Treasury Bond Riddle Solved?

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Farmer Brown's picture
Farmer Brown
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Treasury Bond Riddle Solved?

There has been a lot of talk recently all over the blogosphere regarding the "mysterious" source of all the money absorbing the record-smashing amount of Treasuries being auctioned this year.

I tagged the article below onto the bottom of the DD today, but upon re-reading it, I decided it might deserve its own thread.

This article, if accurate, solves all the riddles and mysteries regarding the source of Treasury bond purchases.  Here is the beginning of the article, with my two cents following underneath. 


Bailout Banks Buying Treasuries Help Keep Rates Low (Update1)

By Liz Capo McCormick

Aug. 3 (Bloomberg) -- U.S. lenders bailed out by the government are returning the favor by stepping up purchases of Treasuries, helping to temper a rise in borrowing costs.

Bank holdings of U.S. government securities are up 15.6 percent from a year ago, almost double the average annual growth rate of about 8 percent since the Federal Reserve began tracking the data in 1973, according to the Greenwich, Connecticut-based trading and research firm MKM Partners LP. Purchases may accelerate as lenders look for places to park rising deposits as sales of federal agency debt of companies such as Fannie Mae and corporate bonds slow.


You can view the whole article here:

The following points jump out at me and explain how it is possible for the US to auction over $1 trillion in the first half of this year:

1)  US savings rate suddenly at 6% vs. 30 years of being zero (and sometimes negative).  We constantly hear some ask where is the demand for Treasury bonds going to come from if US imports are down and dollars are no longer flowing to the foreigners who have traditionally lent us the money.  Well, if that money stays at home, then we will lend ourselves the money, which apparently we're doing!  Note the article cites:

Americans are hoarding money as job losses mount. The U.S. savings rate reached 6.9 percent in May, the highest level since 1993, as consumers curtailed spending. It was as low as zero as recently as April 2008.

Reflecting their newfound frugalness, Fed data show households more than doubled their holdings of Treasuries in the first quarter, to $643.9 billion from $266.6 billion in the final three months of 2008.

Wow!  $643.9 billion.  That's a pretty good chunk of the $1 trillion already raised.  I would really like to know how this number compares to the decrease in US$ outflows. 

2)  Almost so plainly written that it screams, "the answer is right in front of you, stupid!":

Meanwhile, those savings and the $1 trillion pumped into the banking system over the past year by the Fed through bond purchases and emergency loans led banks to accumulate excess reserves of $744 billion. Excess reserves, the cash banks keep on deposit above what they are required by the central bank, averaged $1.7 billion for the five years prior to August 2007.

and then this:

The federal funds rate averaged 0.16 percent over the last month, while the two-year Treasury yield averaged 0.9929 percent in the same period. The difference of about 0.83 percentage point compares with an average of about 0.26 percentage point this decade.

Two-year notes have handed investors a return of 0.4 percent this year, compared with a 9.9 percent loss for holders of 10-year securities, Merrill Lynch indexes showed.

“The steep yield curve is good for net interest margins and will allow banks to recapitalize themselves over time as well as help the Treasury finance large increases of government spending,” said Darda of MKM.

So we have excess reserves of $744 billion compared to a prior 5-year average of $1.7 billion, a 437-fold increase!  As the article suggests, business and consumer loan demand is dead, so of course there is plenty of juice left over to buy Treasury bonds.

Moving on to the second quote above, even if those reserves are not enough, banks can borrow from the all-too friendly Fed at below-Treasury bond rates, buy Treasuries, and pocket the difference!


Would love to hear some thoughts on all this.  If this is all true, it is no longer any mystery to me where Treasury bond demand is coming from.  I need to dig up that Sprott paper from a few weeks ago to see if they discussed these topics.




JAG's picture
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Posts: 2492
Re: Treasury Bond Riddle Solved?

You nailed that one Patrick. You were proposing this particular theory weeks ago. I wish I had a better understanding of the treasury markets so that I could have a conversation with you about this. I wish I could refute the "you scratch my back, I'll scratch yours" relationship between the government and the shadow government (banks), but I can't.

What do you think the ramifications of this deal are? 

Thanks for your work...Jeff

mpelchat's picture
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Re: Treasury Bond Riddle Solved?

Good stuff Pat,

Let me get this straight in simple terms, banks get money from the Fed and pay 0.16% than they can buy treasuries that yield 0.99% from the government.  When they should have lost 9.9% on securities but we (the people) could not let them fail.

This is a way to hide quantitative easing by sending money through the banks instead of directly through the Fed to the treasury, then banks make money on your money, as well as the Fed makes money on our money and than when the money runs out (from the banks) quantitative easing starts again directly with the Fed.

WOW, I thought the mob was good at money laundering. Guess they have competition.

investorzzo's picture
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Re: Treasury Bond Riddle Solved?

Fractional reserves, from bank loans to Fed loans.......those fractions add up!  And a pittance to the saver (customer) and out right thievery from the Fed, Wall street, banks, government of your future.

Time to end the Fed..........


homestead's picture
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Re: Treasury Bond Riddle Solved?

This might not have anything to do with what you're all discussing, but maybe it's related in some way and so I'll share it.  Our bank sent an 8 page (legal size paper) document to us last week, "Rules and Regulations to Deposit Accounts; Arbitration Provision".  In the first paragraph, they inform you that when you originally signed your account agreement, that date now becomes the date you accept this new agreement, which replaces all previous agreements.  Then in the 29th section, there is this odd bit of information:

"29.  Sub-accounts.  We may at our option establish two (2) sub-accounts for each transaction account.  If we decide to establish sub-accounts, one sub-account will be a transaction account and the other will be a savings account.  We may transfer varying portions of your account balance between these two sub-accounts, but we will report to you only your total account balance, which will be unchanged by the establishment of the sub-accounts.  The interest you earn on your interest checking account, any minimum balance requirements for your account and your use of your account will not be affected in any way by our establishment of any sub-accounts."

I'm guessing that this is some sort of accounting gimmick that they're going to use to make it look like they're carrying more reserves?  It just seemed odd when I read it.  Looks like they're splitting our checking account money into 2 parts, but it will all be done behind the scenes and won't affect how we use the account or what we see on our statements.

investorzzo's picture
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Re: Treasury Bond Riddle Solved?

Just how much Wall Street makes on trading with customers, including the Fed, is hard to calculate, dealers say.

Debt trading profits are especially tricky to calculate but there is no doubt that they grew as a percentage of Wall Street revenues in the second quarter.

Goldman Sachs made $6.8bn on its fixed income, currency and commodities trading in the quarter, which David Viniar, chief financial officer, attributed to “historically wide margins” and a “fragmented credit environment”. 

Such lucrative conditions are in marked contrast to two years ago when banks made money by using their own capital to trade. 

Brad Hintz, an analyst at AllianceBernstein, says: “We won’t have narrow spreads ever again because there won’t be as much leverage ever again. It is a customer-flow model like in the nineties now.”

investorzzo's picture
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Posts: 1182
Re: Treasury Bond Riddle Solved?

update from Chris Martenson's original piece.

The Fed Already Buys Back Last Week's Treasury Notes

machinehead's picture
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Re: Treasury Bond Riddle Solved?


The 'subaccount' scam is all about avoiding reserve requirements. Banks have to put up reserves against demand accounts, such as checking. However, if they sweep those balances into a fictitious 'savings' subaccount overnight, then BINGO -- no reserves required.

Why are reserve requirements lower on savings accounts, you ask? Because in a financial crisis, the rules pertaining to savings accounts allow banks to restrict the number and size of withdrawals. Savings accounts present no risk of a bank run, when your bank can 'just say no' to a withdrawal request.

Of course, what your bank (and many others) are doing is a subterfuge and a fraud. People think these are ordinary checking accounts, but they aren't. One morning if the futures are limit down, and the magic wand isn't waved to move funds from one subaccount to the other, you are stuck with a savings account.

Since the 'overnight sweeps' fraud was blessed by the Maestro hisself -- 'Sir' Alan Greenspan -- in 1994, complaining to the Better Business Bureau or the banking commissioner isn't going to help. The fix is in, and we're the bagholders. But you could always write to your KongressKlown, LOL.

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