World War C Continues: Quick Update On The Fed’s Battle Lines
The long end of the yield curve, as measured by the TLT ETF, experienced a -9.8% intraday peak-to-valley drawdown on Wednesday. The TLT finally bottomed at 2:40 est. This was the exact time of the Fed’s last auction where it began purchasing 30-year US Treasuries. This auction was unscheduled and was added during the day to combat the dramatic increase in yields. Today the Fed aggressively fought back.
On Wednesday at 4:30 est, the Fed posted that they would be buying 50 billion in US Treasuries on Thursday and Friday. This morning they increased their purchases to 75 billion today and Friday. That’s an increase of 50 billion over two days. Thus far, all auctions have been oversubscribed, meaning that the Fed is purchasing less than the market wants to sell. The oversubscriptions today have so far been smaller than any point since the purchases began on Friday, March 13th. At this rate, the Fed is on pace to purchase 1.5 trillion in total over the next three weeks.
Announcements for purchases are posted on this site at 4:30 est.
Actions are updated as they occur on this site. You will need to refresh your browser to follow along. https://www.newyorkfed.org/markets/pomo/operations/index.html
The graph below shows the cumulative regular treasury purchases made by the Fed (TIPS excluded) plotted against the cumulative purchase/cumulative subscription ratio. This measures how the Fed can affect selling pressure in the treasury market as a function of their aggregate purchases through time. A linear regression showing the current trend is also plotted.
Today the Fed also opened up a new facility for money market funds, which accepts treasuries as collateral for cash. Money market funds are enormous, so this critical addition should dramatically reduce pressure on the selling of US Treasuries. We can’t stress how important this facility is to improve the liquidity of the US Treasury markets!
Deleveraging of the risk parity trade has been dramatic and is flooding the market with the selling of US Treasury futures. Below is a graph from Nomura Securities that highlights this tsunami.
Excess supply of US Treasuries is just one battle the Fed is fighting. The world is scrambling for US Dollars, so the Fed opened up the pipes on Sunday to the largest central banks. This was not enough. After the carnage in AUD/USD and NZD/USD last night, they also added nine new swap lines with central banks that didn’t have them before.
The shortage of US dollars is still a significant problem. Shadow banking grew significantly since 2008 and has become a substantial financial player. Shadow banking doesn’t currently have access to these swap lines, so hopefully, there is a smart solution on the way soon to fulfill the dollar needs of this important financial sector.
We had initially planned to publish a letter over the weekend, but conditions are changing so rapidly, we felt it was essential to update our readership. We wish you the best of luck trading through these challenging conditions.
