The mid month “as good as it gets” liquidity period is under way. Treasuries have found a bid as a result, and the conditions conducive to a stock market meltup have continued. This report lists 10 bullet points telling what to expect next, and why.
Free excerpt below.
Table of Contents
Week Just Completed
Treasury Auction Takedowns By Investor Class
Primary Dealer Trading
Foreign Central Banks
ECB And The Treasury Market
Bond Fund Flows
Bank Purchases Of Treasuries
Federal Government Cash Flows
10 Year Treasury Yield
US($) Dolor Index
Each week these reports cover the issues above. For example, the current discussion on Treasury Auctions:
The calendar was light with the usual weekly bills settling Thursday, and a 10 year TIPs auction that settles at the end of the month. The Treasury again brought $35 billion in 4 week bills instead of the forecast $30 billion resulting in a $3 billion paydown Thursday. Add $11 billion in Fed Treasury purchases and the settlement of some $47 billion of MBS during the week and it was a recipe for a meltup in stocks and maybe even some buying of hated Treasuries. Stocks rose, although not quite at a meltup pace as they faced some news headwinds. Treasuries did find a bid off and on during the week.
Bid cover ratios at this week’s auctions were up from the previous rounds of the same auctions. Rates fell on the bills. The TIPS yield was sharply higher. The demand for short term paper remains historically elevated and was boosted by the $58 billion in total Fed purchase settlements. The Primary Dealers whose accounts were stuffed with cash scrambled to place it. The indirect bid was weaker however, suggesting softer foreign central bank and other indirect bidder demand continuing the softness indicated by the Fed’s FCB custodial data.
7/12/13 The minimal Treasury supply in July is extremely unusual, thanks to the now widely reported June surplus. Supply pressure is normally heavy in July as tax collections are light. The GSE windfall and surging tax collections are having the effect we’ve expected, of reducing supply. It has yet to benefit the bond market, but it has helped stocks and should continue to.
Even though the Fed settles no MBS purchases around the turn of the month, the $11 billion in weekly Treasury purchases adds to cash holdings when Treasury debt is paid down. This normally boosts the markets. The Fed’s MBS purchase settlements run from July 15-22 this month. That will total $64 billion going to primary dealer accounts. Approximately $36 billion of that will come on Monday, $11 billion on Thursday 7/18, and $17 billion on Monday 7/22. In addition to being a bullish factor for stocks, I would expect to see some the Treasury market also get some help over this period.
3/30/13 There’s always more cash around at mid month when the Fed is settling MBS purchases and less cash around at the turn of the month when the Fed is more in the background. Market sentiment determines which investment sector gets the benefit. In January and February it was mostly stocks as sentiment gradually turned against Treasuries. The European situation has at least temporarily flipped that relationship over, with Treasuries getting more of the benefit, but there’s enough liquidity around to keep bull moves going in both investment sectors, thanks to a combination of central bank rigging, and fear concentrated one area of the world that motivates capital to move to the US.
9/22/12 The $1.5 trillion in reserves in the system that are driving extremely heavy demand for short term Treasury paper could serve as a base for increased speculative lending should “animal spirits” take hold again in stocks and/or commodities. The Fed did not need to do another dime of QE. There was enough fuel already in the system to ignite a destructive upside explosion should the psychology tilt far enough. Sadly, it won’t do anything to dent structural unemployment. In fact it could make matters worse as costs rise and profit margins get squeezed. If energy and industrial commodities really start to move up, it’s game over, especially so if Treasury yields rise instead of falling as the Fed hopes and expected. What will the Fed do then?
The calendar is heavy with the usual weekly bills settling Thursday, and 3, 5, and 7 year notes and 30 year bonds settling July 31. If the 4 week bill totals $35 billion it will settle zero net new supply on Thursday, and if the 4 week auction is for $30 billion, then there will be a paydown of $3 billion on Thursday. The Treasury will settle $55 billion in new paper on July 31. That’s the biggest chunk of new supply the market has had to absorb since May 31, which was enough to cause both Treasuries and stocks to sell off in the last week of May.
6/22/13 According to the TBAC the rest of July looks like this:
July 25- $2 billion paydown (bills)
July 31- $ 55 billion new supply (notes and TIPS)
That means that after July 1, July will be an easy month with no net new supply until the end of the month. The Fed will still be pumping the usual $110 billion or so into the accounts of Primary Dealers, and the Treasury will pay down $21 billion from July 3 to July 25. That sets the groundwork for a bullish month, but China is the wild card. We’ll need to put the most weight on reading the technical tea leaves every day for signs of what to expect.
7/12/13 The TBAC forecast for August is for just $6 billion in net new supply, but $55 billion on September 3. That’s a formula for a continuing meltup in August. With all that cash coming into the market and so little new Treasury supply, the odds would favor a rally in Treasuries. But the same was true for most of the first half of the year and everybody but the Fed was selling. Pressure has been coming out of Europe with the drive to unwind the LTRO carry trade.
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