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Thursday, March 24, 2016

Treasury Buying Mystery - Does Treasury Data Imply the Treasury Market is a Fraud!?!

This is a story about the largest market in the world, the $19+ trillion US Treasury market representing about 10% of all global debt.  Utilizing government data, I'll explain what looks like a fraud and if this greatest of markets is corrupted, then all markets are undermined by this fraudulent mispricing.  A story of record supply, collapsing demand, resulting in near record low yields (those familiar with precious metals should recognize the same strange non-market based dynamics impacting metals)!?!?
  • One by one, nearly all Treasury buyers have ceased buying (net) US Treasury's.
  • As each group of buyers ceases their purchases leaving an ever smaller pool of potential buyers, interest rates have fallen further in contradiction to market fundamentals?!?
  • Since QE3 was fully "tapered" (no further net new Fed purchases), all foreign buying has simultaneously ceased.
  • The only remaining buyers are the US intra-governmental purchases but primarily the US public (US banks, US pensions, US insurers, US private citizens).
  • Since the completion of the Fed's taper in November 2014, the US public has undertaken the greatest Treasury buying spree in history pushing Treasury yields to near record low yields.
    • Really?  Why?  Why would domestic insurers or pensions suddenly buy an asset yielding 0.8% for a 2yr to 1.8% for a 10yr Treasury when their total distributions are around 7.5% to 8% annually?  Buying significant quantities of low yielding US debt ensures a shortfall for these plans which are already generally underfunded. 
    • Why the sudden surge in domestic Treasury demand in 2015 coinciding and overriding the collapse of Federal Reserve and foreign purchasing?  This is a sudden reversal to decades long Treasury buying patterns.
    • If these domestic sources did buy US debt, when or what did they sell to raise the cash with which to purchase the Treasury's now closing in on a trillion dollars?
  • If not the above domestic sources, not the Fed, and not foreigners...who's left as the buyer of last resort?  In short, a buyer that doesn't care above profit motive, a buyer that need not sell anything to raise cash, a buyer that seems to have motives in contradiction to everyone else in the market?
The Details:
The first chart breaks all Treasury buying purchases down among 4 basic groups (The Fed, Foreigners, Intra-governmental (aka, SS surplus), & US Public).  Foreigners are broken further into 4 subgroups, BRICS, BLICS (Belgium, Luxembourg, Ireland, Cayman Islands, Switzerland), Japan, and the RoW (Rest of World).  The periods are December '00 to December '08 (Dec '08 when QE began), December '08 to July '11 (July '11 the month China Treasury holdings peaked and China plus the BRICS holdings have declined since despite ongoing record trade surplus' with the US), July '11 to Dec '14 (Fed's QE plus BLICS maintain the buying).  Finally, the post QE period from Dec '14 to present (January '16).

The chart above makes it clear nearly all net new Treasury buying is coming from domestic sources, US public primarily with an assist from an equally strange source, intergovernmental buying (Intergov is strange due to soaring SS recipients vs. no net new full time jobs since July '07...where are the billions in excess surplus dollars coming from?).

The chart below shows the monthly 10yr Treasury yields.  Interesting to note, rates rise during QE and fall absent QE...exactly opposite to the Fed's stated goals for QE?!?
Finally, the chart below shows which of the sources has been buying (on an average monthly basis) over the different timeframes back to 2000 plus impact on the 10yr Treasury yields (in blue boxes).  The current pace of domestic and intergovernmental purchases are of a scale never seen before, particularly strange at the present extremely low yields. 

Perhaps someone in "the know" can help explain how and/or why domestic sources would have suddenly shifted to purchase all the new Treasury debt at even lower rates than the Fed or Foreigners were willing to pay?  Otherwise, the fraud is full frontal.  And if this market is corrupted, it's almost sure all downstream markets are likewise fully phony and fraudulent.

BRICS vs. BLICS vs. Fed & All Foreign Purchases

***All data is via the US Treasury and the Federal Reserve.

Why would the Fed or ESF or whoever go to such lengths to maintain a false market?  For those curious why such an elaborate ruse is likely taking's shockingly simple.  As the primary driver for growth, population growth, slowed and transitioned from wealthy to poor nations, interest rates were slashed to incent greater debt to maintain artificially high growth rates.  Unfortunately, there is nothing left but synthetic "growth" as organic growth has entirely ceased.  This is a rearguard action to maintain the unmaintainable.
Details Here and Here and Here


  1. Over the last 3 QEs the Fed has expanded its Balance Sheet by almost 4 Trillion dollars. This was then invested into Treasuries in various time durations of notes. As these notes mature principle and interest are repaid to the Fed and that is then used to repurchase new Treasuries. So to say there is no new QE is a misleading stmt. The interest received is new QE as it is reinvested every month. Not until the time the Fed reduces its BS will this new creation of cash end.

    1. Thanks for your statement was no net new QE. The Fed is maintaining its balance sheet of Treasury's and MBS. Sorry if that was misleading.


  3. Why? Check out the correlation between Fed balance sheet expansion and the S&P 500. Check out corporate profits and EPS growth over the past 3 years. Check out the amount of international sovereign debt trading with negative yields. Check out what happens when the Fed tightens for almost 2 years. The U.S. public (including pensions, ect.) is not counting on the yield but on the price increase induced from an equity market decline. The Fed is saying risk OFF and terming it in much more ambiguous terms. Just my .02

  4. There is simply no major buyer of U.S. government debt. The bonds are clearly being bought through intermediaries; 'the powers that be' have any number of proxy buyers and instruments that they can use. In any event it's obviously a grand deception which - in normal circumstances - would unravel at some point, however it's easy to underestimate the absolute determination to keep the plates spinning.

  5. Those Belgians must really like ~0% bonds

  6. I can answer who in the US is buying these treasuries - it is the American worker with a 401K. They do not want to play in the Wall St casino so they just park it in money market funds and take their employer match.... to the tune of the missing trillion discussed above

  7. My belief is that the Fed's discount window lending, supported at very low rates (ZIRP), has exploded, to fund Treasury purchases yielding, on average 1.8%, with loans to intermediaries from the Fed at 0.025%. The spread, which should be roughly 2.42 Billion, is enjoyed by those with access to the discount window. How are these loans secured? By posting the US Treasuries. How do the intermediaries handle the maturity gap? I suspect by the Fed loans somehow being treated as not subject to deficiencies in the event of default... after all, the Fed has said it will never suffer "losses" as it will hold securities to maturity.

    This is, of course, speculation. All that we are actually left with in a world where our leadership lies continually and refuses to disclose its operating information.

    This is how societies die.

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  9. This is an incredible blog post. Wow...however, I read yesterday that foreign buying of Treasuries was huge yesterday (or the day before). What am I missing here? Are foreigners buying or not? Or have they just started again after January of this year.

    1. Thanks for reading.

      Regarding record foreign demand...what you are talking about is what happens at Treasury Auctions as only primary dealers can buy directly from the Fed. They then turn around and resell those bonds in the secondary market.

      What I'm showing is who (ok, really where) bonds are actually held, based on Treasury TIC data.

      Record foreign demand at auctions is just primary dealers buying in their role as market makers. I show where those bonds are actually going and on a net basis.

  10. Thanks for the response. Based on this May press release for March purchases, it loks like the foreign purchases are back, or am I missing something?

    "The sum total in March of all net foreign acquisitions of long-term securities, short-term U.S.
    securities, and banking flows was a monthly net TIC outflow of $98.3 billion. Of this, net
    foreign private outflows were $51.5 billion, and net foreign official outflows were $46.9 billion.
    Foreign residents increased their holdings of long-term U.S. securities in March; net purchases
    were $64.7 billion. Net purchases by private foreign investors were $83.0 billion, while net sales
    by foreign official institutions were $18.3 billion.
    U.S. residents decreased their holdings of long-term foreign securities, with net sales of $13.4
    Taking into account transactions in both foreign and U.S. securities, net foreign purchases of
    long-term securities were $78.1 billion. After including adjustments, such as estimates of
    unrecorded principal payments to foreigners on U.S. asset-backed securities, overall net foreign
    purchases of long-term securities are estimated to have been $64.6 billion in March.
    Foreign residents increased their holdings of U.S. Treasury bills by $9.0 billion. Foreign resident
    holdings of all dollar-denominated short-term U.S. securities and other custody liabilities
    increased by $1.8 billion.

    1. Not wrong...the TIC data you show for March is correct. This means foreigners have purchased a net increase of $70 billion over since 2014. This is compared to the US public that has purchased about $900 billion...this is a total reversal of buyers. So, in general, the foreign net increase of Treasury's hasn't been this weak since prior to '00. So far, this is just a blip and typical monthly back and forth but the trend is least for now.


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