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 http://www.chrismartenson.com/blog/fed-buys-last-weeks-treasury-auction/23880 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:

http://www.newyorkfed.org/markets/pomo/display/index.cfm

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.