Management or Manipulation: The TIO Story

By bart
September 17, 2006

11/7/2007: Note that TIOs have become significantly less reliable as a US stock market bullish signal since 2nd quarter 2007, and lately (roughly mid July) have had a higher correlation with bearish effects. Whether this is a signal of a change in stance of the 22 primary dealers or not, it is an unmistakable change.

A TIO is an abbreviation for Term Investment Option, and is a way for the Treasury to make extra income.
From the treasury site here, the "Treasury will periodically auction excess operating funds to participants for a fixed term at a rate determined through a competitive bidding process."

Now for some interesting quotes, with our comments, from a few Federal Reserve members over the last 17 years:

  • "So the question is, having very consciously and purposely tried to break the bubble and upset the markets in order to sort of break the cocoon of capital gains speculation, we are now in a position—having done that and in a sense succeeded perhaps more than we had intended—to try to restore some degree of confidence in the System."
    -- Alan Greenspan, Chairman of the Federal Reserve. Source - FOMC meeting minutes from March 22, 1994
    1. Oh...
    2. Our favorite quote from a member of the Federal Reserve.

  • "In today's markets, for example, there is an increased reliance on private counterparty surveillance as the primary means of financial control. Governments supplement private surveillance when they judge that market imperfections could lead to sub-optimal economic performance.”
    -- Alan Greenspan, during a Sept. 2002 speech in London entitled "Regulation, Innovation, and Wealth Creation"
    1. "Private counterparty surveillance"? Is this "Fed-speak" for the PPT since the Fed is actually a private organization, or perhaps for the CRMPG? Even without the benefit of a tinfoil hat, the concept of private and controlling surveillance of the market is quite disturbing.
    2. An admission that governments interfere ("supplement") during periods of "sub-optimal" performance, from the Maestro. We wonder who defines what is sub-optimal, at the very least, and also note that September 2002 was also the approximate bottom in the U.S. stock markets.
    3. The first public TIO transaction from the U.S. Treasury was in April 2002.

    The running TIO total pool and the S&P 500, since early 2006

    Just simply notice the very high correlations between the dates a TIO transaction starts and ends with the up and down moves of the S&P 500. Also note that TIOs aren't the only tool in the Fed's toolbox.

    Note: graph has changed since original publication. Temporary repos (one element in Open Market Operations by which the Federal Reserve can manage or manipulate various markets) have been added for a clearer and fuller picture. TIOs are still the thick black line.

    The following chart has also been added to show the actual signals more clearly.

    Management or Manipulation: You decide

    Securities lending, bonds & Fed intentions and hopes

    Another little known tool of the Fed used in managing interest rates is Securities lending, and it can be helpful to see what the Fed wants to have happen on the shorter term with bonds and interest rates. It’s also quite illustrative of the strong effect that the Fed has and can have on those markets. Notice how Securities Lending operations have always led changes in interest rates since 2000.
    Currently, it appears to us that the Fed want rates to go back up some, probably due to the yield curve inversion.

    Web site:

    TIO daily chart:
    SecLend weekly chart: