The Madame Chair was finally asked a FAFRRRF -aka DEATH STAR - (we are very happy to have coined this now universally accepted term) question today by Sen. Kay Hagan of NC. In Heidi Bowl fashion CNBC broke away from the answer for something about Dan Loeb. I did a little call around yesterday on the subject and we all came away scratching our heads.
Sen. Hagan wondered how much action the death star was seeing. Madame Chair confirmed activity at about 5B up from 3B and that the rate had moved to 5bp. (Sidebar- I'm not convinced they were confusing size with rate in this exchange) Yellen accurately pointed out that there were large spikes around certain bad dates and what not. Taken on AVERAGE the facility is tracking roughly 75B/month. Sound familiar? Since "Taper Part 2" to 65B/month in LSAP, the Fed is - may be - possibly isn't - can't be sterilizing a slightly larger amount of bond buying than they are conducting. (We're not sure, that's the point of this discussion and we welcome clearer thoughts)
The reason we are thinking about these activities is 2 fold:
1) We believe the Death Star Rate should be walked out to 8-12bp in conjunction with taper to zero for obvious reasons.
2) The ECB will have to have a serious discussion right before the US Employment report about a negative deposit rate or suspending the sterilization of the SMP.
Ending sterilization there, only doable with a big hand from the Bundesbank, would add roughly $240B to the EU system. Quietly, it appears the Fed has moved to the other side. Perhaps, coordinated CB policy has not ended as quickly as we had thought. From a market perspective, the possibility of a negative rate, the steep roll in Treasury Futures and the large spec short base are combining to drive a squeeze of sorts. Tactically, we'd like to see the rally spike around the ECB next Thursday. Generally, we are wondering if the Fed hasn't already used the Jedi mind trick of Forward Guidance to secretly fire up the Death Star.
The Emperor's Phone Call