Sunday, October 9, 2011

The Big Dump on Ben Bernanke's Head

On September 22, I wrote in the EPJ Daily Alert, with regard to Operation Twist:

The major beneficiary of OT might be the Chinese, if they had any trading sense. If I am the Chinese stuck with trillions in Treasury securities and I know the Fed is going to be sitting on the bid to the tune of $400 billion, then I just found my exit strategy and am going to hit the bid day in and day out.
I went on to question whether China would be as clueless about this opportunity as others, but foreign banks may indeed be taking Operation Twist as an opportunity to dump Treasury securities on the Fed. Lee Adler writes:
Foreign central bank dumping of Treasuries and Agencies reached record levels this week, far beyond anything seen in the 9 years since I started tracking this data. The last time anything remotely similar happened was at the top of the bull market in the summer of 2007, and those levels pale by comparison with what is going on today. Furthermore, this is no flash in the pan. This has been going on for 4 weeks, and has been growing for the past 3. Over the past 9 years, there has never been a time when FCBs were sellers of their Treasury and Agency debt for 4 weeks in a row. I do not believe that the bull market in bonds can survive under these conditions, regardless of what the Fed does. If the runs on European banks, bank paper, and sovereign debt subside, by even a little, it’s over.
Thus, it appears that FCBs started selling Treasury securities, even on anticipation of OT.

I concur completely with Adler on this point. The FCB securities dump on Bernanke's head is likely to result in a backfire of Operation Twist. He will simply be bailing FCBs out of their Treasury positions---positions FCBs are not going to come back to at any time soon, no way, no how. If at the same time things calm down in the EuroZone, those who believed they fled risk by buying Treasury securities will be competing against the FCBs to get the hell out of Treasurys.

When you know, you have a big sap like the Ben Bernanke sitting on the bid, you are going to hit that sap with paper, hour after hour.

Couple all this with my expectation of increasing price inflation and as Adler puts it, there is no way the bull market in bonds can survive under these conditions. At some point it is going to get very ugly.


  1. Bob, not only that, but over the last few months, Treasurys have been the go-to hedge for stock funds because elevated volatility has made index puts very expensive. It worked so well that some long-only funds returned a profit in Q3 despite the indexes being down. When the Treasury hedge stops working, not only will another source of Tsy demand be removed, but fund returns will suffer due to increased insurance costs.

  2. @BobM: OT, but Whalen tweeted your Mises article today:!/rcwhalen/status/123398416490442752