Our friend TF from TFMetalsReport notes that The Fed’s current holdings of Treasuries under 2 years in duration are now negligible, meaning The Fed is out of short-term paper to sell (think operation twist) to keep long rates down .
TF states that with 10 year rates suddenly climbing back towards 2% and with The Fed suddenly out of bullets, the only option left is a re-ignition of overt quantitative easing.
The Fed is out of bullets. The goal of “Operation Twist” was to create demand for the 10-year and the 30-year, thereby keeping rates low and in a downtrend. They accomplished this “sterilized” program by selling their short-term bills and notes and using the proceeds to buy longer term notes and bonds. Now, look at that final frame again. The Fed is now out of paper to sell. Their current holdings in the 1.5 year and less range are negligible. Therefore, they have no more ammo. Now look again at that last frame. The Fed now owns nearly 70% of the outstanding 10-year note inventory. They are that market. There is hardly anyone left besides the Fed and the Fed is out of cash to keep it going. Suddenly, we have a simple imbalance of more sellers than buyers and…down goes price.
Notice what I said above, “the Fed is out of cash”. Like athletic momentum or alcohol-induced desire, this is but a temporary thing. Let me state this clearly again: THE FED CANNOT AND WILL NOT ALLOW RATES TO RESET HIGHER. THE RESULTING BURDEN OF HIGHER INTEREST COSTS ON THE ALREADY ACCUMULATED DEBT WILL ONLY SPEED THE DEMISE OF THE PONZI AND THIS CANNOT BE ALLOWED. Therefore, with rates backing up and with the Fed out of liquidity to support a turnaround, the only option left is a re-ignition of overt quantitative easing.
Will this announcement come from Jackson Hole? Will it come from the next FOMC meeting on 9/12-13? Will it come at the following meeting of 10/23-24? It’s impossible to say but what is possible to say is this: Watch the 10-year note. It will tell you.