STOCK MARKET WATCH -- Wednesday, 26 December 2012

[Demeter]

13. Dealers Tighten Treasuries Grip as New Fed QE3 Suppresses

WHO WRITES THESE HEADLINES? IT SOUNDS LIKE A MANGLED TRANSLATION FROM A 3RD WORLD ECONOMY...

http://www.bloomberg.com/news/2012-12-24/dealers-tighten-treasuries-grip-as-fed-qe3-suppresses-correct-.html

The world’s biggest bond dealers are growing more reluctant to give up their record holdings of Treasuries, providing support for a rally in the world’s most- liquid debt market that is entering its fourth year...Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of the 21 primary dealers of U.S. government securities have reduced the amount of bonds they offered to the Federal Reserve to average of $8.04 billion a day in the past two weeks, from the $11.6 billion in September 2011, when the central bank began its Operation Twist stimulus program, according to data compiled by Bloomberg. At the same time, Wall Street’s holdings of Treasuries more than doubled since March.

The hoarding shows rising demand for the safety of U.S. government debt as economic growth remains sluggish and President Barack Obama and House Republicans struggle to resolve the budget dispute that threatens to trigger more than $600 billion of spending cuts and tax increases in January.

“The market continues to be held hostage by politics and the economic numbers aren’t that strong,” Matthew Duch, a fund manager in Bethesda, Maryland, at Calvert Investments, which oversees more than $12 billion in assets, said in a telephone interview Dec. 20. “In this environment, where you have fewer and fewer options, you have to align yourself with what the Fed is doing. You can’t afford not to.”

Investors have bid a record $3.16 for each dollar of the $2.011 trillion in notes and bonds the government has auctioned this year, up from the previous high of $3.04 last year, Treasury data show.

Banks submitted offers equaling $2.61 for each $1 of securities purchased by the Fed for its expiring $667 billion stimulus program, known as Operation Twist, where the central bank swaps short-term debt it owns for an equal amount of long- term Treasuries. That’s down from the weekly average of $2.99 since September 2011, according to data compiled by Bloomberg. The primary dealers that trade with the Fed boosted holdings of Treasuries to $136 billion from this year’s low of $59 billion in March, central bank data shows. Inventories of government securities averaged $90.4 billion in 2012. Investors have poured about $302 billion into bond mutual funds while withdrawing $135 billion from those that favor equities, according to data from the Washington-based Investment Company Institute.

The Fed has been the biggest buyer of U.S bonds, flooding the economy with more than $2.3 trillion through three rounds of purchases since the depths of the financial crisis in 2008. It’s now the biggest owner of Treasuries, with $1.66 trillion as of this month, ahead of China’s $1.16 trillion...Purchases by the Fed will effectively absorb about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan. The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 that ended Sept. 30, according to 18 of the 21 primary dealers...

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