One of the issues I addressed in the Treasury update posted this weekend is what happened to all the cash Fannie and Freddie just dumped into the US Treasury. Below is what I wrote last week before I knew the answer.
On Friday Fannie and Freddie paid a dividend of $66 billion to the US Treasury. This is a huge windfall for the government and the US taxpayer.
Normally when the Treasury gets a tax windfall it pays down debt over the next couple of weeks. Those paydowns are cash credits to the accounts of the holders of the paper, often Primary Dealers or large investors. Those paydowns are usually immediately put back to work in the markets. The reduction of Treasury supply in the weeks of the paydowns also means that there’s insufficient supply to absorb all the Fedbucks being pumped through dealer accounts under QE. It’s a case of all that cash with no place to go. So typically asset prices rally in those weeks. The fair haired child asset class this year has been US stocks.
Will these GSE dividend payments be put to similar use? It could be a very bullish couple of weeks if so. Stay tuned.
As it turned out, the Federal Government had already used the anticipated cash to pay down some paper over the last several weeks, keeping cash on hand lower than normal in the process. When they got the dividend, cash levels rebounded to a level higher than last year on the same date.
Another dividend is probably coming from the GSEs in the third quarter although it should be much smaller than this one was, thanks to the rise in mortgage rates cutting off the flow of refi business, and damaging the GSE portfolios in other ways. If mortgage rates are now in a longer term uptrend, that will be the end of that gravy train for the US Treasury and taxpayer.
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I’ve been watching the Fed’s operations every day ever since it started publishing them daily in 2002 along with its balance sheet and the commercial banking system balance sheet. I also closely follow Treasury operations, revenues, and outlays weekly. As the famous financial philosopher L. Berra wisely said, “You can observe a lot by watching.” I invite you to watch along with me, and observe a lot.
This week’s Treasury Update is : Price Is Right Musical Chairs- More Players, More Cash, Less Chairs
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