Category: Fed, Central Bank and Banking Macro Liquidity

Watch out! The US Treasury is now in the process of actively discussing buying back outstanding Treasury notes and bonds in an effort to bolster the collapsing bond market.

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As reported by Bloomberg:

The specific step taken by the Treasury was in its quarterly survey of primary dealers, released Friday in connection with the financing plan to be announced Nov. 2. The 25 dealers were asked for a detailed assessment of the merits and limitations of a buyback program for government securities. When the last financing plan was released in August, the department’s industry advisers on the Treasury Borrowing Advisory Committee recommended further analysis of the issue. https://finance.yahoo.com/news/momentum-builds-creation-treasury-bond-174307311.html

The Treasury is holding $650 billion in its cash account at the Fed. This “rainy day fund” was set aside for just such occasions. And let’s not kid ourselves. When big government agencies start talking about doing something, it’s as good as done. This is going to happen, and when it does, it will push bond prices higher. And that will also give stocks a lift. Non-subscribers, click here for access.

So the questions are when and how much. As to when, the big boys are publicly speculating that it will be early next year. But looking at the bond market crash, and knowing what we know about Primary Dealer positions, leverage, hedging, and the crashing bond market, it will certainly be xxxxxxx, perhaps xxxxx xxxxxxx xxxxx. Non-subscribers, click here for access.

Meanwhile, a couple of my hot takes on the Bloomberg piece. Non-subscribers, click here for access.

Liquidity metrics for the US government debt market are approaching crisis levels after a year of steep losses for bonds caused by rising inflation and Federal Reserve interest-rate increases, and with the central bank simultaneously cutting some of its holdings, the situation may worsen. Treasury Secretary Janet Yellen expressed concern about it last week.

Duh. Like I haven’t been reporting this for the past 2 years. And they’re just getting around to recognizing it. Geeze. They’re the rocket scientists. I just have a sixth grade education (I went to Temple) and I did not stay at a Holiday Inn Express last night. Non-subscribers, click here for access.

Taken together with Yellen’s recent comments and extreme volatility in the UK bond market in recent weeks, the query suggests “that the November refunding will likely show more progress toward opening a buyback facility,” JPMorgan Chase & Co. rates strategists said in an Oct. 14 research note. Strategists at Bank of America Corp. predicted a rollout in May 2023.

Are you kidding me? May 2023? The markets will have ceased to exist by then. I predict (in my best Amazing Kreskin voice) xxxxxxx xxx, or maybe xxxx xxxxxxxx. Non-subscribers, click here for access.

Under current circumstances, which include large federal deficits, a buyback program would have different purposes. They include adding liquidity to parts of the market most in need of it, and allowing Treasury bills to be sold in more consistent quantities, with proceeds used for buybacks of securities less in demand.

That’s just BS. The purpose is to stop and reverse the bond market crash, however temporarily. And we know that it will be temporary. The effect will end when they run out of cash. Which will be at whatever level of cash they feel they need to hold. We don’t know what that is. Non-subscribers, click here for access.

Furthermore, once they get to that point, and the market has rallied because of their buying, they’ll start borrowing again to build up their cash account back toward their magic number of $650 billion. Once they start to do that, it would reverse the bullish effects of the buybacks. So prepare for a roll coaster ride over the xx-xx months following the beginning of the program. First bond prices will soar and yields will come down. Then prices will rollover, and finally crash again with yields rising in tandem. Non-subscribers, click here for access.

On the other hand, when the Treasury is finished buying, the Fed awaits to take the handoff. It has not only the possibility to return to QE, which is unlikely as a first step, it has the $2.2 trillion RRP slush fund that it could force back into the markets. Non-subscribers, click here for access.

Who knows where the Fed will be in its QT program by the time the Treasury cash for the buyback program effectively runs out.? If the PCE and CPI numbers cool enough, they’ll probably stop QT. That looks likely to happen in the next xx months based on past lead time between changes in the size of the Fed’s balance sheet and inflation data. I’ve covered that in a previous report. Non-subscribers, click here for access.

But I want to reiterate that it is not productive to guess and try to front run these things. Despite conventional wisdom that says otherwise, markets respond to money, not talk. Trade the charts, and invest based on actual macro liquidity flows. In that respect, we are not at a xxxxxxx xxxxx yet. Non-subscribers, click here for access.

Meanwhile, the government has piles of cash that could be used to light a bullish fire under securities prices. One is the aforementioned Treasury cash account, and the other is the Fed’s money market fund of money market funds, its unlimited Overnight Reverse Repo (RRP) program. When they use those they could ignite bull runs that will look like bull markets. Non-subscribers, click here for access.

The Treasury and Fed money are demand side impacts. Then there’s always the issue of supply.  On the Treasury Supply front, keep in mind that the updated TBAC forecast for the current quarter and advance forecast for Q1 of 2023 will be released the week of November 2. They’ll give us a roadmap on what to expect for the subsequent 4½ months. Non-subscribers, click here for access.

In this report, I describe what’s likely in the months ahead, and suggest what you might do about it to defend yourself, or even take advantage. Non-subscribers, click here for access.

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We track Treasury supply because Fed policy comprises only one side of the supply/demand equation. Treasury supply makes up the bulk of the other side. The information we have on Treasury supply is known, either in advance or at least in real time. Tax revenue is the primary determinant of changes in supply. We merely need to monitor the tax revenue trend, and legislation that affects the Federal Budget to get an idea where supply is headed in the near term.

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We’ve now seen xxx months of falling withholding tax collections. That’s a xxxxx, but it was mitigated in September by very strong quarterly estimated individual and corporate taxes. But those are lagging because they are based on the third quarter as a whole, not just September. Non-subscribers, click here for access.

On the other hand, excise tax collections were up, an indication of strong retail consumption. So that’s a fly in the ointment in terms of the idea that the economy is contracting. But it’s too small an item to matter to total revenue.   Non-subscribers, click here for access.

September revenues got a boost from quarterly estimated taxes, as always. We expected that. As a result, the Treasury paid down a significant amount outstanding T-bills during the month. Again, no surprise. But it certainly didn’t help the markets much. Maybe the Treasury market a little toward the end of the month. But if that’s all a “good” liquidity month can do, watch out for the next two months. Non-subscribers, click here for access.

The point is that September was as good as it gets, and as good as it will be, until xxxxxxx, when the xxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxx will again create a temporary budget surplus. That will be used to pay down T-bills again. But xxxxxxx xxxx xxxxxxxx will be a drought, with heavy Treasury supply, which would be made worse by weakening tax revenues. Non-subscribers, click here for access.

The Fed will exacerbate the problem with QT. It will tell the Treasury to redeem $60 billion a month of the Fed’s Treasury holdings. That’s an extra $60 billion a month in Treasury supply that the US government will need to issue so that it can repay the Fed. Investors and dealers will be forced to absorb that, because the Fed cavalry isn’t riding to the rescue to take up the bulk of supply.  Non-subscribers, click here for access.

The xxxx xxxxx months will be the worst supply demand imbalance we have seen so far in this bear market. I would expect both stock and bond prices to xxxx xxxxxxx xxxxxxxx xxxxxxx. Any rallies should be xxxxx xxxxx, and should xxxxx be xxxxxxxx xxxxxxxxxxx. Non-subscribers, click here for access.

Furthermore, xxxxxx the xxxxxx will continue to be a really bad idea, just as it has been all year, unless you plan on, and in fact do, xxxxxx the xxxxx. Non-subscribers, click here for access.

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The dealers have significantly hedged their bond longs since April, but the price damage that we expected, in both bonds, stocks, and everything else, was an inevitable result of that. To deleverage means to liquidate existing positions. Liquidate means sell. The dealers and their biggest customers have been doing just that. To build up hedges, they’ve also been selling futures, adding to the pressure.

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But unfortunately, they reduced hedges during the recent bond market selloff. The dealers are the Wrong Way Marshalls of the bond market.

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This market selling pressure comes as no surprise to us. The forces of this spiral have been building for the past two years, first as Treasury supply overwhelmed the market beginning in August 2020, and then subsequently, as the Fed moved to tighten policy.  The dealers have never been properly positioned for this. It’s the mirror image of their massively wrong positioning in 2007 that triggered the 2008 crash. Non subscribers, click here to read this report.

The problem now is that their hedging may not be enough. The spiral of falling prices, collateral calls, and more liquidation has now taken on a life of its own. The technical analysis of the Treasury market says there’s more of that to come, with conventional price projections pointing to the xxx% range on the 10 year yield as the next target for the bond market. Needless to say, that should also be catastrophic for US stocks. Non subscribers, click here to read this report.

From past reports:

7/27/22 The bottom line is this. Don’t be fooled by what the media is touting as a massive rally in bonds. Yes, it looks big, and it probably has a little further to go over the next couple of weeks. But in the big picture, it’s nothing. And it’s likely to stay that way. Non subscribers, click here to read this report.

Meanwhile, the dealers have mitigated some of their risk, but they and their big bank parents remain at great risk if bond prices start declining again. That should happen as liquidity begins to tighten again in the second half of August. Non subscribers, click here to read this report.

The bond rally should have a bit further to go, but I’d be a seller on the first technical signs that the trend is turning. And when bond yields start to rise again, and bond prices start falling again, I’d expect stocks to suffer from the same adverse liquidity factors that would be pulling the bond market down.  Non subscribers, click here to read this report.

LATE BULLETIN! HOLY COW, as I was proofreading this report, I just checked the Treasury issuance schedule for this week, and the Treasury will issue $40 billion in new T-bills on Monday. That will upset the apple cart, but at this point I won’t rewrite this entire report. Let’s just accelerate the time frame for when I expect the market to begin experiencing tighter liquidity from mid-month, to the beginning of August. We need to be on the lookout for signs of reversal in the bond rally sooner that I originally thought. Non subscribers, click here to read this report.

But at least this news confirms my earlier forecast that the T-bill paydowns would end in July, making for tighter liquidity in conjunction with the Fed’s QT program. And lest we forget, they plan to double the amount of system withdrawals in that program beginning in September. Non subscribers, click here to read this report.

6/13/22 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. Non subscribers, click here to read this report.

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. Non subscribers, click here to read this report.

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. Non subscribers, click here to read this report.

5/14/22 That all means that a double whammy will hit the market in mid June, at a time when Primary Dealers and the banking system are already weakened by huge losses in their bond portfolios. Some of these highly leveraged dealers will be forced by their lenders or their parent bank holding companies to liquidate anything that they can to pay back the margin and repo loans that funded the purchases of all this paper. Non subscribers, click here to read this report.

There are no doubt other big leveraged players out there with massive losses that will be forced to liquidate by margin calls. The selling will not be limited to the bond market. It will hit stocks too, and anything else that isn’t tied down. Non subscribers, click here to read this report.

If this analysis is correct, the weakness that we have seen in the market over the past couple of months will be seen as but an opening act. Conditions will worsen. Stocks and bonds will decline even faster this summer. Non subscribers, click here to read this report.

Consequently, the strategic and tactical outlook remains the same. Sell all rallies. Non subscribers, click here to read this report.

4/11/22 So what would I do with this information? The same thing I’ve been doing for the past 20 months.  They’re gifts to us on the way to Dante’s Inferno.  If I owned bonds, I would sell them. If I owned stocks, I would sell them. And I would keep looking for stocks to short on the rallies. Non subscribers, click here to read this report.

I know. Cash is trash when inflation is high and interest rates are negative to inflation, but it’s less trashy than assets that are actively losing value. The strategy that I think makes the most sense in such an environment is to trade stocks from the short side. I publish the weekly swing trade chart picks for those who are looking for ideas along those lines.  https://liquiditytrader.com/index.php/category/technical-market-timing/ ….Non subscribers, click here to read this report.

The problem after that is that the Primary Dealers and the biggest banks who own them have enormous hidden losses that aren’t showing up yet on bank earnings statements or balance sheets.  As market conditions tighten in the second half of this year and margin calls beget losses, which beget more margin calls, those hidden losses will start to show up. Banks will be forced to liquidate some of their assets and will be forced to report some of those losses. Non subscribers, click here to read this report.

2/20/22The bottom line is that the financial market is moving toward a crisis. Fast. It will continue to do so as the Fed cuts QE first to zero. It will do so even more as the Fed shrinks its balance sheet by allowing maturing paper to be paid off rather than rolled over. If they do that, the pressure on on Primary Dealers will only get worse. They have not established the net short positions needed to manage it. Non subscribers, click here to read this report.

On average, their positioning is not good for a decline in bond prices (rise in yields.) Some Primary Dealers are probably well positioned. That means that some, if not most, are not. Those who are not well positioned are almost certainly already in trouble. Non subscribers, click here to read this report.

This won’t end well.Non subscribers, click here to read this report.

I’ve opined to stay away from the bond market for the past 18 months. Nothing has changed. Bond rallies are selling opportunities. The pressure on the bond market has infected the stock market, and will continue to do so. I continue to look for swing trade short selling opportunities in the Technical Trader reports. Non subscribers, click here to read this report.

1/25/22But now the Fed is getting out of the buying business. No more backstopping the dealers with constant massive funding. Meanwhile, the dealers are still REQUIRED, by virtue of their status as Primary Dealers, to still buy Treasuries. Non subscribers, click here to read this report.

How exactly will they be able to do that without steadily being cashed out by the Fed to the tune of a hundred and some billion per month, month in and month out? Non subscribers, click here to read this report.

The Fed will probably tell us tomorrow that it’s going to zero purchases after March.  The dealers must keep buying. There are only two ways they can fulfill that responsibility. They’ll either have to sell stuff first. Stuff, as in other Treasuries, other fixed income instruments, OR, drum roll please…… Stocks! Or they will need to borrow more money, that is, increase their leverage even more. Non subscribers, click here to read this report.

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What happened in the stock market on September 13 (-178 on the S&P and -1276 on the Dow), was inevitable. The timing was a complete surprise, at least to me, but sooner or later, there would have been a day like this. And I’ll go out on a limb and say that there will be more of them… until the Fed reverses course.

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Federal withholding tax collections declined in August. This was the second consecutive monthly decline after rising sharply and persistently throughout June.

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Collections steadily declined throughout the month. This is consistent with the usual 3 month pulse of the US economy, where it accelerates for the first 6-7 weeks, then slows for the second part of the period. However, the current slowdown started earlier than usual and has therefore had a longer downstroke. That downstroke is due to end now. Non-subscribers, click here for access.

Despite the slowdown, revenue growth year to year remains positive, thanks to employee earnings inflation.  From the perspective of the markets, only nominal revenue matters, not the real economic growth rate. Because revenue is a key determinant of Treasury supply. Non-subscribers, click here for access.

Nominal withholding grew xx% year over year. That would be great except that it’s a big drop from the +11.3% at the end of July. Non-subscribers, click here for access.

It suggests a rapid slowing in the US economy. But it’s only slightly weaker than the xx% gain 3 months earlier, at the end of May. As JP Morgan said, markets will fluctuate. Well, guess what! So does US economic activity. Non-subscribers, click here for access.

So is the US economy decelerating or not? With wage inflation reportedly hovering around 5-5.5%, the xx% gain in withholding tax suggests that jobs growth has xxxx xxxx xxxxx. However, this should be the trough of the normal 3 month cycle, and it is no lower than the last two troughs. While the short term cyclical breather phase is a bit more extended than usual, there’s been no breakdown from the range of the past 6 months. The economy is xxxxx xxxxx xxxxxx, not xxxxxxxxxxxx. Non-subscribers, click here for access.

Of course we never know what the BLS jobs release will show. Instead of reflecting the data collection date of the 12th of the month just completed, I’ve gotten the impression in recent months that it relates more closely to where things stood at the end of the previous month. So it’s possible that the BLS imaginary number for August will reasonably strong positive growth, reflective of July tax collections, even though we know from the tax data that the jobs market began to collapse in the second half of July and continued through August. Non-subscribers, click here for access.

The monthly average has a little over two weeks of built in lag. The 5 day average of collections is whippier, but gives us a picture of weekly action in near real time. That rolling 5 day average held above the June low, but edged slightly below the February lows twice during the month. These were not material breaks. Non-subscribers, click here for access.

On the other hand, you can see in the above chart that the trend of the 11 day total collections, which is the whippiest of all, but still subject to trends, has been xxxxxxxxxxxxx xxxxxxxxx xx xxxxxxxxx xxxx xxxx xxxx  the February-June lows. Non-subscribers, click here for access.

8/3/22 If Friday’s BLS jobs report bears any semblance of reality, the number shouldn’t differ much from the growth rate in June. But given the timing of the data collection as of July 12, and the various “adjustments” that the BLS applies to their survey data, we really never know what the first release for the month will show. They then fit their data to actual data over 7 subsequent monthly revisions and annual benchmark revisions. The first release is garbage, and hit or miss as to whether it reflects reality.

The fact of the tax data shows that so far, the much feared recession isn’t here yet.

So here we are Friday morning, a few hours before the BLS jobs data release, and as usual, I can’t predict what the BLS’s fictional artistic impression of the August jobs market will look like. The fact is that it was weak and getting weaker throughout the month. But if the number is more reflective of July, that weakness won’t show up until next month. When it does show up, whether this morning or next month, the bond market and stock market will get a short lived boost from those who expect that it will mean that the Fed will soon loosen policy. Non-subscribers, click here for access.

But the fact is that if tax revenues are weakening, Treasury supply will only increase, regardless of what Wall Street says about the economy. Treasury supply will increase due to weaker tax revenue just as the Fed requires the Treasury to add $60 billion a month in new debt sales to the public to pay off the Fed. Non-subscribers, click here for access.

In addition to that extra supply from Quantitative Tightening, and a weaker economy, Fed QT also causes demand to weaken. Not only is the Fed no longer the primary buyer and financing agent in the market, but it is also choking demand by removing the cash from the banking system that would otherwise be available to fund Treasury purchases. Non-subscribers, click here for access.

The bottom line is that the weaker tax revenues are not bullish. The accompanying weaker economic data will be spun as bullish, while in fact it will not be. At least at first. It will only be bullish when xxxxxxxx xxxxxxxxx xxxxxxxx xxxxxxxx. All I can say is, “Wait for it!” I’ll give you a heads up, right here. Non-subscribers, click here for access.

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