What Goes Around, Comes Around

The markets responded as expected to this week's light Treasury supply, which included a hefty paydown on Thursday along with the usual dose of POMO. Stocks sold off Monday under the pressure of settling $72 billion in new notes and bonds, but then they recovered as POMO and $10 billion in Treasury paydowns put cash back in the pockets of the market's movers and shakers. As usual, they deployed some of it into stocks.

However, there was a fly in the ointment of this week's light Treasury schedule. The evidence suggests that the foreign central banks ran away from the auctions. If this is the reversal of their short term buying cycle, it should depress the performance of the markets in the weeks ahead. I'll look at the Fed's custodial data on FCB holdings in the Fed report, to be posted on Friday.

The supply bogeyman will return at the end of the month, with $61 billion of new notes and TIPS settling on May 31. That will be an interesting challenge for the market. Once again, how that's handled should give us a preview of things to come when the Fed's POMO pause begins in July. I have a hunch it won't be pretty.

Interestingly, the new supply would have only been $56 billion but the Fed bought part of the maturing issuance under QE. So QE put money into the market then, but now, the Treasury must borrow more to refund that. What goes around comes around. This is only just beginning. It won't be a big issue this year, because few issues acquired under QE settle during the remainder of this year, but it will become a very big issue in 2012. We'll have that to look forward to.

The month to date Treasury data on receipts and outlays for May is mixed on withholding data. There's still some indication of upward momentum, but there are also hints of a stall. An analysis of the rate of outlays and tax refunds, suggests a sharp dropoff in stimulus effects over the past 6 weeks. That should only worsen as the government cuts spending and the Fed takes a "wait and see" break on POMO.

The dollar's rally stalled at a key resistance level. That's now up in the air, but the bigger issue is the 10 year Treasury yield, where a combination bull-bear Super Bowl- World Series is being played at the 3.15 area.

This is the executive summary of the Wall Street Examiner Professional Edition Treasury report.

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