BY BART13
you can usually find bart here ...
Message 24038508
Securities Lending and bond trading
By bart
October, 2007
The smoking gun
"...the Federal Reserve has the capacity to operate in domestic money markets to maintain interest rates at a level consistent with our economic goals.”
-- Ben Bernanke, Fed Chairman, March 26th 2007 to the Senate Banking Committee.
A little known tool of the Fed used in maintaining and managing interest rates is Securities Lending, and it can be quite helpful to see what the Fed wants to have happen on the shorter term with treasuries and interest rates. It's also quite tradable.
The chart below represents the results of the SecLend operations, along with the 10 year T-Bond interest rate.
The green line is the annual rate of change (with a 13 week moving average applied to smooth it out) on the actual dollars injected via the daily Securities Lending Open Market Operations of the Fed. The average is about $2 billion per day and the amounts can go well above $10 billion on a daily basis during significant Fed operations. Each operation lasts only one business day.
The blue line is just a straight 13 week moving average of the same data.
The concept, confirmed by various statements by Alan Greenspan, the FOMC minutes and Chairman Ben Bernanke (example above) is that the Fed via the New York trading desk can and does affect interest rates. This is a Central Bank, and they have as many billions as is needed to make things like SecLend operations work. If hedge funds and multi-national bank trading desks can make the profits they do and push markets or stocks or commodities around like they can, then the Fed should certainly be able to do the same thing.
The basic trade is a combination of the three items:
Blue line going up
Green line going up
Trend line break in a down trend of the 10 year interest rate
It produces a quite reliable sell signal (a sell in TBond futures is the same as investing on the basis that interest rates are going up). The blue line will virtually always precede a green line move up and is an early warning, or alert if you prefer.
Just look at how the blue line starts up before the black line since early 2005 and the green line even usually precedes the interest rate up move too. The 3rd rule above (the trend line break) is used for confirmation and risk management purposes.
Securities Lending FAQ from the Fed itself.
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