When we last looked at Primary Dealer positions and financing in November, it looked like the dealers were in dire straits. Massively leveraged in the bond inventories, with falling prices, and inadequately hedged. It looked like the beginning of the end.
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But it wasn’t. As she had in the past, in a different role, Janet Yellen rode to the rescue of the dealers, the bond market, and indirectly the stock market and stock investors. In December, as we noted at the time, the US Treasury began paying down T-bills, first in small amounts, and then in mass quantities. Non subscribers, click here to read this report.
That made all the difference that was needed to prevent disaster, and to turn the outlook at least mildly bullish in the short run. The US Treasury was acting in loco parentis, or in this case, contra loco Fed. The Treasury pumped money into the market. The mechanism is different than when the Fed does it, but the effect is similar. Money goes into the markets. Securities prices rise. Non subscribers, click here to read this report.
While I noted and reported this to you back in December it wasn’t clear to me why the Treasury was doing that. Call it a lack of situational awareness. Mea culpa. But now we know. And we also know what to expect. We’ve been here before. Non subscribers, click here to read this report.
Here’s what happened, and what we can look forward to in the next several months. Non subscribers, click here to read this report.
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