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Is it possible that, despite astronomical borrowing by the US and Japan, there could atually be a $660 Billion shortage in supply of new debt to match "the demand?" If so, then the easiest way to make a quick profit is by acquiring long debt and re-selling it to the Central Bankers in the secondary market.

The pseudonymous Tyler Durden suggests that neither the Japanese Treasury nor the US Treasury has been or will be issuing sufficient debt to match the announced amounts of debt monetization scheduled by the Federal Reserve and the Central Bank of Japan, as follows:

When the BOJ announced two weeks ago the full details of its expanded easing program, which amounts to monetizing a whopping $720 billion in government bonds over the next year (a move which makes even the Fed's own open-ended QE appear like child's play in perspective), one thing it did was lay to rest any hope of a rotation, great or non-great, out of bonds and into equities. The reason is simple: while the Fed is en route to monetize $1,080 billion in UST and MBS debt in the current year, when there is just $760 billion in net US issuance, what the BOJ has done is add a bid for another $720 billion when Japanese net supply of debt is just $320 billion in the next 12 months. In other words, between Japan and the US, there is now some $660 billion in secondary market debt that the two banks will have to purchase over and above what their respective treasury departments will issue.

This means that the two biggest central banks are about to be perfectly price ambivalent as to what cost the monetize nearly two thirds of a quadrillion in debt: their mandate is to expand their assets at any cost, which means buying up debt from the secondary market at any price. The immediate consequence is that the best performing trade of 2011 and 2012 - frontrunning the Fed's purchase of the long end - is about to come back with a vengeance, as speculators buy up every piece of duration debt that is not nailed down, knowing full well they will be able to sell it right back to Bernanke and Kuroda in the future at whatever price they so desire."

This situation is not fictitious, actually. The same linked essay cites the following language issued by the venerable JP Morgan bank:

...the displacement caused by BoJ purchases this year. The offset that central bank purchases provide to government debt issuance, represent the so called Demand or Flow Effect of QE. In fact, central bank purchases more than offset government bond supply this year. The BoJ is going to surpass government debt supply this year by buying $720bn of government debt vs. government net supply of $320bn, resulting in a net withdrawal of $400bn of government debt securities from bond markets. Assuming $85bn per month purchases for the whole year the Fed looks set to buy $1020bn of USTs and MBS securities this year vs. net issuance of $760bn, so a net withdrawal of $260bn from bond markets.

If the above language is accurate, then a tremendous front-run trade has been, and evidently will continue to be, collecting free money as a secondary market seller - courtesy of the "unlimited checkbook" wielded by the Central Banks in their CTRL+Print abilities. For the Central banks, "price is no object."

Ah... the joys of fiat currency, market distortion, displacement of honest arms-length trade, and utter abrogation of the risk pricing mechanism.

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