Primary dealers have finally taken aggressive action to mitigate the losses in their bond portfolios. But it is too late. The damage is done, and the pressure will only get worse as the Fed pulls money out of the banking system and forces the Treasury to borrow even more money to pay off the Fed.
In everything we look at in the Primary Dealer positions and related data we see only stress and more stress. This is unfolding exactly as we expected. There are no secrets here. We knew all this was coming simply by watching the data and Fed policy as we have month in and month out. It only proves again and again, Rule Number One. Don’t fight the Fed.
Shockingly, the Dealers seem not to have followed the Rule, and now they’re screwed, and so is the world of investors. For those who can’t sell short, there are no good options. No pun intended.
Meanwhile, the Fed will need to raise its Fake Funds rate by 75 BP this week to keep up with the market. It’s already there as liquidity conditions tighten rapidly and dramatically.
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