We’ve updated our chart illustrating the Fed ownership of the U.S. yield curve. We’ve also included the percentage of total maturities the Fed owns in each year from the April 2011 data and December 2010 data. Most of POMO buying since December has taken place in the 7-9 year maturities. In December, for example, the Fed owned 13.4 percent of the bonds maturing in 2019 compared to 31.6 percent today.
We’re with the conventional wisdom of no QE3, no massive flight to quality, or a miracle long-term budget agreement. We therefore expect continued upward pressure on interest rates. We recently posted our Flow of Funds analysis showing that the Federal Reserve and foreign flows effectively funded 100 percent of the U.S. budget deficit in Q4 2010. Interest rates need an upward adjustment to attract new non-official buyers, which could also put a short-term lid on commodities, in our opinion. We’re on the same side as the Bond King.
(click here if chart is not observable)