The Treasury is injecting more cash into the market. It announced on Thursday that it will do a second round of T-bill paydowns next week, adding another $41 billion in T-bill paydowns, to be settled on February 25. This is on top of the just announced $55 billion T-bill paydowns settling on February 23.
This means that the US Treasury will inject a total of $96 billion in cash into the market in two days. The Treasury is spending this money out if its $1.6 trillion cash hoard. Treasury officials are obviously in a panic over the plunge in Treasury note and bond prices that accompanies the surge in the 10 year Treasury yield.
With good reason.
This will have an effect similar to Fed QE. Treasury paydowns put cash directly into the accounts of the dealers, banks, and investors who hold the expiring paper. The paydown of the expiring paper will simultaneously create a shortage of paper in which to reinvest cash.
The Treasury’s goal is to force the former holders of the short term bills to reinvest the cash further out on the yield curve in order to stem the rise in yields and the fall in bond prices.
The injection of $96 billion comes just before the Treasury settles the regularly scheduled net issuance of new notes and bonds at the turn of the month. This cash will help the market to absorb that new paper. Net issuance of that paper will be $174 billion. This was as forecast by the TBAC.
The declining bond prices are crushing the leveraged portfolios of Primary Dealers, with the resulting collateral calls. There’s been an imminent threat of contagion into stocks, and ultimately a systemic crash. We’ve seen vestiges of it in the form of downdrafts in stock prices in recent days. So far, they have not been sustained.
I have been warning about this approaching catastrophe for months. It now appears to be upon us. The Treasury’s injection, and any subsequent ones, will mitigate against that risk for the time being.
See these reports for more details, charts, and explanation, as well as strategy viewpoints.
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