How the Fed Cornered the Long Bond

Fed Treasury Holdings 5-7-2014
The above link should take you to a PDF showing the Fed’s System Open Market Accounts holdings of Treasury Bonds and Notes which the second link will tell you comprise $2.224 trillion of the total $4.017 trillion of SOMA Holdings, with that total including $1.631 trillion of Fannie and Freddie Mac MBS’s. With the remainder in a variety of other Federal securities. In other words the ‘AFTER’ of three rounds of QE.

The PDF is extracted from a formatted Excel worksheet and shows all Fed SOMA holdings of Notes (1 to 10 years) and Bonds (20 & 30) by Maturity Date, Issue No, Coupon Rate, Par Value, and % (of Issue) Outstanding. As you scroll through the PDF a particular relationship jumps out at you: the higher the Coupon Rate the higer the % of Outstanding actually held by the Fed SOMA with a top limit apparently set at 70%. This isn’t entirely fixed, there is an additional layering of Long Term over Short Term with the Fed holding small percentages of all issues before jumping up to the 44.3% of the 9.25% Feb 15, 2016 and then taking progressively higher chunks of the Long Bonds maturing after that until holding peak as a percentage of issue with the 70% of the 8.13% 8/15/2019. Which percentage holds steady until the 8.00% 11/15/21 but then varies downward with holdings ranging mostly in the 55-70% range for issues between 2021 and 2042.

Feel free to prod at the numbers in this data table as you will. But the first order conclusion is that the higher the coupon rate in the out years of the Long Bond the larger the position of the Fed. With an apparent self-imposed limit of 70% of any given issue. I plan to comment on this at length in Comments but will allow readers the first crack. But would add one little fact nugget for your consideration: the Fed rebates all profits to Treasury. And to the extent that those profits are driven by those 8 and 9% interest payments on Bond issues where the Fed has holdings ranging up to 70% the end result is that a very large percentage of debt service on the Long Bond, a dollar amount that is recorded as an Outlay on the Federal Budget is effectively rebated back to Treasury.

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