Supply and demand conditions for stocks and bonds have been as good as it gets over the past month. We can thank the Fed’s Not QE program, and light Treasury supply for that.
The Fed continues to pump massive amounts of cash into Primary Dealer trading accounts. At the same time, Treasury supply had its usual seasonal reduction from mid December to late January. That happens because quarterly corporate taxes flow into the Treasury on December 15 and individual estimated taxes come rolling in on January 15. So the Treasury has some extra cash for a few weeks.
New debt issuance slows, and the Treasury may even pay down some debt in some weeks. This is one of those weeks. Between December 17 and January 27 the government will have issued “just” $25 billion in net new debt. Meanwhile, the Fed pumped $67 billion in cash into dealer trading accounts over the past month.
Now let’s see. The dealers had $67 billion in new cash, but the Treasury only issued $25 billion in new debt. Do the math! Even if the dealers are tasked with absorbing every penny of new Treasury debt, which they most certainly are not, they’d still have $42 billion left over. That’s play time for them. $42 billion will buy a lot of stuff at the margin, every time. So the dealers did buy bonds this month, and of course they bought stocks just like they always do. For them, that’s the easiest markup game in town.
Here’s what to look for over the next few weeks and months that would keep the game going, or could send the players for the exits, broke.
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