Moments ago, GETCO’s rampathon algos did not like what they heard coming out of the mouth of the Fed’s biggest permadove, Charles Evans.
That thing was math, and it was as follows:
- IF FED CONTINUES TO BUY ASSETS AT CURRENT PACE THROUGH YEAR END,BALANCE SHEET WOULD BE ‘VERY LARGE’ $4 TRILLION – FED’S EVANS
Supposedly this was news to someone although it wasn’t news to our readers who knew sinceSeptember that not only will the Fed’s balance sheet hit “a very large” $4 trillion by 2014, it would hit a “very larger” $5 trillion by 2015, when the Fed may realistically start abandoning QE.
Obviously it was the concern creeping in Evans voice at the size of this number, that forced various vacuum tubes to give up the day’s gains.
To think: all the Fed had to do was engage in simple first grade math to show just how ludicrous its own policy is getting.
But wait, there’s more.
Because for all the jawboning by the Fed, the reality is that even if it were to halt QE, the resulting plunge in stocks would force Bernanke, or Yellen, or satan forbid Geithner, to reactivate it post haste as it is the only weapon in the Fed’s arsenal.
So here is some even more critical math. Since the Fed will most likely continue to monetize debt at some ungodly pace for the next 18 months or more, with or without tapering and brief intervals, what it will run up on is what we wrote about nearly a year ago: the exhaustion of monetizable bonds in the private market.
Indeed, as we explained back in September, at the current pace, the Fed would end up owning a ridiculous 65% of all TSYs in the 6Y-30Y bucket, meaning liquidity would be severely limited as a result of the Fed’s endless bond monetizations in this most critical and formerly liquid of bond markets. Now when one assumes that the Fed may indeed reduce the amount of deficit funding it needs and thus forcing the Fed to buy even more bonds from the secondary market, this number rises to a mindblowing 70%!
For those who forgot, here is the math that matters:
In terms of outstandings, we expect the Fed to end up owning more than 33% of the total market by the end of 2014, which is also significant since many mortgage investors tend to reinvest paydowns. These investors would need to be persuaded to sell MBS to the Fed, which would require tighter spreads.
Treasuries: Fed will own a 45-50% in the long end in a year
Table 3 and Table 4 simulate the Treasury universe during the course of 2013 and 2014. Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014. Given the current issuance schedule, we believe it is very likely that the Fed changes its purchase buckets through the next round of Treasury purchases. In particular, the Fed will begin to run out of issues in the 8y-10y bucket and will be forced to buy newly issued 10y notes should they choose to maintain the same distribution.
That’s right: there is a possibility the Fed would end up owning over two-thirds of all Treasurys with a maturity over 6 years by the end of 2014, especially now that the US suddenly needs to issue less primary debt than expected previously.
Extrapolating further: 80% by 2015; 90%+ by 2016 and #Ref! by 2017 and onward.
And that, ladies and gents, is the real math that the Fed does not want to talk about.