Over the past 10 days the CME reduced margin requirements first on stock index futures then Treasury futures. I don’t think that this was simply the exchange acting on its own any more than it was when it hiked margins on silver, crude and corn, and I do think there’s a message in these actions. The Fed wants commodity prices lower and stock and bond prices higher, and it will pull the strings to try anything to make that happen. In the end, however, without QE the manipulation cannot succeed. Therefore, I think we will see a return of a modified QE in the not too distant future. Look for it to include MBS again. The Primary Dealers have been accumulating that garbage hand over fist over the past two months.
Printing operations for the holiday shortened week ended 6/1/11 totaled just $12.9 billion of cash to Primary Dealer trading accounts. After the Wednesday H41 statement closing date, the Fed took a day off on Thursday, then added another $6.9 billion on Friday. POMO operations for the week ahead are as follows.
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The Treasury paid down $9 billion in T-bills at last Thursday’s settlement and will pay down another $9 billion this Thursday. There’s a big slate of note and bond auctions this week. The government has done miraculously at pushing yields down. That has come at the expense of the stock market. I’ve always felt that keeping Treasury yields down is Job One for the Fed and Treasury, and if that means they have to sacrifice the stock market, they will. Clearly POMO alone is not enough to do the job with foreign central banks and the commercial banks on strike at the Treasury auctions.
The current monthly POMO schedule ends on Thursday. The Fed will post the final schedule on Friday at 2 p.m. Apparently there will not be an operation on Friday.
As of next Thursday, including estimated MBS paydown replacements, the Fed would need to buy approximately $68 billion more in Treasuries to meet its balance sheet goal of $2.654 trillion by the end of the QE2 buy program. That averages about $24-25 billion per week, which is a slightly higher pace than the past month.
After that, they’ll go cold turkey, buying only enough to replace the MBS paydowns and GSE expirations. That should only be around $10-15 billion per month. While the market’s reaction may not be immediate, I expect it to be profound, with losses primarily hitting stocks as the government’s manipulators and dealer henchmen attempt to use liquidation of equities to support the Treasury market. I’m not sure that will work for long. Treasuries should begin to weaken before too long. We’ll have to watch the technical indicators closely.
None of the Fed’s GSE paper matured in the week ended Wednesday 6/1. Treasury purchases necessary to replace expiring GSE paper are included in the Fed’s POMO schedule for the month. GSE Maturities since April 2010 when the Fed’s GSE holdings peaked totaled approximately $50 billion. Another $2.4 billion will mature between now and the end of QE2 at the end of June.
There were no MBS paydowns in the week ended Wednesday 6/1, leaving the total for the past four weeks at $9.2 billion. The Fed estimates MBS paydowns in advance and includes an amount necessary to replace those paydowns in the total POMO scheduled for the month. MBS monthly paydowns have been running close to my $10 billion estimate.
Over the next 12 months $25.8 billion of GSE holdings will mature, including $9.3 billion over the next three months. The next maturities will be on June 15 when $0.7 billion will mature. Then another $3 billion will hit between June 24 and July 1 as POMO is ending. The Fed has pledged to replace any maturing paper on its balance sheet with additional Treasury purchases. Including MBS paydowns and GSE maturities. This should translate to the Fed buying $10-15 billion a month in Treasuries for the remainder of this year. That’s essentially a starvation diet for the Primary Dealers, given that they face the responsibility for absorbing much of the expected $100 billion a month or more of new Treasury paper.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.