Some thing curious occurred today. As we pointed out previously, for the 1st time as portion of Operation Twist, the Fed, rather of getting bonds in the open up market, actually marketed bonds: a departure for Bernanke, and only the initial time the Fed has pretty much rebalanced its portfolio since the very first Operation Twist fifty years in the past. In essence, by dint of its modified mandate, the Fed became the Treasury – what proceeded at precisely 11 am was the announcement of a sale of $ eight.87 billion in bonds with maturities from January 31, 2012 by means of July 31, 2012, bonds that have been offered not by the conventional issuer of bonds, but by the Fed. Granted no new funds was raised by the US in the process, but it was nevertheless a curious development. What was far far more curious was the staggering turnout by the Dealer group, which indicated an interest for, wait for it, a whopping $ 242.6 billion in bonds!  Stated in standard phrases, the Bid To Cover was an unprecedented 27.three, or there was $ 27 in need for each and every $ 1 of bonds ultimately sold by the Fed. Why is this worthy of bolding. Since, in a traditional Treasury auction, the Bid to Cover by the Seller community is far, far lower. In fact, as the most recent 52 week Bill auction demonstrates, there was $ 89.five billion in Bids for $ 14 billion in bonds allocated to Sellers, or a six.four Bid To Cover. Explained normally the Fed is about four.three times a lot more productive at finding buyers than the Treasury. How is this possible? And really should the Fed just take above Treasury in all foreseeable future bond income? Nope: the solution is that this is practically nothing but nevertheless an additional taxpayer funded gift to the Seller. Allow us make clear.
Very first, right here is what the mechanics of the most latest 52 week Bill sale looks like:
One particular can see how the Vendor Bid To Cover is a respectable six.4.
Alternatively, right here is what present-day Fed’s POMO looked like in its last form:
Bid To Cover? 27.4!
How is this possible? Is the Fed genuinely 4 occasions much more effective at promoting bonds than the Treasury? How and why can sellers have such a large apetite for paper which yields within of .one% and as a result supplies completely no true top rated or bottom line positive aspects?
Basic. As Zero Hedge has discussed numerous times in the prior, POMO, in no matter what format, be it beneath LSAP auspices or Operation Twist, is practically nothing but a taxpayer funded present to the Seller local community.  As a reminder, the real POMO process is carried out in the form of a reverse dutch auction, where the collusive Seller Community (just lately expanded to contain 2 far more Canadian Banks, BMO and Financial institution of Nova Scotia, which simply implies that US Taxpayers are now on the hook to bailing out two more banks which are aspect of the supposedly protected and stable Canadian banking system) submits best bids or offers to the Fed, depending on regardless of whether the local community is getting or marketing bonds. Today, for the initial time, it was getting, so it was Bidding. And while we can not show it as the genuine particulars of the price tag allocation are a non-public mystery, we are 100% self-assured that the solution lies specifically in the threat-totally free arbitrage, funded by the Fed, and for this reason the US taxpayers, consisting of a collusive wholesale bid at prices far reduce than prevailing industry charges, and the potential to quickly flip the bonds to the open market upon allocation for a tidy profit.
How tidy? We have no notion: the data is non-public. Even so, it is tidy enough to generate four moments much more getting curiosity than would be there typically. For this reason the, pardon the pun, twist.
We are assured that the “99%” will be delighted to discover that Operation Twist, even though flattening the 2s10s and 10s30s massively, also consists of in it the salvation for the banks, and particularly the bonuses for their bond buying and selling divisions: simply because all QE or Twist or whichever genuinely is, is an ongoing subsidy through the bid/consult distribute, funded by US taxpayers, to retain America’s hurting banking institutions solvent.
What is the final top rated line benefit? We are not sure. But we are self-assured the consequence will be created right away apparent once the month-to-month POMO information is unveiled. We are eagerly searching ahead to reverse engineering just how considerably funds the middle-course is now funneling into America’s banking institutions by means of what is when yet again a everyday POMO bail out.