Last week, conditions were favorable for a big move up in both stocks and bonds, but it didn’t happen. There was no new Treasury supply—in fact a paydown of $1 billion, and the Fed bought around $11 billion in Treasuries from the Primary Dealers. But the markets stalled. Apparently some friction is developing. I suspect it’s because the banks are no longer taking that 10% share of the supply that they have been absorbing of late.
Federal withholding taxes continue to run ahead of last year. The year to year gain is running around 7.4% as of October 21, while the month to month gain versus September is strong at around 3%. That has contributed to a large reduction in Treasury supply next week, to around $67 billion from the original TBAC forecast of $89 billion. $67 billion is still a ton of paper, however. The Fed will be a buyer, but nowhere near enough to make a big dent in that supply. Banks and FCBs will need to step up, or the markets will have trouble. There are signs lately that the banks don’t have the will, or the wherewithal.
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