The next story is a dandy but I will preface it with a little background.
The auctions for bonds are bid for by 17 primary dealers. In the past few weeks, 3 new primary dealers were accepted into the fold:
1.Toronto Dominion Bank
2. Royal Bank of Canada
3.Nomura Securities of Japan.
They joined the previous 14 dealers. These dealers must bid for the bonds at an agreed price.
Also recall that at the end of the auction, they reveal what is known as the bid to cover ratio.
Thus we must always have a minimum of 1:1.
The dealers then can resell bonds to institutions seeking bonds at a higher mark up.
Private pension funds and Bond dealers like PIMCO can also bid for the bonds. The primary dealers and the latter funds thus make up the direct bid for the bonds.
The indirect bid is foreign central banks that bid for the bonds and hold these bonds at the Fed.
You may have foreign non government entities bid for the bonds say, the oil interests etc. They too keep the bonds stored at the Fed.
So if you see 36% of direct bid and 67% indirect bid you know that only 36% of the bonds were bought by usa interests and the remainder by foreign central banks or other foreign entities.
I pointed out to you last week that 230 billion dollars worth of bonds were offered. The first two auctions when poorly with the 5 yr auction going at bid to cover ratio of 1:90 and 63% indirect participation.
The markets tanked on the news as it means that the dealers were gorging themselves on the bonds as they could not get the minium of 2: 1 to relieve themselves of bonds.
Then came the 7 yr auction and news surfaced that the auction when extremely well to everyone's surprise. Nowthe story surfaces that of the 36% direct bid, 48% of that bid by the 17 dealers recycled the bonds back to the Fed,
We also know that the indirect bid is the usa dollar swaps sitting on foreign soil which is purchasing the bonds on behalf of the Fed.
Ladies and Gentlemen: the Fed bought most of the 7 yr auction. And China will not be a happer camper when this gets out!!
Here is the story:
The Fed Directly Monetizes 17% of Last Week's 7-yr Treasury Auction
The Fed conducted a Permanent Open Market Operation today (POMO), in which it purchased from Wall Street firms $4.753 Billion of the of the $28 Billion 7-yr Treasuries auctioned last Thursday. A Fed POMO is an operation in which the Fed directly buys Treasuries from bond brokers as a means of permanently injecting money into the banking system. The Fed holds these bonds permanently on its balance sheet.
Chris Martenson sniffed this out today at http://www.chrismartenson.com/blog/fed-buys-last-weeks-treasury-auction/23880 where he shows the details copied from the Fed's website and from the details of the auction released by the Treasury. As you can see, the Fed today bought $4.753 Billion of the exact bond cusip from last weeks Treasury auction (the cusip number is a specific number assigned to any registered stock or bond security for identification purposes)….
The ECB have finally announced their next Washington agreement and they have lowered the cap from 500 tonnes per year to 400 tonnes per year.
Two aspects in the agreement are clear:
1.they have included the 403 tonnes of IMF gold
2.Switzerland has stated no interest in selling any gold for the forseeable future.
All signatories believe that the quota will not be met as they seem not interested in parting with any of their gold.
Three new banks were sent to the morgue yesterday bringing the total to 72.
Jim Bunning in an interview with Sheila Bair was told to expect 500 bank failures by the end of the year. Here is the story:
By Alison Vekshin and Ari Levy
Aug. 8 (Bloomberg) -- U.S. bank failures rose to 72 this year with the collapse of two lenders in Florida and one in Oregon amid the worst economic slump since the Great Depression.
Regulators shut First State Bank and Community National Bank, both based in Sarasota, Florida, and Community First Bank in Prineville, Oregon, the Federal Deposit Insurance Corp. said in statements yesterday. The FDIC was named receiver. Closing the lenders, with combined assets of $769 million and deposits of $662 million, will cost the deposit insurance fund about $185 million.
Regulators are closing banks at the fastest pace in 17 years as losses mount from unpaid real-estate debt. The FDIC is offering to share losses with potential buyers, reviving a practice used during the U.S. savings-and-loan crisis in the late 1980s.
Stearns Bank of St. Cloud, Minnesota, will assume almost all deposits of the Florida banks, the FDIC said. First State, the biggest of the three failures with $463 million in assets and $387 million in deposits, had nine branches along Florida’s Gulf coast that will open Aug. 10 as Stearns branches, according to the FDIC.
Community National’s four offices will open under the Stearns name, the agency said. Stearns is paying a 0.25 percent premium for Community National’s $93 million in deposits and the FDIC is sharing losses on most of the $545 million assets being acquired from the two failed lenders.
Home Federal Bank in Nampa, Idaho, is buying most of Community First’s $182 million in deposits and 94 percent of its $209 million in assets. The FDIC is sharing losses on $155 million of assets in the deal. The eight branches of Community First will reopen on Aug. 10 as offices of Home Federal.
The FDIC, based in Washington, insures deposits at more than 8,200 institutions with $13.5 trillion in assets and reimburses customers for deposits of up to $250,000 when a bank fails. This year’s failures have cost the insurance fund more than $15 billion.
Last Updated: August
Many have commented that yesterday we saw a shift in government`s managed expecations on the stock market:
For months we saw the following scenario:
1. Dow up, gold up (the inflation scenario)..bonds would go down in price...dollar would go down as in an inflation scare.
2. Dow down, gold down (deflation scenario)..bonds would go up as deflation takes hold...the usa dollar rises.
Yesterday, we entered a new set of managed expectations with the Dow up, the dollar up, gold down and bonds tanking.
The long bond closed yesterday at 115.3 which means that JPMorgan`s 61 trillion dollars of interest rates swaps are starting to bellow in smoke.
I guess Larry Summers is trying to orchestrate some Goldilocks scenario in that the economy is improving but no inflation with all of the 2 trillion dollars of printed dollars and QE surfacing.
There is another bond auction slated for this coming week.
Something is brewing but I just cannot figure out their next move.
Something is also brewing in the silver department. It has shown tremendous resilence the past few days. I guess Gensler has told JPMorgan to remove its huge short in silver.
speak to you on Monday.