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The Final Backstop- None- Professional Edition

The Fed released its H41 balance sheet report, money supply, commercial paper, and primary dealer data on Thursday and the MBAA released its mortgage applications data. The Fed shrunk its balance sheet for the 5th week in a row in spite of big increases in TAF and CPR. Meanwhile, FCBs continued to binge on Treasuries while dumping GSE paper. The Fed’s program to buy MBS and Agency paper isn’t working as spreads between GSE debt and Treasuries continued to widen. Treasury yields soared as they face a massive surge in Treasury supply.

At the same time the dollar rallied as the demand for dollars to pay off debt continued strong. This liquidation trend is causing money supply data to surge as cash pours in to institutional money market funds and non-transaction deposits in bank, much of it backed by government guarantees of one form or another. The illusion that these numbers represent money can continue as long as the holders do not demand cash. The assets to fund any large scale runs on the banks or money market funds do not exist. The Federal Government better hope that its ability to sell debt to fund the bailouts and backstops isn’t curtailed, because if that happens, there will be no backstop.

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