Yesterday I did an extended discourse on this as a brief intro for those of you who may be among the uninitiated to how the Fed is monetizing the US government’s debt, and at the same time lifting stock and bond prices and creating the illusion of functioning markets.
Wait, is that even possible? Extended discourse as brief intro. Oh, WTF! Stay with us, newbies. I promise, you will get the hang of it! Feel free to post your questions and comments below the post. I’ll try to answer them in the next episode of Big Brother Fed.
Today, just the facts.
Yesterday, the Fed bought $20.9 billion in Treasury paper and bit less than $8 billion in MBS from the Primary Dealers. It pays for those purchases by depositing newly imagined money into the dealers’ bank/trading accounts at the Fed.
The Treasury settlements are next day. So that cash is immediately available to the dealers. They can do whatever the flock they want with that money. They use some to buy their next allotment of Treasuries. The rest they use to accumulate other inventory, mark it up, and distribute it to their institutional sheep customers.
The MBS are forward contracts. The Fed schedules them for the following month or the month after that. They always settle in the third week of the month. So each month we get a huge bulge of cash hitting dealer accounts in mid month.
The big MBS settlement in April was on April 15 ($116 billion) and April 21-22 ($65 billion). Is it any wonder that stocks rallied the following day both times?
In May, the bulge is set for the 13th to the 20th. Until then, bupkiss.
Next month’s total will be similarly gargantuan, around $185 billion. So sell in May — the day AFTER the Fed deposits that cash into dealer accounts. THEN go away.
The Fed has no policy now. They’re just guessing. Ad hoc, week by week, seat of the pants fakery. But the money that didn’t exist yesterday is real enough once it gets into dealer trading accounts.
And it’s real in the banking system when the US Treasury spends it. A mere trillion keeps the masses placated while surreptitiously using the other trillion or so to pad the pockets of the Regime’s plutocrat cronies and sponsors. They all get to have a good laugh with Trump at his next big soiree at Mar-a-Lago.
When it reopens. A year or so after a few thousand more of his voters croak in Georgia and Ohio because they drank bleach.
Meanwhile, the Fed posts its purchase schedules for its MSO (Market Support Operations) on Friday afternoons.
Today’s schedule is for $15.5 billion in Treasuries, and $9 billion in MBS. Only the Treasuries settle immediately. That cash gets deposited directly to Primary Dealer bank/trading accounts at the Fed.
Sounds great, right?
But here’s the problem. The dealers and other players need that cash to absorb new issuance of US Treasury bills notes and bonds. That’s the money that the US government needs to pay for the Pandemic Pandemonium Panic Relief and Crony Pocket Padding programs.
Today is a rare day. There are no Treasury paper settlements set for today. The markets are on easy street. Unfortunately, net settlements of $240 billion are coming next week. Somebody has to pay for that.
Buyers of Treasury paper (TP) must either borrow the money via repo, or sell shit to pay for it. OK, no pressure today. Just wait till next week. Batten down ladies!
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