The market has the benefit of $115 billion in Fed mid-month QE MBS purchase settlements this week. That would normally be very bullish.
It’s notable that the market has not done more with it. And why not? Still massive Treasury supply along with surging corporate debt and equity issuance is absorbing most QE. There’s not enough left to power an endless bull trend in stocks.
That has been our thesis for the past month or few, and the market seems to be bearing that out. Stocks are stuck in a broad trading range and bonds are weakening.
$83 billion of the MBS settled last Thursday. That helped put $82 billion in Treasury coupon issuance to bed the next day. Whodathunk that the Fed would pump into dealer accounts almost the exact amount that the market needed to absorb the Treasury issuance!
Amazing how that works.
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Normally this much QE every month would be wildly bullish. But the supply of financial assets has risen to meet the demand driven by QE. We’ve reached stasis – equilibrium, so to speak.
But it is fragile. Bonds are teetering on the brink of an abyss. If they go over, and bond prices fall (yields rise), the system would collapse without another round of massive Fed intervention.
So we need to pay attention. Do bonds go over the cliff? How long would it take the Fed to react if they do? And will it be enough, yet again?
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