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More Facts on Current Fed and Treasury Impacts

The Fed did a paltry $500 million net add today, leaving the 5 day net change in the System Open Market Account still at a net drain of $10.95 billion. That compares with a 5 day net add of $12.3 billion on the day after Christmas last year. The 4 week net is currently a drain of $12.2 billion, compared with an ADD of $12 billion at this point last year.

Fed Funds were well below target Monday night at 4.0%. Today’s repo auctions had stop out rates ranging from 4.32 on Treasury collateral to 4.52 on mortgage backed. If Fed Funds are below target this evening, look for a drain tomorrow. If they are above target, we should see an add.

Tomorrow is a big day with last week’s $20 billion TAF settling as an addition to the SOMA, but with a total of $38.5 billion in expiring repos and T bill redemptions draining reserves. So the Fed will need to add at least $18.5 billion in the usual Thursday overnight, 7 day, and 14 day repos just to stay even. So stay tuned for that result tomorrow morning.

After raising $9 billion in new cash Monday in the 13 and 26 week bill auctions, which totaled $39 billion, the Treasury paid down $13 billion at today’s auction of $15 billion in 4 week bills. It appears that the Treasury is simply lengthening maturities. The paydown was more than offset by the new cash to be raised at the 2 and 5 year note auctions today and tomorrow. In other words, the Treasury is trading in 4 week bills for 2 and 5 year notes. The 4 week bill auction was $4 billion greater than the May TBAC estimate.

The Federal Reserve System held $14,015 million of the Treasury bills maturing on Thursday, in the System Open Market Account (SOMA). The Fed has announced that it will redeem all of those bills, forcing the Treasury to increase its public offerings in the days ahead.

On Monday, the 13 week bills sold at a rate of 3.28% (vs. 3.0% last week) with a bid to cover of 2.32 (vs. 2.32 last week). The 26 week bills went at 3.49% with a bid to cover of 2.61 (vs. 3.28% with a bid to cover of 2.34 last week). Indirect bidders including foreign central banks) FCBs took down $4.7 billion of the 13 week and $6.2 billion of the 26 week bills. Indirect bidders including FCBs had taken down $6.4 billion of the expiring 4 week bills, $6.5 billion of the expiring 13 week bills and $4.1 billion of the expiring 26 week bills. Monday’s takedowns were a reduction of $2 billion from the auctions of the expiring bills. This is more evidence that cash flowing out of the ABCP market into the Treasury market may be diminishing as I have been suggesting that it would. The result should be higher interest rates.

The Treasury auctioned $15 billion of 4 week T-bills today, resulting in a paydown of $13 billion. The TBAC had originally estimated in May that the offering would total just $11 billion. The bills came at 3.04% with a bid to cover of 2.92, compared with 2.75% and 3.04 last week. Considering the $13 billion paydown, which should have pushed rates down and the bid/cover ratio up, I would characterize this result as “terrible,” and possible additional evidence of the growing pressure I expect to see in the US money market. Indirect bidders took $2.1 billion of the current auction, a drastic cut of $4.3 billion from the maturing bills.

The Treasury auctioned $22,000 million of 2-year notes today and will auction $13,000 million of 5-year notes on Thursday 12/27, to refund $19,512 million of publicly held securities maturing on December 31, 2007, and to raise approximately $15,488 million of new cash. The total of $35 billion in the 2 auctions was also $4 billion greater than the TBAC estimate.

The 2 year notes went off at a yield of 3.285% and a bid to cover of 2.23. The total indirect bid was $5.6 billion, nearly the same as their takedown at the 2005 auction of the notes now expiring. The yield at the November auction was 3.159%.

Instead of a net paydown of $3.5 billion in the week, as estimated by the TBAC back in May, instead we will end up with new supply raising over $11 billion in net new cash. Government finances are rapidly worsening as the US economy weakens. Treasury supply continues to grow at a rate far higher than the government had expected back in May. It will be interesting to see how much of the new paper is absorbed by indirect bidders including foreign central banks in the days and weeks ahead.

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