Interesting Times Start Next Week

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Terrorists stood on the periphery of the Treasury market this week, waiting to detonate the explosives strapped to their waists if US politicians don’t get their acts together and move toward a compromise that would raise the debt ceiling. It will be an especially tense standoff this week, because on Friday the market must settle $66 billion in net new notes and bonds. That in itself could be enough to light the fuse and send yields toward an upside breakout.

In spite of the fact that very little paper was offered this week, the indirect bid remained weak, suggesting that the foreign central banks still are not pulling their weight. With the market depending on the FCBs and commercial banks to pick up the slack with the Fed out of the game, this is not an encouraging sign. Last week the banks showed even less willingness to buy Treasuries than usual of late. It will be interesting to see what the data has in store along those lines on Friday evening. I’ll update that in the next Fed Report.

As June drew to a close and we got the first couple of days of July under our belts, the withholding tax data showed a bit of a bounce, but in real terms, adjusted for the change in wage levels, tax collections are flat versus last year, suggesting a bleak picture for employment and the economy.

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