I wrote the following in this Fed QT/Treasury Supply report on August 6.
8/6/22 Well, guess what. Time’s up. Party over. The Treasury has revised its issuance forecast as we knew it would. It will now be slamming the market with both coupon supply (notes and bonds) and T-bills. That’s the biggest difference. The Treasury had been paying down massive amounts of T-bills for months, stuffing cash back into the accounts of dealers, banks and money market funds. That game is now running in reverse. The Treasury is now sucking money out of the system from those same players. And the Fed isn’t replacing it. The cash that the Treasury uses to repay the Fed disappears from the firmament.
For the first 3 weeks of August the market decided to fight the Fed. The money didn’t come out of the Fed’s RRP fund, and the Fed sure wasn’t funding the buying, in fact the opposite. It was pulling cash out of the system. So it would appear that traders funded the rally with margin and bank repo, with a dose of short covering for good measure.
But when traders violate Rule Number One, eventually, they must face the punishment. I warned in other reports in the past couple of weeks that the clock was ticking and that reality was about to set it. It finally did on Friday. Non-subscribers, click here for access.
No doubt the selloff was helped along by a massive new T-bill issue totaling $60 billion on Thursday. I had penciled in about $40 billion per week in bill issuance, so that was a bit of a shocker. Then on Friday it had to absorb another $22 billion in long term Treasury coupon paper. Non-subscribers, click here for access.
Apparently, that $82 billion in paper to be paid for, put the stock market in a choke hold. When Powell affirmed the magic word, “No Pivot,” as if like magic there was suddenly no cash around to support stock prices. Only it wasn’t magic. There really was no cash. And there won’t be no mo any time soon. And now the players have awakened to the fact that there’s no reason to borrow on margin or put up other collateral to buy stocks. In fact, they’re probably out of collateral, or soon to be. Non-subscribers, click here for access.
The outlook for the next couple of months looks xxxx xxxx, except for … Non-subscribers, click here for access.
Here’s what to expect, when, and what to do about it. Non-subscribers, click here for access.
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