There is an interesting and useful little dustup going on in the blogosphere today. Tyler Durden who writes Zero Hedge had a post that accuses the Fed and Treasury of conspiring to rig the market for Treasuries. John Janssen, the author of the highly respected Across the Curve blog responds to the accusation in an uncharacteristically strong manner.
Durden as is his wont grabs hold of a single data point and with no supporting evidence extrapolates it in order to put forth his conspiracy theory:
The question is did the Fed implicitly tell the primary dealers they are merely holding the treasuries for a flip, and that it would acquire them immediately. Absent this $4.8 billion in effectively monetized bonds, what would the Bid To Cover have been for the primaries? Would this have been the second practically failed auction for USTs after the deplorable 5 year auction results a day prior? One wonders if there would have been 62% indirect interest in these bonds (which the day before had a measly 32.5% indirect bid) if the purchasers were aware of the Fed’s immediate prompt monetization of a large part of the directs’ balance.
It is truly a sad state of affairs when the Fed has to manipulate public and media perception in this way, and has to cover up for the complete lack of interest in US Treasuries.
Jansen is a rock solid veteran of the bond markets who writes a sober and always informative blog about daily activity. Having traded on behalf of both the Fed and Wall Street banks, he finds the charges absurd and points out that they represent nothing out of the ordinary:
I am not sure where to begin here. A blogger named Chris Martenson wrote a story which alleges that the Federal Reserve System is secretly monetizing the debt. The Zero Hedge Blog links to the story and describes it as a phenomenal piece of investigative reporting. The story also received coverage at the high profile left wing/progressive blog the DailyKos. The author there was nearly apoplectic.
The story is that the Federal Reserve in its Open Market Desk intervention today purchased $4,750,000 of the recently issued 7 year note.
The principal reason for the Open Market Desk’s purchase of so much of just one issue is simple and uncomplicated and it is not part of some Byzantine conspiracy. The Federal Reserve responds to that which the dealer community offers to them. Since the 7 year note was just auctioned the street would own far more of that issue in the narrow sector in which the Open Market Desk was operating today than of surrounding issues.
So to complete the operation quickly and cost effectively, they would opt to buy that issue. Pretty neat and surgical and quick.
I guess I am not so good at marketing myself as I wrote about this on April 2, 2009. So there is absolutely nothing unique or special about today’s transaction by the Open Market Desk.
Jansen also called Durden to task for what appeared to him to be a fundamental misunderstanding of who issues debt on behalf of the government:
The author (Tyler Durden) makes the statement that the Federal Reserve bought the bonds just one week after issuing the bonds. Anyone with a modicum of understanding of the process knows that the Federal Reserve does not issue bonds. The bonds are issued by the US Treasury and then the Federal Reserve purchases them in the “open market”.
Some will counter that the distinction is one without a difference but in discussing such an esoteric topic and in presenting oneself as expert on that topic one should get the facts absolutely correct. So to make the egregiously incorrect statement that the Federal Reserve issued those bonds should be a warning signal that the author has waded into an area where he lacks some expertise regarding fundamental and elemental facts.
One of John Jansen’s readers pointed out that the phrasing of Durden’s piece actually implied that the Treasury issues debt but acts as the Fed’s puppet. Jansen admitted in his comments section that he may have erred in his interpretation and apologized for the comment in his post. He may not have needed to do that. The second comment that appears on Durden’s post reads as follows:
“by Andy Dufresne
on Thu, 08/06/2009 – 16:06
#28223T., the Treasury issues the bonds, not the Fed:
“that the Fed, merely a week after issuing $28 billion in 7 year bonds (which Zero Hedge discussed previously) of which $10 billion ended up being purchased by primary dealers, has turned and bought 47% of the primary allocated bonds in Open Market Purchases”
not picking on you, just saying…”
A minor point perhaps but it would appear that if Andy Dufresne was quoting from the article, Mr. Durden may have altered his original post after the fact. Not good form at all if that’s what occurred.
The larger point here is not so much Mr. Durden’s penchant for conspiracy and hysteria but the fact that such behavior does little to advance a general understanding of what is truly happening. A lot less of trying to find a spy behind every tree and more of the solid sort of reporting and analysis that Mr. Jansen provides would go a long way towards making the blogosphere a more respected and trustworthy part of the media.
more: here (Jansen), here (Durden) and here (Naked Capitalism’s Take)
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