The Fed printed $25 billion last week and deposited it into Primary Dealer Trading accounts. The Treasury paid down the last of its $25 billion in Supplementary Financing Program Cash Management bills. $16 billion of that went to the dealers as well. So with $41 billion of “walking around money” to play with, it’s no surprise that stocks rose.
Banks did a little buying of Treasuries in mid March, but less than they did the week before. A drop in FCB buying over the past two weeks suggests that one of the biggest foreign central bank (FCB) buyers of Treasuries seems to have stopped bidding. We almost certainly know who it is and why. This is not just a short term situation.
Both banks and FCBs have normal buying cycles, and both should be at or just past the peak part of their buying cycles, if the current cycle conforms to past norms, as I expect. In addition, because of Japan’s predicament, FCB buying now is likely for the foreseeable future to be well below the necessary levels to keep levitating stocks. Add to that the loss of the 2 month, $25 billion weekly stipend from the Treasury, and we have the conditions for a real rough patch. With less help from the Treasury, the banks, and FCBs, the Fed will have its hands full keeping all its balls in the air. Some are likely to hit the ground.
The first big test will be next Thursday, March 31, when the Treasury will settle around $61 billion in new paper. The pain of the dealers in paying for that should be expressed beginning by Tuesday, although on occasion the reaction can be delayed until immediately after the settlement depending on external stimuli. There will probably need to be some liquidation somewhere. No one has shown any inclination of drawing down cash reserves to buy longer term Treasuries. One way or the other, the market should end the week heading down. Monday could still be a play date, but the game should begin to bog down by mid week as players start to leave the table.
Banks continue to accumulate cash at a frantic rate in their accounts at the Fed. The last time reserves rose this fast was in the midst of the crisis in 2008. Although the banks did buy some Treasuries in mid month this month, we continue to see evidence that they are losing money in the first quarter, especially the too big too fails. That could be a catalyst for problems when first quarter earnings begin to be released in April.
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