Headline Corrected
The storm warnings of extreme dealer leverage have dissipated over the past two months. For the moment, the skies are only partly cloudy with a chance of showers, but no sign of any big storms. They’re still over the horizon. Non-subscribers, click here for access.
Subscribers, click here to download the report.
Dealers are required to buy a significant percentage of every Treasury offering by the deal they made with the devil to be its Primary Dealers. And those offerings keep coming in a never-ending tide. But they were sharply curtailed from late March through early May by the annual tax collection bulge. Those collections enable the US Treasury to pay down debt over that period. That reduction in supply accrues to the benefit of the dealers. It enabled them to not only reduce leverage, but also to add to hedges as the accumulate inventory. So over the past two months they have taken the opportunity to get a little healthier than they were through early this year. Non-subscribers, click here for access.
We know from our other reports on the Fed’s balance sheet and the banking system that the time when trouble is likely is when the Fed’s RRP slush fund runs out. It’s been holding in the 400-500 billion range, but as T-bill issuance picks up it will begin to diminish. We’ll watch that data as always and will keep an eye on the dealers’ positions as the other signs of impending doom begin to appear. Right now, they’re on hold. Non-subscribers, click here for access.
This report shows the pictures that tell the story, and that tells us what to do about it. Non-subscribers, click here for access.
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