Fed's Debt Monetization: Why NOT QE Is Precisely QE4
The Fed Just Monetized $6.4 Billion In Debt Sold Earlier This Week
Yesterday, when looking at the details of the Fed's ongoing QE4,
we pointed out that the New York Fed was now actively purchasing
T-Bills that had been issued just days earlier by the US Treasury, and
which settled the day of the permanent open market operation, or POMO.
As a reminder, the Fed is prohibited from directly purchasing
Treasurys at auction, as that is considered "monetization" and directly
funding the US deficit, not to mention is tantamount to "Helicopter
Money" and is frowned upon by Congress and established economists.
However, insert a brief, 3-days interval between issuance and
purchase... and suddenly nobody minds. As we summarized:
"for those saying the US may soon unleash helicopter money, and/or
MMT, we have some 'news': helicopter money is already here, and the Fed
is now actively monetizing debt the Treasury sold just days earlier
using Dealers as a conduit... a "conduit" which is generously rewarded
by the Fed's market desk with its marked up purchase price. In other
words, the Fed is already conducting Helicopter Money (and MMT) in all
but name. As shown above, the Fed monetized T-Bills that were issued
just three days earlier - and just because it is circumventing the one
hurdle that prevents it from directly purchasing securities sold
outright by the Treasury, the Fed is providing the Dealers that made
this legal debt circle-jerk possible with millions in profits, even as
the outcome is identical if merely offset by a few days"
So fast forward to today, when the Fed conducted its latest T-Bill POMO in
which, as has been the case since early October, the NY Fed's market
desk purchased the maximum allowed in Bills, some $7.5 billion, out of
$21.9 billion in submissions. What was far more notable, were the actual
CUSIPs that were accepted by the Fed for purchase. And here, once
again, we find two particular issues that stick out: UB3 (due July 2,
2020) which was the most active CUSIP, with $5.245BN purchased by the
Fed, and TM1 (due April 2, 2020) of which $1.2BN was accepted.
What's so special about the highlighted CUSIPs? Well, just as we
first showed yesterday, the Fed - together with the Primary Dealers -
appears to have developed a knack for monetizing, pardon, purchasing in
the open market, bonds that were just issued. And sure enough, TM1 was
sold just earlier this week, on Monday, Dec 30, with the issue settling
yesterday, on Jan 2, just one day before today's POMO, and Dealers
taking down $15.9 billion of the total issue...
... and just a few days later turning around and flipping the Bill back to the Fed in exchange for an unknown markup.
What about UB3, which was the most actively
purchased CUSIP in today's POMO, representing 70% of the entire $7.5
billion operation? Exactly the same, as this particular 182-Bill was
auctioned off on Dec 30, and settled on Jan 2, also one day before
today's POMO. Here, too, Dealers were most active, taking down $23.5
billion of the entire auction... and just days later selling 22% of
their entire takedown, or $5.245BN back to the Fed.
These are not isolated incidents as a clear pattern has emerged - the
Fed is now monetizing debt that was issued just days earlier, only
because it was held however briefly by Dealers, who are effectively
inert entities mandated to bid for debt for which there is no buyside
demand, it is not considered direct monetization of Treasurys. Of
course, in reality monetization is precisely what it is, although
since the semantic definition of the Fed directly funding the US
deficit is violated by a temporal footnote, it's enough for Powell to
swear before Congress that he is not monetizing the debt.
Oh, and incidentally the fact that Dealers immediately flip their
purchases back to the Fed is also another reason why NOT QE is precisely
QE4, because the whole point of either exercise is not to reduce
duration as the Fed claims, but to inject liquidity into the system, and
whether the Fed does that by flipping coupons or Bills, the result is
one and the same.
