Treasury Sucks While Fed Pumps, But Markets Go Limp

Courtesy of Lee Adler of the Wall Street Examiner

(My notes in italics and emphases in bold ~ Ilene)

Excerpts:

The Treasury added more unexpected supply last week. (Much of the Treasury’s supply gets paid for by the Primary Dealers, leaving them with less money to buy stocks.) It has now sucked out all of the cash the Fed pumped into the market in its mid month round of MBS (Mortgage Backed Securities) settlements and then some. This has helped to create a hostile environment for stocks…. 

We had an even bigger week than expected when the Treasury added another $25 billion surprise Cash Management Bills (CMB) resulting in net new supply of $79 billion, including the prior week’s TIPS offering. The Thursday settlement had $25 billion in net new supply, instead of the originally expected zero. $16 billion in new supply from the TIPs settled Friday, and $38 billion will settle Tuesday after Labor Day. 

Apparently the dealers and other buyers needed to liquidate stocks in order to pay for the new paper. After massive selling of Treasuries in the prior couple of weeks, they got a few “likes” last week, but yields were still well above the last round of note auctions in July. 

While the Fed did not settle any MBS purchases, it purchases and closes the usual $11 billion or so in Treasuries every week, and there may still have been some cash left over from the mid month MBS settlements. For whatever reason that cash went back into the Treasury market last week…

The two CMBs totaling $50 billion in recent weeks, along with the increase in the size of the 4 week bill from a forecast $45 billion to $50 billion over the past two weeks raised $60 billion in cash that the Treasury did not appear to directly need, at least at such a large level. The Treasury’s cash balances were running well ahead of this period last year, so it raised the issue of why the Treasury was pulling $60 billion in cash out of the accounts of financial market players when it didn’t need that much, if any of it. 

I posed the idea over the past two weeks that these Treasury draws may have been done in conjunction with the Fed for the purpose of old style reserve management. Between its MBS purchase settlements and weekly Treasury purchases the Fed pumped $100 billion in cash into the markets from August 12 through the end of the month. I believe that it has begun to worry about the asset bubbles that QE has caused and may have wanted to act to draw down the QE cash without unduly alarming the markets by pre-announcing a Taper. So it got the Treasury to do the dirty work while it pretended that “to taper or not to taper, that is still the question.”  (I.e., the Fed wants to taper but is scared of the stock market’s reaction, so instead the Treasury is selling more bonds which will have the same effect – taking money out of the hands of the Primary Dealers.)

On that basis, I’m guessing that a taper of around $25 billion is coming in September. However, I must add the disclaimer that I’m trying to guess what a group of insane people will do. Better to wait for the actual acting out, that attempting to anticipate what future irrationality will flow from their past insanity.

*****

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