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Treasury Supply Pounding Market – WSE Pro

The Fed pulled $0.5 billion from the market Monday by replacing $7.25 billion in expiring repos with $6.75 billion in overnight repos. The 5 day net dipped to a net add of $4.5 billion, well short of the huge $32 billion in new Treasury debt that settled Thursday and today. This week they start slap the market for another $23 billion in new cash. It’s amazing that the market is bouncing at all considering that it is taking a $55 billion supply hit in the course of a week. Click here to download complete report in pdf format (Professional Edition Subscribers).Try the Professional Edition risk free for thirty days. If, within that time you don’t find the information useful, I will give you a full refund. It’s that simple. Click here for more information.

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  1. SPK

    I got 2 questions for you:

    1. Per your article, it appears that the US Treasury is hitting the market for another $23B (in addition to $32 last week). Is it possible that the Fed is sitting on the sidelines fully knowing that this will result in market decline and due to ‘flight-to-quality’ – will actually reduce rates as opposed to an increase? At some point in future, the fed can then flood the market again with liquidity to prop the market?

    2. Treasury Secretary Paulson is asking the Congress to increase the US debt limit to accomodate higher outlays. Due to the turmoil in the mortgage markets, isn’t it in the interest of US to keep the borrowing costs low – even at the expense of markets? The only way to achieve it would be to make sure that ‘flight-to-quality’ persists. (In the face of increased borrowing, if the Fed increases money supply then it would actually depreciate dollar and lead to increase in inflation and rates? Perhaps Mr. Bernanke did hide M3 figures to make sure that no one can see these once he starts reducing the money supply M3.)

    I’ll post these questions on a couple of other blogs too – just to see what people think.



  2. Lee Adler

    Thanks for your question!
    As to #1 I’d say that yes, it’s very possible even likely. These guys have done a masterful job of manipulating things so far and their tightness may be part of the plan for the reason you propose. Or it might not. Who knows. One of these days they’re going to slip up and make an enormous mistake. Is this the time? Don’t know.

    As to 2, M3 is a non-issue. The Fed lost control, or even influence over M3 a long time ago. There was a complete decoupling between the SOMA and M3 in 2004. Once that happened, the Fed decided it’s better to hide that fact.

    But as far as hiding what they are doing, that would be close to impossible–unless there’s a conspiracy involving hundreds of people at the Fed and elsewhere to flat out lie about their daily activities. In my view, that’s not happening. I see nothing in my daily tracking of the SOMA that would hint at that, and we can see connections between certain levels of M2 and MZM growth which prompts certain counter actions vis a vis daily OMO, and the response of the Fed in keeping the SOMA in its growth track.

    In terms of how and what its doing with the monetary base, I believe that the Fed’s actions are there for all the world to see. They may lie about it in their words, in fact, they do all the time. They’re using the bully pulpit to manipulate market opinion and action. But we see right through that as we witness their actions in the market every day.

    In short, yes, I believe the Fed manipulates, but no, I don’t think there’s a massive conspiracy to hide the true facts from public view. They are there for all to see and analyze, and usually what they are doing makes complete sense if we look at it from the point of view of their mandate.

    But they are going to make a huge blunder one of these days that compounds their mistakes of the past 15 years, and contributes to the destabilization of the system. Of that, I’m certain.

  3. SPK

    Thanks for the answer. As far as the blunder goes, maybe the Fed under Uncle Alan has already done that during the past 4-5 years. So, all we should be looking forward to is a major pain.

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