The Treasury rally got some help this week from a surge in Federal Withholding Tax collections that is helping to keep new supply down. Whereas new supply had been exceeding TBAC estimates for the past couple of months, it has come back in line with estimates, and could be reduced even further in the weeks ahead if the sudden growth of withholding taxes persists.
In addition to reduced supply, a renewal of the European panic with Friday’s S&P sovereign downgrades has Treasury yields again melting down, in spite of the fact that foreign central banks continue to sell their holdings. Another way of looking at it is that this buying panic is allowing FCBs to liquidate without destabilizing the market, which otherwise probably would have happened. The string of FCB selling has now reached 6 consecutive weeks which is unprecedented and suggests a structural change as central banks need to deploy funds at home. That problem for the US can be swept under the rug as long as Europe’s problems are bigger and the resulting capital flight boosts the Treasury market.
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