Primary Dealer Short Treasury Bill Positions Rise To Lehman Crisis Levels
Courtesy of Tyler Durden
The New York Fed has released this week’s Primary Dealer net holdings update. While the data indicates that PD’s were aggressive sellers of virtually everything (USTs, Corps, Agency, except MBS) in the prior week, the one category that stood out was Treasury Bills, in which net short exposure reached levels last seen during the Lehman bankruptcy. Last week’s net short exposure of ($15) billion compares to the ($26) billion two year low seen on September 17, 2008. The Lehman collapse period was very curious as during it PDs saw both a record selling in Bills followed by a record buying of Bills, all within a month: whereas in the week ended 9/17 $41 billion of Bills were sold/shorted, the week of October 22, saw a covering/buying spree of over $51 billion. We have not seen this kind of amplitude in the past two years. Over the past 5 weeks, PDs have sold a total of $29 billion in Bills, starting with a net long exposure of $13.8 billion in the week ended January 13, and culminating with a net short of ($15) billion on February 17.
So Primary Dealers generated about $30 billion dollars simply by shorting a zero carry instrument. What did they do with the proceeds? A part of the new cash went to buy Coupon securities: as the chart below demonstrates, over the same period, PDs bought $ 14 billion in Coupon bonds, with half the Bill shorting proceeds converted into Coupon purchases.
A granular analysis indicates that PDs did not buy Coupons even across the curve: the under 3 year category was largely shunned- PDs had a net ($23) billion position at February 17. The same goes for the 3-6 year bucket, where levels have been flat for nearly half a year at just slightly net short positions. PDs have demonstrated by far the greatest enthusiasm for 6-11 year Coupons, where net positions were positive to the tune of $16 billion. In the 11 year + bucket holdings have also been relatively flat, and closed the February 17 week at $5 billion. More detail in the charts below.
Compiling all the Primary Dealer securities data, indicates that over the past week, PDs generated roughly $13 billion in cash from sellling and shorting various Treasury and Corporate fixed income securities. What that money was used for is unknown, although if one were to guess that it was likely used to purchase equities, one would likely not be incorrect, especially since there is little verifiable evidence to disprove such a hypothesis.
