There once was a time when the Federal Reserve abhorred the idea of monetizing debt. That day is long over.
In the second quarter, the most recent for which data is available, the Fed bought $164 billion out of the $339 billion in net new Treasurys sold.
In the mortgage-backed debt markets, the Fed has been buying upward of 80% of the bonds issued by agencies such as Freddie Mac and Fannie Mae.
ZeroHedge helps to put this number into perspective.
the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.
This dramatic imbalance puts a lot of question marks over how the upcoming hundreds of billions in incremental Treasury purchases will be soaked up, now that QE only has $15 billion of capacity for USTs: with Households lapping up risky assets it is unlikely they will look at Treasuries absent some dramatic downward move in equities, while Foreign purchasers, which many speculate are in a game of Mutual Assured Destruction regarding UST purchases, have in fact been aggressively lowering their purchases of Treasuries (from $159 billion in Q1 to $101 billion in Q2, an almost 40% decline in appetite!).
The Treasury market will probably survive the end of the Fed purchases, although at a substantially higher interest rate. The problem is the Fed's program of buying Fannie and Freddie's mortgage-backed securities, a program that is scheduled to end in the coming months. Foreigners have been net sellers of GSE bonds since they were nationalized.