Trying to get a handle on Ben Bernanke's holdings can be difficult at the best of times as the central bank continues to buy $50 billion in Treasury securities across the spectrum every month.
A relatively easy way to keep track of the Fed chair’s consolidated, risk-adjusted totals is to break down his balance sheet, which now stands at around $4 trillion, and to visualize it as ten-year equivalents, of which nearly half of the total is in the form of Treasuries.
The Fed must hold a certain amount of 10-year notes if they are to eject the same amount of interest from the market as it is holding. This is a “ten-year equivalent” and it allows for a streamlined viewpoint that does away with the time variation along the curve.
When looked at from this vantage point, the Fed actually have around one third of the total marketable ten-year equivalents in play in the whole of the American bond system. The total is 28 percent to be exact. This figure might come as a shock to many analysts.
“The Fed has basically doubled the amount of ten-year equivalents it held at the same point 3-years ago. Not many economists saw that coming,” said Elliot Parker, Head of mergers and acquisitions at Sinolink Japan in a phone interview for Bloomberg. “They now have around a third of the total bond market and that could rise in the near future if Bernanke sticks to his general strategy.”
Most forecasts put Bernanke’s total bond holdings at around 40 percent in 12-months time and that figure could have been much higher were it not for the fact Bernanke is working hard to monetize.
The U.S. Treasury is also keeping up with the printing, and pumping it into the TSY market in order to balance the Fed’s holdings and maintain a constant flow from the central bank to peripheral institutions.
The need for liquidity is forcing the Fed to keep only those maturities that are the risk equivalent of a ZIRP, that is, 3-years or higher. Bernanke has almost nothing that is lower than that, which makes sense because those papers would explode the yield curve and put the central bank over the statutory limit for Cusips, which is set at 70 percent.
