Fed repos outstanding from Temporary Open Market Operations (TOMO) hit a new record on Thursday, October 17. That, in just over a month since the program started, to fix a money market problem that was supposed to be a “one-off.”
One-off my ass.
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This problem will never go away as long as the US Government continually inundates the market with wave upon wave of new Treasury debt paper. Dealers and investors must constantly absorb that paper, and there’s not enough cash in the system to do that. So the Fed has to either buy it outright, or finance it.
The Fed is doing just that. Yesterday it bought $7.5 billion of Treasury bills in Permanent Open Market Operations (POMO). Today it bought $1.8 billion in Treasury coupons. Tomorrow, Friday, October 18, it will buy another $7.5 billion in T-bills. Monday it will buy another $1.8 billion in coupons.
Fed Repos Outstanding Increase to $205.7 Billion
Today the Primary Dealers needed and took another $73.5 billion in Fed overnight repos and $30.65 billion in 14 day term repos for a total of $104.5 billion in Temporary Open Market Operations (TOMO). Meanwhile, $96.5 billion in repos expired. So the total Fed repos outstanding rose to a new record of $205.7 billion.
And so on, and so on. It’s permanent QE. The Fed will need to buy Treasuries of all maturities from the Primary Dealers from now till kingdom come. On top of that it will continue to lend as much additional money via TOMO, as the dealers need to absorb the rest of the new Treasury supply that the Fed isn’t buying outright.
The Fed conjures up that money and deposits it directly into the checking accounts of the 24 Primary Dealers at the Fed. They use it to fund their trading accounts, and do what they do. Trade. Accumulate securities inventories, mark them up and sell them to their customers. They buy and sell Treasuries, other fixed income securities, stocks, futures, options, other derivatives. You name it.
The Program Will Be Permanent Because There’s No Nice Way Out
Sure, the Fed says this massive POMO and TOMO program is only temporary. So far, they’re only projecting it to last into the second quarter of next year.
Right. I can’t wait to see what happens if they ever did try to stop.
Look, it can’t happen. The financial system would collapse. There’s just no more borrowing capacity to finance this tsunami of Treasury debt that dealers, investors, and dare I say, foreign central banks, must absorb. Clearly, the system hit the wall in September.
So the central banks now have no choice. They must print the money, and monetize the US government’s debt. Or else.
Or else what? Well, we don’t know. And we won’t find out. Because they simply won’t be able to do it.
But eventually we’ll find out what endless money printing will bring. Last time around, it was asset inflation. Normally, we’d expect the same thing this time. But if bond prices fall, then the dealers will need the cash to cover the losses. As of mid September they reached a point where they were leveraged to the hilt, in what are effectively margin accounts that have no equity.
So if bond prices fall, this round of QE will not work to keep asset prices inflated. And it seems that the dealers are buying only short term T-bills. Bill rates keep falling, but bond yields have risen steadily since October 8. This isn’t how it is supposed to work. They need to get bond yields down. But how. The dealers are loaded to the gills with bond inventory. They are choking on it. They don’t want to buy more. In fact, they can’t.
Of other investors don’t take up the slack, it will be trouble. Big trouble. Watch the 10 year yield for clues.
The Fed Repeated All The BoJ’s Mistakes, Now It Has No Choice
So what will the Fed do? What can it do? In the not do distant future, the Fed will become a clone of the BoJ. It will need to buy every financial asset class in sight, not just Treasuries, just to keep these rancid, rotten, bloated gas filled bubble markets from imploding.
What the Fed has done is disgusting. It has created a monster, and it does not know how to control it. And so this spectacle of John Lawe-esque, bubble-inflating money printing holds a macabre fascination as we watch this horror story play out. Unfortunately, there’s no safe way out. The Fed must keep feeding the monster to keep it contained.
Bookmark this link to follow the Fed QE New story every day. Some day it will make an interesting case study for future financial historians.
Meanwhile, you can follow my in-depth analysis, forecast, and recommendations at Liquidity Trader.
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