The Treasury sold 13 week and 26 week bills and 3 year notes on Tuesday, and announced the 4 week bill to be auctioned Wednesday. Bid/cover ratios were high but lower than last week’s hysterical panic levels at the bill auctions. One week does not a reversal make, but a trend of reduced bid/covers could be a harbinger of doom for the Fed and Treasury’s shell game, and hence for the financial markets.
The bid/cover on the 3 year note was slightly higher than at last month’s auctions. However, in all 3 cases the indirect bid was down significantly from the last auctions of the same paper. That could be significant as it continues a gradual trend that began a couple of months ago.
The 4 week bill will be $3 billion more than the TBAC forecast, but it will still involve a paydown of $13 billion. That means that Thursday’s settlements will involve a net paydown of $16 billion, normally a plus for the markets. However, that will be reversed next Monday when the the notes and bonds to be auctioned this week will settle. We’re still waiting to see if there’s a CMB announcement for settlement Monday. If not, that would reduce Monday’s settlement to net new supply to just $35 billion. It will also give us some idea if the Treasury’s revenues are coming in any better or worse than expected.
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The Fed did the scheduled buy of 7-10 year Treasuries totaling just under $5 billion as they wind down their direct Treasury purchase operations. Treasury yields rose slightly as the market nervously faced the prospect of being take off Fed life support in the weeks ahead. Next week won’t be that much of a test because the September 15 week gets a boost from tax collections which normally result in significant paydowns for a couple of weeks. Those paydowns will be reduced and could even be eliminated this year as a result of collapsing revenues. The question is what impact that will have. It will be a crucial test of the market’s ability to absorb massive supply without the Fed subsidy, as well as reduced FCB subsidies.
The Fannie spread widened to 24, Freddie to 51.
The next Fed Report with tables, charts, and complete analysis will be posted for subscribers on Wednesday. The weekly update including all the data from the Fed’s weekly balance sheet updates will be posted late on Friday.
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