Fed to Print [Only] $97 Billion Over Next 30 Days

After last month's record printing performance of $112 billion, the NY Fed will scale down and print only $97 billion over the next 30 days. In actuality, total purchases pursuant to QE2 will remain the same at $80 billion; however, the purchases needed to compensate for maturing assets (QE Lite) are dropping from $32 billion to $17 billion--in part, because of fewer Agency (Fannie/Freddie) securities maturing, but primarily because of lower MBS principal payments.

Mortgage rates have been climbing over the last few months, reaching the highest level since April 2010 only today. Rising mortgage rates mean fewer refinances, which require payouts to the MBS holders (including the Fed) of the full value of the repaid mortgages. Inasmuch as rising long term interest rates are testament to the resounding success of the Fed's purchase program (just ask Brian Sack), thanks to Fed profligacy, it is slightly less profligate this month.

Full schedule:

Tentative Outright Treasury Operation Schedule

Across all operations in the schedule listed below, the Desk plans to purchase approximately $97 billion. This represents $80 billion in purchases of the announced $600 billion purchase program and $17 billion in purchases associated with principal payments from agency debt and agency MBS expected to be received between mid-February and mid-March.

Printer version

	OPERATION DATE1	SETTLEMENT DATE	OPERATION TYPE2	MATURITY RANGE	EXPECTED PURCHASE SIZE
	February 11, 2011	February 14, 2011	Outright Treasury Coupon Purchase	08/15/2016 – 01/31/2018	$6 – $8 billion
	February 14, 2011	February 15, 2011	Outright TIPS Purchase	04/15/2013 – 02/15/2040	$1 – $2 billion
	February 15, 2011	February 16, 2011	Outright Treasury Coupon Purchase	02/28/2015 – 08/15/2016	$5 – $7 billion
	February 16, 2011	February 17, 2011	Outright Treasury Coupon Purchase	05/15/2021 – 11/15/2027	$1.5 – $2.5 billion
	February 17, 2011	February 18, 2011	Outright Treasury Coupon Purchase	05/15/2018 – 02/15/2021	$6 – $8 billion
	February 18, 2011	February 22, 2011	Outright Treasury Coupon Purchase	08/31/2013 – 02/15/2015	$5 – $7 billion
	February 22, 2011	February 23, 2011	Outright Treasury Coupon Purchase	08/31/2016 – 02/15/2018	$6 – $8 billion
	February 23, 2011	February 24, 2011	Outright Treasury Coupon Purchase	08/15/2028 – 02/15/2041	$1.5 – $2.5 billion
	February 24, 2011	February 25, 2011	Outright Treasury Coupon Purchase	08/31/2012 – 08/15/2013	$4 – $6 billion
	February 25, 2011	February 28, 2011	Outright Treasury Coupon Purchase	05/15/2018 – 02/15/2021	$6 – $8 billion
	February 28, 2011	March 1, 2011	Outright Treasury Coupon Purchase	08/31/2013 – 02/15/2015	$5 – $7 billion
	March 1, 2011	March 2, 2011	Outright Treasury Coupon Purchase	08/15/2028 – 02/15/2041	$1.5 – $2.5 billion
	March 2, 2011	March 3, 2011	Outright Treasury Coupon Purchase	03/31/2015 – 08/31/2016	$5 – $7 billion
	March 3, 2011	March 4, 2011	Outright Treasury Coupon Purchase	05/15/2018 – 02/15/2021	$6 – $8 billion
	March 4, 2011	March 7, 2011	Outright TIPS Purchase	04/15/2013 – 02/15/2041	$1 – $2 billion
	March 7, 2011	March 8, 2011	Outright Treasury Coupon Purchase	09/15/2013 – 02/28/2015	$5 – $7 billion
	March 8, 2011	March 9, 2011	Outright Treasury Coupon Purchase	09/30/2016 – 02/28/2018	$6 – $8 billion
	March 9, 2011	March 10, 2011	Outright Treasury Coupon Purchase	03/31/2015 – 08/31/2016	$5 – $7 billion

The next release of the approximate purchase amount and tentative outright Treasury operation schedule will be at 2 p.m. on March 10, 2011. At that time, the Desk will also publish information on prices paid for securities included in the operations listed above.

______________________________
¹Operations are tentatively scheduled to begin around 10:15 AM and close at 11:00 AM unless noted otherwise.
²Nominal coupon operations are specified as “Outright Treasury Coupon Purchase” and TIPS operations are specified as “Outright TIPS Purchase”

Is the 3 Decade Bond Bull Market Officially Over, or Will the Central Planners Succeed in Kicking the Can?

To answer this question, we'll look at the yield (inverse to price) of the 30 Year T-Bond and its downward sloping trend channel that began in 1990 (the actual high was nearly a decade earlier in October, 1981).

Click image for larger chart.

Last week, the yield did close above its channel, but allowances must be made for porosity due to the length of history. Accordingly, a close above the April 2010 high of 4.86% would be the first confirmation that the secular trend in bonds has turned.

However, if this latest surge in yields is a trap (as we suspect), long term yields will be quickly reversed to the downside and could trend lower into July, testing the 3.85% to 4.15% area. And just what would facilitate a reversal, as the Fed continues to create $30 billion per week ex nihlo (not to mention the $25 billion per week SFP wind down)?

First, since inception of QE2, the Fed has underweighted purchases in the 20-30 year tenors by about 75% when compared to the 2-10 year tenors. Tomorrow, the NY Fed will update its schedule of Treasury purchases for the next 30 days and could simply announce it will expand purchases in the 20-30 year segment. Alternatively, the FOMC could announce a similar change at its March 15, 2011 meeting, though that might be a bit too late.

However, in addition to a change in Fed policy, it would likely take a concurrent deflationary headline scare to sustain the trend. Once sentiment turns bearish from one major story, other stories that have been shrugged off, such as China tightening and food riots, will become bearish catalysts. In that regard, we're closely monitoring developments in the US financial sector as a trigger, especially with regard to the foreclosure fraud story that has largely dropped off the media's radar, but has potential to re-surge if talks regarding the Bank of America law suit "break down". From Bloomberg dated Feb 2, 2011 (emphasis ours):

The investor group including Pacific Investment Management Co. that is weighing whether to sue Bank of America Corp. over about $47 billion in mortgage bonds agreed to extend talks with the lender for the second time.

The bond owners agreed to renew “their extension of any time periods” laid out in an Oct. 18 letter, said Kathy Patrick, a lawyer for the investors, in a statement e-mailed late yesterday. The original extension was set to expire at the end of January, Bank of America Chief Financial Officer Charles Noski told analysts last month in a conference call.

Pimco, which runs the world’s biggest bond fund, BlackRock Inc. and the Federal Reserve Bank of New York are among investors demanding that the biggest U.S. bank by assets repurchase loans packaged into bonds, people familiar with the dispute said in October. Chief Executive Officer Brian T. Moynihan has said the bank would engage in “hand-to-hand combat” to reject unwarranted buyback demands.

“We’re not doing anything that’s not going to be in our shareholders’ best interests, but we always want to talk to everybody in the world to make sure we understand where they stand,” Noski said in the Jan. 21 call.

Robert Stickler, a spokesman for the Charlotte, North Carolina-based bank, confirmed that discussions were continuing and declined to say if there was another deadline. The mortgages in the dispute were created by Countrywide Financial Corp., acquired by Bank of America in 2008.

So the fate of BAC lies in the hands of an investor group consisting of the Fed itself, BlackRock and Pimco, even as Bill Gross has emerged as a US Dollar and bond bear recently? While we're long term bond bears, the 30 year yield shooting north of 5% is too great a risk for the central planners to not exercise the few powerful cards they still hold. Recall that it was the announcement of the SEC lawsuit against Goldman Sachs on April 16, 2010 that precipitated the first plunge from what would ultimately be the near-highs of the then-current rally.

Accordingly, implications for equities in our scenario is they would first correct on a major bearish trigger in the financial sector, then likely enter a trading range for several months. In contrast to April, 2010, ongoing money printing reduces the likelihood of another flash crash, and should cap any correction at about 10%-12% (roughly the November lows). Conveniently, this would also relieve much of the short to intermediate term (but not long term) bullish pressure in commodities, and provide [academic] justification for extension of the Fed's large scale asset purchase program (QE3) at the April 26-27 meeting.

To be clear, we are not issuing a bearish call on equities or long term yields at this point--only highlighting what to be alert for, and how the central planners might soon wrap up some untidy developments.

Update 2:12 pm EDT: ZeroHedge notes that indirect (foreign) buying interest surged in today's 10 year auction, a complete reversal from yesterday's tepid interest in the 3 year.