bloggers' Case

A week ago a great debate was stirred in the financial blog world. As is often the case, Zero Hedge was in the middle of the fracas. Mr. Durden penned a piece that suggested that the Fed was manipulating the auctions in such a way as to benefit the primary dealers. It got to be a very sophisticated discussion that brought in some thinking from Yves Smith at Naked Capitalism and John Jansen at Across the Curve.

The debate is over is far as I am concerned. The Treasury had another successful auction today of the 30 year. But in order to make it a success the Fed bought $27 billion of 15-30 year mortgage paper. The curve is the curve. If Treasury sells duration while at the same time the Fed buys duration the net impact to the market is negligible. The near simultaneous supply and demand is expressed in the Agency MBS/Treasury swap market. The numbers are so large that only pros are allowed to play. A $27 billion swap trade only benefits the dealers.

This is timed intervention. That is a polite way to say manipulation.

Comments

[jimboy:]

I've followed the blog spat but don't really understand the intricacies of the Treasury markets. I guess underlying it all is basic question: is the government struggling to finance the deficit and keep rates low at the same time? Is it resorting to tricks because, despite the Fed's QE program, the wheels are threatening to come off ? I don't know but my gut is they will get through 2009 OK only for things to fall apart next year when they have a similar mountain of debt to sell and the stimulus effects have faded without sparking a proper economic recovery.

Aug 14 06:02 AM

[Johnc222:]

Speaking of Fed interventions....why is the Treasury taking a Divy from FRE that make no sense. The reason the Government invested into these financials was to hold them up through this tough downturn in the economy. Not to make money.

The 1.1 billion dollars the Treasury is taking from FRE would be better kept at the GSE for operational expensive. The faster FRE gets back onto it's feet the better for everyone.

Time for the Treasury to convert those perfered shares into common.

It like there takeing money from a cripple person, it's a little distasteful...let FRE keep it's 1.1 Billion for it operations.

Aug 14 06:58 AM

[Boot:]

The media is ok in advertising our collective fear of China owning a large chunk of our debt, and in turn dictating the tone of currency exchange, and political leverage.
How is it that we are OK having the FED, a private large banking infrastructure buying up all of the US treasuries. Our large banks now have the monitary leverage to dictate to our political parties and administration what we should do, who we should be allied with and/or at war with and how to run our domestic policies.

Thomas Jefferson said in 1802:
'I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered..'

Aug 14 07:31 AM

[coldcall:]

Agreed. The Fed's actions are a blatant scam in order to make it appear as if there is enough demand for the debt they are issuing.

Thats the point that was being made by Zero Hedge and its 100%demonstrably justified.

Aug 14 08:00 AM

[coldcall:]

jimboy,

its very simple. The Fed makes it known it will re-purchase the bonds issued by the government, so the primary dealers lap it up knowing they can offload them back to the originator for a quick profit.

Of course there is demand for such a racket - not necessarily demand for the bonds.

Thats the nitty gritty.

Aug 14 08:02 AM

[Windwood Tr...:]

The issuing of debt and the virtual simultaneous purchase by the feds is nothing more that spinning the wheels on the printing press to force interest rates down by devaluing the US$. The dealers and financial vehicle firms make money on the spreads- We pay the eventual price.

The process won't really create inflation until we, the public need to buy something made offshore- Things like oil, manufactured goods, clothing, autos and such.

Can you say 'screwed once again?'

Aug 14 08:33 AM

[lynnybee:]

thank you for writing that quote from Thomas Jefferson. I am learning so much from this website. When I march on Washington D>C>, that is what my big protest sign is going to read, that quote by Thomas Jefferson. Sincerely .............


On Aug 14 07:31 AM Boot wrote:

> The media is ok in advertising our collective fear of China owning
> a large chunk of our debt, and in turn dictating the tone of currency
> exchange, and political leverage.
> How is it that we are OK having the FED, a private large banking
> infrastructure buying up all of the US treasuries. Our large banks
> now have the monitary leverage to dictate to our political parties
> and administration what we should do, who we should be allied with
> and/or at war with and how to run our domestic policies.
>
> Thomas Jefferson said in 1802:
> 'I believe that banking institutions are more dangerous to our liberties
> than standing armies. If the American people ever allow private banks
> to control the issue of their currency, first by inflation, then
> by deflation, the banks and corporations that will grow up around
> the banks will deprive the people of all property until their children
> wake-up homeless on the continent their fathers conquered..'

Aug 14 10:51 AM

[shine4u:]

Good thing the Fed Res. books are closed to the public.
I do not know when growth will return, but if waiting for Obamanation to pass the dollar is in trouble.

Aug 14 01:36 PM