The amount of Fed Not QE outstanding has reached a new record of $548 billion as of February 20. That number will continue to increase as the Fed continues buying Treasuries outright, regardless of the fact that the TOMO (Temporary Open Market Operations) Repo component is shrinking.
As expected, the amount of TOMO repos has been declining because as the Fed buys Treasury paper outright from the Primary Dealers, the dealers have less need to borrow to finance their purchases.
The story that the Fed is deliberately cutting the Repo offerings is absolute bullshit. Those offerings are shrinking because demand for them is falling. We knew this would happen. But they want the story to be that the Fed is being proactive.
This happened because dealers paid off some of the repo loans which they had previously taken from the Fed. THat’s because while the Fed continued buying more paper outright, Treasury supply declined in January due to big inflows of quarterly taxes to the Treasury’s coffers. With less supply, dealers did not need to buy as much. But the Fed kept buying paper from them, cashing them out. So they were able to shed some of their repo debt financing their existing positions.
Meanwhile, the Fed keeps cashing them out, buying approxximately $20 billion in Treasuries from them every week. The total size of the Not QE program is growing, but the composition is changing from mostly temporary loans (TOMO Repos) to injections of permanent money.
Meanwhile, think of it. The Fed pays the dealers around $80 billion a month via Treasury purchases, and then it pays them interest on the money it just gave them. What a racket.
The Fed was running Not QE at about 88-95% of Federal debt issuance until early February. But that percentage fell in recent weeks as Treasury issuance surged this month. Not QE is now only absorbing 77% of issuance since the inception of the program.
In recent weeks the percentage is far lower as Treasury supply exploded. Fed purchases have absorbed less than half the new supply. So it’s no surprise that the bond rally stalled. Thanks to Coronabear Virus Panic, there’s still enough buying to keep yields from reversing.
As I wrote on December 26, I’ll say it again. It bears repeating because the underlying facts are the same, even though Treasury supply is again increasing. It will decline again in March-April.
This is outright debt monetization. The Fed really has no choice if it wants to suppress market interest rates. It must buy virtually all the paper the government issues. If it didn’t, bill rates and bond yields would soar, taking all interest rates with them.
Meanwhile, the Fed is buying, and the Treasury hasn’t been selling as much over the past month. Conditions just don’t get more bullish than this. We’ve had light Treasury issuance since mid December corporate tax collections, and mid January individual estimated tax collections. All the while, the Fed continues to pump massive amounts of cash into dealer trading accounts.
Supply normally increases in February when there are no estimated taxes due, and tax refunds are at their heaviest. The Treasury normally needs to borrow to pay those. I have to wonder if this year the Treasury might tap its immense hoard of cash instead.
The TBAC says that issuance will be concentrated in T-bills in Q1, with $153 billion in new bill issuance. No worries though – the Fed is all set to absorb $180 billion in bills from the market. By rights, that should push short term rates lower. We’ll see how that goes.
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