The Treasury Market New York Subway Rat Race
Courtesy of Lee Adler of The Wall St. Examiner
This is an excerpt from the weekly Pro Trader Treasury Supply and Demand Report.
The Treasury shocked the market on Thursday, announcing that it was canceling the 2 year note auction that is always held at the end of each month. We had expected something like this being possible as the government grappled with the debt ceiling. It is part of the practice for the past 6 weeks, of the Treasury paying down outstanding short term debt to make room for net borrowing at the long end while up against the debt ceiling. To compensate for the new borrowing at the long end, the Treasury had reduced the 4 week bill offerings from $40 billion per week down to $5 billion.
Thursday’s cancellation of the 2 year note was the first time the Treasury had gone beyond reducing only bill supply. The result of this action will be that the holders of $32 billion worth of notes will be getting their cash back at the end of the month. Suddenly, they and a few piggyback riding momo players all went scurrying around like New York subway rats scavenging for slices of pizza. Except these Wall Street rodents were looking for places to stash cold cash until the debt ceiling problem goes away. So both bonds and stocks rallied.
Adding to the pandemonium, this week the Fed completed its mid month MBS purchase settlements of $28 billion of purchase money deposited to dealer accounts October 14-21. That added even more cash to the Treasury’s pumping of debt paydown cash into dealer accounts. The result of the sudden extreme shortage of supply and concomitant excess of cash was a meltup.
But there will soon be a problem, a big problem.
