March 9, 2013 Leave a comment
When is a market not a market?
A market is not a market once it has been cornered.
There is growing concern about where rates are headed. That is normal. There is growing concern with the seemingly bizarre trading of the longer end of the curve. That concern is normal too. What isn’t normal is the nature of the bond market today and that goes a long way to explaining what we are currently seeing.
Let’s focus on the 10 to 20 year part of the curve for example. There will be no new issuance in that part of the curve if we count new 10 year bonds as part of the 5 to 10 year bucket. All we get is some small amount of roll down which doesn’t change the argument much.
Of the $221 billion of bonds in that 10 to 20 year bucket, the Fed already owns $93 billion, or 42%. Since the Fed is limited to no more than 70% of any one issue, they could buy up to their max position of $155 billion in under 2 months of QE. If the Fed decided they wanted to push aggressively on the 10 to 20 year part of the curve, they could own 70% of it by the end of March. Is there any reason to assume the Fed wouldn’t do this? Seriously, think about it. This Fed is aggressively trying to manipulate rates both across the curve and across products. They may well do things we never dreamed possible if it suits their policy agenda.