Extended free summary excerpt
The massive $50 billion Treasury bill paydown that the dealers and other holders received on April 16, augmented by a much more modest $3 billion paydown last week was enough to keep the markets floating upward on a sea of cash. But the tide is about to go out.
Monday, the players must settle $54 billion in new notes and TIPS auctioned last week. From now until mid June, when estimated quarterly income taxes will be collected, there will be no more paydowns. Every other week, another wave of longer term paper will buffet the market. This is a normal feature of the calendar every year, which is one of the reasons why “sell in May and go away” works so well year in and year out.
Last year the Fed exacerbated the problem by taking a wait and see attitude after QE2 wound up. Ben will not make the same mistake this year.
The public, as indicated by bond mutual fund flows, is still buying bonds like mad. By holding short term rates at zero, Bernanke is forcing old people to take ever increasing duration and credit risk. The first wave of Bernankecide through the forced drawdown of savings accounts and money market funds will be followed by a second wave when the elderly face massive capital losses in their bond mutual funds. This massive ongoing loss of purchasing power is a drag on the economy. Bernanke has never addressed the issue because the question hasn’t been asked exactly in those terms.
Tax receipts through mid April were much stronger than last year, but that party appears to be over. Tax receipts have fallen rapidly over the past 10 days, so that they are now barely above last year’s pace in real terms. I may be jumping the gun, but if this continues it will indicate that the economy has stalled again. That will spell bigger than expected Treasury supply.
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