To many people this whole thing comes as a total surprise. Wall Street firms make money trading with the Fed and the US Treasury. From the FT:
The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.
However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.
No kidding. Below is the current schedule of securities purchases the Fed makes public long in advance of it's actual purchases of securities. It gives you the dates and the types of securities it intends to buy. From historical experience it's not hard to deduce the amounts it will be buying as well.
By this Thursday, make sure you accumulate some 5 and 7-year notes. And by Friday have a bunch of 7 and 10-year notes. Those are the days when you should expect a good bid for this paper.
On the other hand, short some paper ahead of the Treasury auction, particularly if there is no nearby Fed purchase coming up. Or just buy paper at the auction and then sell to the Fed.
Think about it, you've got a massive seller and an equally large buyer of paper. Both tell you in advance what they are doing. And you, as a primary dealer, are asked to get in the middle to trade with the government on both sides. How can you not make money? And now people complain that Wall Street makes money on the government? The system is set up for this. And yes, by the end of the year they will pay themselves nice bonuses, complements of the Fed and the US Treasury.