The most important chart that nobody at the Fed seems to pay any attention to, and certainly none of the economists who urge the Fed to accelerate its monetization of Treasury paper, is shown below: it shows the Fed’s total holdings of the entire bond market expressed in 10 Year equivalents (because as a reminder to the Krugmans and Bullards of the world a 3 Year is not the same as a 30 Year). As we, and the TBAC, have been pounding the table over the past year (here,here and here as a sample), the amount of securities that the Fed can absorb without crushing the liquidity in the “deepest” bond market in the world is rapidly declining, and specifically now that the Fed has refused to taper, it is absorbing over 0.3% of all Ten Year Equivalents, also known as “High Quality Collateral”, from the private sector every week. The total number as per the most recent weekly update is now a whopping 33.18%, up from 32.85% the week before. Or, said otherwise, the Fed now owns a third of the entire US bond market.
At this pace, assuming Janet Yellen keeps delaying the taper again and again over fears of how “tighter” financial conditions would get, even as gross US bond issuance declines in line with the decline in deficit funding needs, the Fed will own just shy of half the entire bond market on December 31, 2014… and all of it some time in 2018.