Flush with government largess on election eve, the market rocketed higher on Monday. The Fed pumped in $10.75 billion with overnight repos. They conveniently had scheduled no expirations today. Last week, the Treasury announced a $25 billion debt paydown in the three year and 10 year note refunding, only half of which will stick around, and then only for a week or so. Still $12 billion is a lot of scratch for a few days. In effect, the party in power threw a power party, between the Fed and the Treasury giving the market a $23 billion one time shot in the arm, and the Pat Paulson rally was suddenly revitalized. It all began the day he was sworn in, and over the last couple of days, more markers were placed to tilt the playing field in favor of the desired outcome. Click here to download complete report in pdf format (Professional Edition Subscribers).
Try the Professional Edition risk free for thirty days. Unbundled subscription service packages starting from as low as $39! Click here for more information.
The stock market has been rising last month with a fairly tight fed.
Why would an 10.75 B injection
show up in stocks the same day ?
What is the mechanism by which this
injection would find its way into stocks immediately while previous
tightness in liquidity had no effect.
The Fed is just one leg of what I call the three legged stool. The other two legs are the foreign central banks and the Treasury. The GSEs used to be a driver, but they have become sort of an appendage that has the ability to tilt things.
Any of the three legs has the ability to support or juice the market. The Treasury can pay down debt. The FCBs can buy more paper. While the Fed has been relatively tight over the past five months, the FCBs have been mostly buying like mad as usual and the Treasury was paying down debt from mid September to mid October.
Yesterday’s pump job from the Fed was both enormous, and inexplicable considering that the Treasury is simultaneously paying down $12 billion this week. It stinks to high heaven.
What’s the mechanism? Every morning the Fed Open Market Desk has a conference call with the 22 Primary Dealers to decide what the program is for that day. The Fed then hands the cash over in the form of repos, or occasionally direct coupon or bill purchases. The dealers like Goldman, Merrill, RBS Greenwich, Bear, BAC Securities etc. etc. then put that cash to work. It’s up to them to decide where to put it. They can put it right back into the money markets, or bonds, or stocks, or futures, or derivatives, whatever.
Yesterday, they bought stocks. The fix was in. Anyway, that’s my view.
It was a great question, and I’m glad you asked it.
It’s not only FCB who are buying debt; Fed is doing that on regular basis which reduces the supply, in turn creates lower yield.
Well, the fact is that over the last five months they haven’t done that at all. The Fed has not increased the size of the System Open Market Account (SOMA) since June. They’ve only been replacing maturing paper.
And even before June the Fed was not growing the SOMA faster than the increase in supply of Treasury debt.
But certainly on Monday they did. It was blatant, and there was no discernible reason for it that I can tell, other than politics.