That Asset Class Again

Zero Hedge does the sums on demand for Treasuries over the next few months:

The reason is simple: while the Fed is en route to monetize $1,080 billion in UST and MBS debt in the current year, when there is just $760 billion in net US issuance, what the BOJ has done is add a bid for another $720 billion when Japanese net supply of debt is just $320 billion in the next 12 months. In other words, between Japan and the US, there is now some $660 billion in secondary market debt that the two banks will have to purchase over and above what their respective treasury departments will issue.

This means that the two biggest central banks are about to be perfectly price ambivalent as to what cost the monetize nearly two thirds of a trillion in debt: their mandate is to expand their assets at any cost, which means buying up debt from the secondary market at any price. The immediate consequence is that the best performing trade of 2011 and 2012 – frontrunning the Fed’s purchase of the long end – is about to come back with a vengeance, as speculators buy up every piece of duration debt that is not nailed down, knowing full well they will be able to sell it right back to Bernanke and Kuroda in the future at whatever price they so desire.

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