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The Fed stepped up in a big way on Thursday making one of the largest one day net additions in OMO ever. The add was designed to ease the pressure of a massive supply of T-bills settling today, as well as another huge load being offered next week.
Meanwhile, the Treasury was paying down a large amount of maturing notes and bonds on Thursday, leaving a wad of long term money in investor hands. Faced with a temporary shortage of long term paper, those investors bid on both stocks and bonds, boosting prices in those markets. But this is a temporary situation. There will be no more paydowns, and the Treasury will be coming to market in the weeks ahead with massive amounts of new short term paper that should put upward pressure on interest rates.
The increase in supply could in turn pressure the Fed to begin growing the amount of Fed credit outstanding, reversing its extremely restrictive stance of recent months. Today’s big add may have been the first shot across the bow. On the other hand, the Fed also announced that it will once again redeem all of its expiring T-bill holdings in the amount of $6.2 billion next Thursday.
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