Session 35–“Fed Bolt From Hell” part III

BillThere continues to be a lot of ink and air time given to Quantitative Easing (Q.E., the open-ended monthly Fed  purchases of $85 billion  of   longer maturity U.S. Treasury securities).  QE is credited by many as the primary reason for the market’s current levitation.  The removal of Q.E. is also a constant concern, as it, according to the bears, maybe the beginning of the end….”The Fed Bolt From Hell” (a la Cramer). It has always been my contention as stated in Session 15 and  Session 18 (Fed Bolts From Hell 1 & 2) that the removal and winding down of Q.E. might get a negative reaction from the market, but would not be a fatal event. I stumbled across some very interesting perspective on QE this weekend while scanning the macro section of  Seeking Alpha.  The piece, entitled “The Small, But Important , Flaw in theTepper Analysis” , was penned by a money manager / blogger by the name of  Jeff Miller (

Here is some further documentation to add to Jeff Miller’s case in on why a halt in QE, or reversal thereof, may not be that big a deal including data from SIFMA, The Securities Industry and Financial Markets Association.  We were not able to attach a table on daily U.S. Government trading volumes.  To confirm the following data, please go to SIFMA.ORG. QE purchases average $85 billion per month. On a 22-trading-day month the average Fed spend would be about $4 billion per day ($2.0 billion on treasuries and 2 billion on Agency Mortgage-backed securities).  This would go against(on the Treasury side) total average daily trading volume in 2012 of $139.8 billion in U.S. government maturities from 6 to 11 years and $35.6 billion per day in maturities over 11 years.  If this is the sweet spot targeted for QE, then daily you have $175.4 billion purchased in that range with the Fed’s measly $2.0 billion representing a little over 1% of total average daily demand (the same relationship would holds true on the agency mortgage-backed side of the equation).

You say,’Bill the Fed is targeting the 10-year maturity not the 6-year.’  Okay, let us just say that only $100 billion is going into the targeted part of the market. The Fed is still only 2% of daily demand in each category. In the first four months of 2013 average daily volume in the 6 to 11-year and 11-year and over maturities was $175 billion per day.  I will not say that this is the greatest thing since sliced bread. If left in place, it obviously could add inflationary / Bubble issues to the economy.  But, relative to the positive psychological impact of having QE there in a somewhat tepid economy, the actual demand impact on rates may not be as big as some imagine; and the impact from its withdrawal may be much worse in the minds of the punditry than the actual decline in demand for treasury securities that it would portend.

One other item as pertains to the end of QE, rates should go up.  I say should, because in the crazy market world we live in the end of QE will probably put the fear of recession in the minds of the timid, creating a flight to safety and the security of U.S. Governments, higher bond prices and lower yields.  Ergo, the Fed might not lose as much on its QE operations as some fear.

Here is the interview with hedge fund manager, David Tepper. You may have read about in Miller’s minor disagreement above.  For the most part Miller thinks that Tepper is right on, except he and many others are missing the size of the pool (daily U.S. government securities trading pool) that QE is being tossed into.  Essentially, the daily Fed purchase of longer duration treasuries represents less than 1% of the more that half trillion dollars worth of treasuries that trade each day. In the end Miller’s numbers would seem to back the proposition that the impact of QE going into the market and eventually coming out may be rather muted.  His point is that it is not just a two-handed market (The Treasury selling and the Fed buying).  There are a lot of players ($500 billion + worth of supply and demand daily…$700 billion including AMBS). It is a very big and deep market. Four billion in demand from the Fed on a daily basis (or on the bid side) may not be that significant.

Importantly, To keep your attention riveted to the tube, the media, however, wants you to worry about this.  It is probably not going to be as big a deal as they would have you believe.

What do you think?

The information presented in represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.  

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