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Rivers of Cash – Professional Edition Treasury Update

Treasury supply was heavy this week, but the new paper doesn’t settle till Monday. That allowed Fed pumping to keep the market elevated early for the first half of the week as we expected, but the effects were finally felt on Friday, as some sellers may have needed to free up cash in order to pay for the Treasuries. This has happened in the past, and it will happen in the future. I’m not prepared to read any more into Friday’s action than that, yet. Maybe the technicals will say otherwise when I do the market update. We’ll see.

Next week, the Treasury will begin to pay off the weekly $25 billion in SFP CMBs. That will go on over 8 weeks in order to reduce outstanding debt as the statutory debt limit is approached. There will be little in the way of new supply to absorb that cash next week, meaning that it will combine with another $20-$30 billion in POMO to most likely boost prices of both stocks and bonds.

Although I should not have been, I was unpleasantly surprised that the Fed chose to completely ignore the raging commodities inflation in the FOMC statement. Bernanke and the Sycophones are determined to run out the QE2 program to the bitter end while pretending that inflation is too low, inflation expectations are “well anchored” and that massive input cost increases, and food and energy price increases, won’t inflict damage on a weak economy.

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