Nov

15

The exquisite sensibilities of this — selecting just a few high yielding securities, only doing it in modest increments, removing the % of outstanding restriction– one must applaud their discipline and endeavors for the public good while buying all the outstanding debt held by their clients. It would be nice if one owned 200% of the outstanding debt of such a security to know that the Fed was going to buy that security without regard to concentration requiremnts. Indeed, it would seem to be a license to profit et al.

Gary Rogan writes: 

They are just helping their friends, because that's what friends do.

Is QE2 A Stealthy $90 Billion Gifting Scheme To The Primary Dealers?

We have previously discussed how due to the inability to know at what price (par or market) the Fed is buying back bonds from the Primary Dealers, there is a distinct possibility that due to the par-market difference, especially with many CUSIPs trading near record prices over par, the Fed may be implicitly letting PDs pocket the market-to-notional difference. The total, as shown below, could amount to over $40 billion. Furthermore, by avoiding the tight spread of on the run bonds, the Fed is effectively allowing PDs to pocket a huge bid/offer spread, which assuming a total size of ~$800 billion (low estimate) of all USTs bought over the (initial) life of QE2, aka QE2.5 and higher pre-extensions, amounts to $50 billion over the next 8 months.

Vince Fulco writes:

Isn't this just another version of Japan's price keeping operations (PKO) done in the early 2000s and perhaps for some periods in the decade before? Just substitute govvies and drechy mortgage products for equities in the case of the rising (or is it setting) sun?


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