Treasuries rallied last week, helped by light supply and increases in buying by Primary Dealers, commercial banks, and foreign central banks. Primary dealer Treasury coupon positions reached their highest net long level since April 2014.
The upturns in bank buying and FCB buying in recent weeks had appeared to signal that they were entering the uplegs of their usual buying cycles, but bank buying stalled and FCB buying was less than robust last week. It’s not clear whether the uptick in buying was just a blip in a downtrend, or a return to increased buying within their normal buying cycle patterns. In the weeks ahead, if there’s no upside follow through, that would be a bearish signal for the markets.
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Treasury supply will be exceptionally light in August and this week in particular. The mid month offering of notes and bonds will result in a net paydown. It will be small, but I cannot remember the last time that we did not see significant new coupon supply at mid month. The Fed will supplement that paydown by mainlining approximately $30 billion in MBS purchase settlement cash into Primary Dealer accounts. Here’s what that all means now, with answers to what to look for in the weeks ahead.
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