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Federal Reserve SOMA Holdings of the Long Bond

It is well known that the Federal Reserve in its three rounds of QE (and especially the first two) aggressively bought Treasury Notes and Bonds or collectively the ‘Long Bond’ of 10 Years and longer. But there has been relatively little discussion of what that means for such things as Federal Government Net Interest etc. So rather than advance my thoughts I figured we could start with the numbers in the following web tool:
System Open Market Accounts

The link should take you to the Summary Tab which shows that total holdings in these accounts are $4.221 trillion comprised of $1.738 trillion of MBS’s (Federal Mortgage Backed Securities) and $2.347 trillion in Treasury Notes and Bonds plus some smaller amounts in TIPS and Agency Securities that are more a rounding error in context. Of interest is that the Fed’s SOMA holds no T-Bills at all. That is the holdings are all Medium to Long (2 years and longer) and not Short (1 year or less).

If you click on the Notes and Bonds tab you will see a breakdown of Fed SOMA holdings of each issue. Now while Notes and Bonds are not individually labelled it is easy to distinguish 10 Year and shorter Notes and 30 Year Bonds simply by inspection of the relative coupon rates of different Treasuries maturing on the same date: rates above 6% being Bonds issued 15, 25, and 30 years ago and rates in the 1-3.5% range being mostly 10 Year Notes. If we then inspect Fed holdings of those higher yield Bonds we see that they comprise up to but never exceeding 70% of the total issue.

I’ll let you all inspect the Tables as you will but would like to ask a question. The numbers show that the Fed’s SOMA holds something like 2/3rds of ALL existing high yield Treasury Bonds. Which means that these accounts are also collecting that percentage of projected Net Interest going forward for that part of Federal Debt actually held in Bonds. Since the Fed has no need to ever sell those holdings against its will and can simply hold them to maturity and since it rebates ‘profits’ to Treasury this would seem to mean that simply examining Net Interest in either nominal terms or as a percentage of GDP will lead one to erroneous conclusions about the ability to the Government to service its debt. That is just examining the total for Public Debt and taking its average coupon doesn’t do much until or unless you segregate out both Intragovernmental Holdings AND the Fed’s SOMA holdings and THEN adjust for the fact that these holdings include up to 70% of the highest yielding instruments.

I have put up these numbers before but as usual had the comment threads hijacked into other channels (cough, cough **Social Security** cough). But I really really hope SOMEBODY will address these issues more directly in terms of macro finance.

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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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