Only 2 Billion of government treasury purchases remain.

Ironically the start of this bear market rally was kicked off when the Fed started its “Quantitative Easing” program. In layman’s terms this means the government printing money to buy treasuries. It is one of the only times in our monetary history that we have done such a thing and if you have been reading this blog for a long time you know that I call this the “Big Red Button” or the “Nuclear Option”.

I said for a few years that they would only use the “Nuclear Option” if their backs really got against the wall and there was no alternative. I also said that at some point they would do it even though it would be horrible for our economy. Well in March that is exactly where they were and as I expected they hit that button.

In all, the program was somewhat successful in holding rates down for the short run. The 10-year bond was trading at 3.00% when the program was announced. (up from 2.00% at the lows) Even with the massive rally in stocks which would usually cause a large flight from bonds the 10-year today is only trading at 3.40%. This is because the Fed was pouring in billions in purchases every week from today since March.

https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEib-wRSpEUe8bXyGLpqf9rQCIUL68hhhSzBO6ZOKNTdHbIEi_uMZJHPNd7GArux1iTsfbTukPQ_atCi86JZA54d56Eu17roT-mOkxCHHt-K-P-F9vmkFl5YTd_gpmzx1k2qkLRbqGNWY2g/s1600-h/FedTreasuryPurchases.jpg

Now I see this story on Calculated Risk which says that with the Fed’s 1 billion in purchases yesterday they are left with only 2 billion of the initial 300 billion.

http://www.calculatedriskblog.com/2009/10/fed-treasury-purchases-just-2-billion.html

Back in May 2009 I wrote a blog here called:

“Dollar or the bond market Benny, your choice…”
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=198854&t=01001808419327792238

This is what I said at that time, this is when rates started to rise and the dollar first really started to fall.
"
The people selling the bonds were selling to force the Fed to buy more. Whenever a market participant makes a bluff like “Paulson’s Bazooka” from last year the MARKET CALLS THE BLUFF. That is why the yields are rising.

The people selling the dollar on the other hand, were selling because they are AFRAID that the Fed will print money to buy more.

So now the Fed has a choice.

1. Buy more bonds now and continue the dollar obliteration but hold down yields a bit..
2. Don’t buy more bonds and watch the dollar strengthen but yields rocket higher.

Because I think they are going to chose #1 I covered most of my shorts in real life… I went heavily short at 888 back on April 30th and today we closed at the same exact level (888). I still think stocks could be headed a GREAT DEAL lower but I thought the more “sure thing” at this point was gold and gold stocks yet again. Plus those ultrashorts BLOW and I don't like using puts. I bought a lot of gold on the break of $930 a few days ago and some of my favorite miners at the same time.
“
That worked out well, unfortunately I did not have the conviction to hold all of those positions till today but I always hold a good amount of gold.

Anyway….

So now we are at an interesting crossroads. Really I should have saved the title “Dollar or the bond market Benny, your choice…” for today’s post. When I wrote that post the Dollar was trading ABOVE 80 on the USDX and the 10-year bond rate was only 3.20%
Today the dollar is down below 75 and even with all the billions in buying from the Fed rates are just a bit higher at 3.40%. On one had the dollar crash has to be getting out of hand even in the Fed’s mind at this point. We have Oil well over $80 even though there is practically no demand for it because of this dollar issue. On the other hand the real estate market has not turned and higher rates at this time would still be disastrous for this economy.

Because of these issue I believe the Fed will wait before this issue a second Quanitative Easing program. They are going to spend their last 2 billion next week and see how the auctions go without them buying. I think the auctions will go poorly but if stocks were to roll over a bit the “flight to safety” could keep the bond market from outright crashing.

Either way if the Fed does not issue a second program yields are going to go higher unless stocks crash (down more than 30%). Even with a stock market crash I don’t see the 10-year ever getting to it’s December 2008 low yield mark of 2.00% where I called the bottom.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=120472&t=01001808419327792238

The only way that is going to happen is if they hit the “Big Red Button” again. If they were to do that though I believe we truly would be at the endgame for our currency. Seriously if they were to issue another 1 trillion MBS/Treasury purchase program I would be joining the camp of the hyperinflationists. Currently I am still solidly in the camp of the stagflationists (the guys who are winning).

Because I think they know at least as much as I do I believe they will hold off on a second Quantitative Easing program and we will get to see the TRUE treasury market over the next few months.

Let’s hope we don’t have to see what happens if their back gets to the wall again.