Thread by @Darky999

Was thinking about the Fed H8 form today - this is what you do on weekend if you are a kool kid these days (along with a bit of RH trading ofc...)

As far as I am aware, i've not seen this logic laid out on FinTwit, please correct me if wrong

1/N

The mic drop is that the Fed bought far fewer Treasuries in June than US banks did

[cue @'s for people who might care]

@RaoulGMI @bondstrategist @apollotradingsd @DiMartinoBooth @TetotRemi @chigrl

2/N

But 'obviously' this is incorrect? Well it is? Are you sure?

All you need to know are two data points:

1. Fed bought $80B of US Treasuries in June (source: newyorkfed.org/markets/domest…

2. Banks bought $260B of US Treasuries in June (source: federalreserve.gov/releases/h8/cu…)

3/N

How do I get to the $260B? Look at the H8 form (released weekly), row 8 (non-MBS = Treasuries, see footnote),

End May = $950.7B
July 1 (proxy for end June) = $1130.2B

Difference = $180B

Banks have $180B NET ('net' is crucial) more Treasuries (which are held at par) more

4/N

And we know the Fed does QE by buying bonds off the major banks (who own the primary dealers); so the Fed bought $80B of bonds off the banks

So banks gross purchases of T's in June = 180 + 80 = $260B

5/N

That is 3x more than the Fed bought...

(even if you don't assume Fed bought off the banks, which it largely did, it's 180B vs 80B which is 2.2x)

6/N

Why are banks buying so many bonds?

They don't have regulatory reasons, they have plenty of HQLA (high quality liquid assets)

They are choosing to buy these Treasuries; and actually they are also choosing to NOT lend (look at C&I lending in same form decreasing rapidly)

7/N

Why do banks take investment decisions?

To make profit...

(if it's not regulatory mandated)

They are businesses after all...

And they are the ultimate 'smart money' as they know all the plumbing of the system

8/N

So US banks must be expecting bond yields to normalise with other G7 countries - i.e. crash to near zero across the curve

Price action this week gives some credence to this too, but it's just a week, lets see what happens over next 2-3 months...

9/N

If you like macro, please take the time to dive into the source data - only by doing so can you discover new ideas, and create insights; the US puts out so very much high frequency data, it's unique; no other country does this

(Bravo US!)

10/N

If I am missing something here, PLEASE can someone point it out, FinTwit can be amazing for having people sense check your ideas & analysis

11/N

Bottom line if this is true...

There is perhaps 1pc more juice to squeeze out of 30Y bonds, that's 25% return or so (c. 25 year Effective Duration in long duration ETFs, plus a couple have liquid options markets too)

PLEASE DYOR BEFORE TRADING!

12/N

Would love to hear people's thoughts on this, it actually took me by surprise, and just came into my head when I was reading the H8, as the amount of T's US banks have been buying recently is really high, I think far higher than most on FinTwit would think

FIN

I meant Row 5 non-MBS here (the data is correct, the form is hugely confusing!)