A Conspiracy Theory

Okay, if there are any readers out there that don't like conspiracy theories, perhaps today's post isn't for you, because I can't necessarily prove that this is what is going on... but it really feels like this is what's going on. So here it is...

To our right this mornings graph... Notice that at the beginning of the day we saw nice gains. In fact we were up three ticks. Treasury yields were low (and continued to trade normally), the stock market was down and flailing - things seemed to be as they should this fine Monday morning. Then BOOM... we walk straight off a cliff, and fall a full 6 ticks resulting in our being down 3 on the day. The market paused... and then continued to trade down another three ticks.

Finally we rebounded, but have been trading lower all day and are now down 8 ticks on the day.

Here's the conspiracy behind today's losses... It takes a massive investor to shift the market and produce a drop like we saw this morning. Clearly it was profit taking... the question is who is in a position to sell mortgage backed securities for a profit and create that large of a shift? The answer... the federal reserve does. They did after all buy 1.25 trillion over a two year period which ended about three months ago. It would make sense they are now offloading and selling a portion of this position.

If I am right, we have our government and their monetary policy to thank for these losses and the worse pricing that is to result. This is a troubling fact because it raises the possiblility that the Fed Could be continuously ordering the sale of small positions (and larger should the market climb further) around the 104.00 price point. Doing so would keep rates around the current levels, and is straight market manipulation. The Fed definitely has a large enough position to execute this type of strategy and curb lowering rates, but this tightrope walk could end in a serious fall if investors get wise to this plan and start selling themselves. That's when these low rates end. Let's hope I've simply had one too many cups of coffee and am reading too far into this sell off.