Federal tax collections were once again extremely strong in April, including withholding taxes, and individual non-withheld income taxes in particular. In fact there were strong gains in all types of taxes.
This means that, if reported accurately, subsequent economic data reports will be very strong. The weak Q1 GDP was an artifact of a slowdown in February. That was reversed in March, and they added on in April.
You may think that this strong economic data is good news for the markets. But it’s not. A red hot economy will continue to feed raging inflation. The Fed xxxxx xxxxxxxx xxx xxxxxx xxxxx tightening policy.
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The markets will get a brief respite thanks to seasonal Treasury paydowns but after that, the tightening monetary conditions should have xxxxxxxxxx xxxx. Non-subscribers, click here for access.
The Treasury just posted its quarterly refunding requirement for the balance of this quarter and for Q3. New Treasury supply will fall sharply. That surprised some Fintwit “experts.”
That’s something that we knew would happen and even predicted here in these reports, simply because we follow the Federal tax collection trend in real time. This isn’t rocket science. It’s published real time data. Track it and whack it. That’s what we do. And it gives us an edge.
One analyst went so far as to predict that because of this “surprise” supply reduction, this is the bottom. Well, it’s not a surprise. And its not the bottom. Primary Dealers and other members of the TBAC- the Treasury Borrowing Advisory Committee, all knew this was coming. AND YET, they still sold bonds.
It’s simply the law of supply and demand at work. The market can’t handle the truth. And never ending supply in excess of demand is a fact. Any excess of supply over demand is a problem. Even massively reduced supply, when the Fed isn’t standing in the middle of the pit taking all of it, leaving only a pittance for the market to absorb on its own.
The fact is that bond yields were only stable at low levels when the Fed was directly buying or indirectly funding more than 90% of net new issuance. Whenever the Fed reduced that percentage, bond prices fell and bond yields rose.
Janet Yellen gave us a demonstration in the 2017-2019 attempt at “normalizing” the Fed’s balance sheet, bless her heart. Powell shit his pants when the 10 year went over 3%. But then he wasn’t dealing with 8% headline inflation prints, which doesn’t include housing inflation running 20%. They suppress that. Now that he’s dealing with this inflation monster he’s crapping himself again, but this time he’s forced to tighten instead of easing, which is his more natural response.
So, since March, the Fed has essentially left the Fed Puts building. It’s still buying MBS, but not enough to keep the bond market price needle from collapsing and the yield needle from soaring.
Price and yield are the meters of supply and demand in the markets. They tell us what’s happening in the Treasury market trading pits. The direction of price is the direction of the relationship between supply and demand.
The Fed has left the trading pits, leaving the markets in the pits. And soon, perhaps as soon as the next week or two, the Fed will actually force the Treasury to increase the amount of supply it offers to the public. The Treasury will have to do that in order to pay back the Fed, when the Fed starts redeeming up to $60 billion per month of its maturing holdings of Treasuries, and another $35 billion of MBS that someone in the market will also have to buy in the vacuum left behind by the Fed.
With no help from the Fed, and despite sharply reduced Treasury supply, fixed income prices have been crashing. The Fed is about to begin piling on to that trend. So forget about the fact that tax revenues are soaring and Treasury supply is shrinking. It’s not shrinking enough to xxxxxxxx xxxxxxxxx xxx xx xxxxxxxxxxx xxxx xxxxxx xx xxxxxxxxx. Non-subscribers, click here for access.
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The bottom line is still: XXX all rallies. That goes for both bonds and stocks.
Late Addition- As I was preparing to post this, the TBAC issued its supply forecast. Yes they’re cutting issuance, but there will still be net new coupon supply of $153 billion May 16-31. And $171 billion June 15-30. https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ22022-05042022.pdf In Q3 they see net new coupon supply of $335 billion. The paydowns will all be in T-bills, as they have been. This will have no impact on the outlook as we have been seeing it. https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ32022-05042022.pdf
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