Thursday, August 6, 2009

The Fed Directly Monetizes 17% of Last Week's 7-yr Treasury Auction

The Fed conducted a Permanent Open Market Operation today (POMO), in which it purchased from Wall Street firms $4.753 Billion of the of the $28 Billion 7-yr Treasuries auctioned last Thursday. A Fed POMO is an operation in which the Fed directly buys Treasuries from bond brokers as a means of permanently injecting money into the banking system. The Fed holds these bonds permanently on its balance sheet.

Chris Martenson sniffed this out today at where he shows the details copied from the Fed's website and from the details of the auction released by the Treasury. As you can see, the Fed today bought $4.753 Billion of the exact bond cusip from last weeks Treasury auction (the cusip number is a specific number assigned to any registered stock or bond security for identification purposes).

As a former bond trader, it wouldn't bother me if just a small amount of paper with last week's 7-yr Treasury cusip showed up on today's POMO report. That could be attributed to coincidental bond trading flow. HOWEVER, the fact that Primary Dealers took down 36% of last week's 7-yr auction and then the Fed turned around and repurchased almost 48% of those exact bonds from the Primary Dealers suggests that some kind of arrangement beyond mere coincidence was in place between the Fed, the Treasury and the Primary Dealers.

In fact, between last Thursday's $28 Billion 7-yr Treasury auction and today's stunning find by Mr. Martenson, the Fed conducted FOUR POMO operations in which it swallowed up (i.e. directly monetized) $23.74 billion in Treasury bonds ranging in maturity from 4 yrs. to 17 yrs. This represents almost 85% of the total 7-yr. Treasury auction. IN FACT, the four POMO operations in the last week represents neearly 10% of the total number of POMO operations conducted by the FED in the last 12 months. Here is a link to the Fed's POMO operations:

Given that we know the Chinese did not participate in a meaningful way in the last week's Treasury auctions, many of us were wondering how the Treasury was able to auction off as much paper as it did without a significant back-up in yields or more overall volatility in the bond market. It looks like we have our answer and the answer is that the Federal Reserve has resorted to printing money in order to directly monetize the record Government spending deficits AND the Treasury auctions used to finance those deficits. Get ready for a big uptick in inflation.


  1. Another great post. I think this story is the big time. Maybe it's time to add to the gold/silver core positions, yes? Great blog by the way.

  2. hey gyc, thanks for the feedback. My view is that you should be taking any and all spare cash you don't need to live and convert it into gold and silver.

    I think silver is very cheap to gold and will outperform gold over time.

  3. Hi Dave,

    I really want to thank you for you efforts on this blog, tremendous!

    I have seen you reccomend Tuvling and CNI for physical and steer people away from the ETFs and towards CEF/GTU/SBT. Big up youself!

    I have an Roth IRA, Traditional IRA and a SEP IRA - I have seen precious metals IRAs mentioned and storage with custodians like the Perth Mint - I was wondering if you have any ideas on how to apporach the IRA issue -
    -just buy CEF/GTU/SBT?
    - invest in a precious metals IRA - what are they, how do they work, aren't there some that are somewaht less than reputable?

    Anyway, I raised a lot but thanks so much for any ideas you may have.

    Stay well, and keep posting well.

    Cheers, J.R.

  4. Hi JR. Thanks for the feedback on the blog.

    Stay away from Perth Mint and Kitco and any of the ETFs except CEF/GTU/SBT. These all have the potential to paper frauds. Sometime soon I'm going to incoporate a the ability to upload PDF files onto my blog and I'll upload a research piece on GLD that I wrote earlier this year.

    In terms of investing your IRA into alternative assets, the best way to do that is to roll everything over to an indepedent self-directed IRA custodian. We recommend for people who invest in our precious metals fund to use Entrust:

    Entrust lets you buy bullion in your IRA.

    If you want, I'd be happy to help you with some ideas. Feel free to email me at

  5. Dave, wouldn't the fact that it was a POMO pretty well confirm some kind of loose arrangement? A TOMO I could understand, slow sales to the aftermarket would be really tricky at a time when supply seems to be on the 'escalator to the stars'.

    And the thing my conspiratorial mind is wondering about, what happened to the 2 Japanese and the 135 billion of alleged bonds?
    Didn't that just kinda drift off into nowhere right before the supply of treasuries takes a large leap forward in supply.

    You're a trader, am I making the wrong inferences here?

  6. I'm not a banker nor am I employed in anything money, however, I found my already privatized Social Security account at Fidelity Investments.
    How does this play to POMO operations?
    Over $240,000.00 was moved to Fidelity in my name since 1991 according to SSA documents.