Fed Manipulation: Adding to the Bloggers' Case

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Includes: TBT, TLT
by: Bruce Krasting

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.