Fed Holdings – Robbing Timmy to Pay Timmy
Fed Owns 19% of all Treasury Bonds
I focused on bonds issued by the Treasury that pay a fixed rate coupon. I didn’t focus on t-bills, as the Fed seems far less involved in those, and they all yield zero anyways. I didn’t include TIIPS for now, because the distribution, off-hand, looks similar, they are smaller, and I was too lazy to do the math on the coupon for those on a Sunday morning.
|
Maturity |
Treasury Nominal |
Fed Nominal |
Fed % |
|
< 2 |
2,598,633,000,000 |
48,811,404,254 |
1.9% |
|
2-5 |
2,710,660,000,000 |
442,880,376,891 |
16.3% |
|
5-10 |
2,036,622,000,000 |
765,304,233,375 |
37.6% |
|
> 10 |
944,989,000,000 |
315,225,160,250 |
33.4% |
|
|
|
|
|
|
Total |
8,290,904,000,000 |
1,572,221,174,770 |
19.0% |
Nothing new here as it shows that the Fed has used Operation Twist to extend the maturity of their holdings and that from 5 years out, the Fed is the DOMINANT player in the market. They have been sucking out the supply.
The front end is less affected by the Fed purchases (since they hold less), but ZIRP lets banks and others buy the short end with almost no risk of loss so they don’t need to buy there anyways.
|
Maturity |
Market Value |
Fed Mkt Value |
Fed % |
|
< 2 |
2,630,252,602,383 |
49,673,008,654 |
1.9% |
|
2-5 |
2,886,194,112,813 |
489,998,749,493 |
17.0% |
|
5-10 |
2,293,985,704,297 |
887,764,458,870 |
38.7% |
|
> 10 |
1,246,563,797,344 |
432,595,650,695 |
34.7% |
|
|
|
|
|
|
Total |
9,056,996,216,836 |
1,860,031,867,712 |
20.5% |
Taking a quick look at market prices shows the weighted average price of U.S. treasuries is 109.24 and the weighted average price of the Fed holdings is 118.31. That makes sense as the Fed has been focused on long end and higher coupon bonds. It does show that the contribution to the system in terms of money supply is far greater than the notional bought. I can’t tell from this whether or not the Fed owns the bonds at a profit, but I suspect that they probably do at this point since the 10 year bonds are at 1.67% which is below the 1.88% average of the past year or the 2.45% average since September 2010 when QE2 was launched.
28% of Treasury Coupons Go Right Back to the Treasury
This I find a little more stunning, and is clearly just Benny robbing Timmy to pay Timmy.
|
Maturity |
Total Coupon |
Fed Income |
Fed % |
|
< 2 |
37,325,056,250 |
760,045,054 |
2.0% |
|
2-5 |
61,251,411,250 |
14,187,203,627 |
23.2% |
|
5-10 |
60,400,318,750 |
26,103,457,046 |
43.2% |
|
> 10 |
43,535,373,750 |
15,533,358,762 |
35.7% |
|
|
|
|
|
|
Total |
202,512,160,000 |
56,584,064,489 |
27.9% |
So 43% of payments being made by the Treasury on bonds maturing within 5 to 10 years, gets paid right back to the treasury. The Fed tends to own close to the 70% maximum on high coupon debt.
The Fed is directly subsidizing the government to the tune of $57 billion, just on these bonds. It ignores TIIPS and other holdings, where the Fed also pays back profits (I believe last year the Fed paid treasury a total of $83 billion in profits).
Almost any way you look at the numbers, the Fed is directly subsidizing the budget by $100 billion and probably another $100 to $200 billion in indirect help by keeping the cost of borrowing so low.
What Does this Mean for QE3?
QE3 is unlikely to have much or anything to do with treasuries. The Fed already dominates the long end. With over 36% of the bonds with maturities greater than 5 years already in the Fed’s hands, they are truly pushing on a string there.
So if we get QE3, which I doubt, it is likely to be mortgage or small business loan focused. Something that the Republicans can’t scream too much about without alienating some of their base or the undecideds.