Courtesy of Lee Adler of the Wall Street Examiner
Here are a few of the key bullet points from this week’s report.
• The Fed’s purchases of $85 billion this month in MBS and net Treasury purchases from Primary Dealers under Operation Twist will be enough to fund almost 100% of new Treasury supply.
• The one chink in this picture is that Primary Dealers aren’t cooperating. They’ve been sellers of Treasuries since June, while everyone else has been buying. That suggests that a turn is coming. The issue is timing, as always.
• Foreign Central banks have shown signs of returning to being big buyers after a year of holding back. A strengthening US economy may be increasing the recycling of dollars by China, OPEC, Japan and other nations who export to the US, who also are motivated to weaken their currencies against the dollar
• US commercial banks have not been big buyers of Treasuries and Agencies lately, but they are no longer sellers as they were for the better part of a year. Even modest levels of buying by the banks adds to market liquidity
• Bond fund inflows have been strong, reaching the highest level since April in the latest reported week. They remain a bullish factor for the bond market.
• Excess liquidity will flood the markets for as long as the Fed provides enough cash to the Primary Dealers to absorb virtually all new Treasury supply while FCBs, banks and the public remain net buyers. Under those conditions, there’s probably not much chance of a big selloff in Treasuries or stocks. Those who believe that a market cataclysm is likely under these conditions are probably engaging in wishful thinking. If Primary Dealers are flipping their Treasury inventory, it means that they will have plenty of cash to deploy elsewhere. A concerted effort by the world’s central banks to rig the markets is likely to be successful until something happens (like a commodities bubble) which forces them to change course.
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