Markets Skate Through Mountain Of Supply Unscathed While Dealers Distribute

The Treasury has now pounded the market with $231 billion in net new supply over the past three weeks and the markets haven’t even flinched (until today). It’s amazing… 

The Treasury had a huge week last week, with a net of $85 billion in new supply. The markets didn’t even blink. Maybe they will on Monday, but to absorb that much new supply, now up to $231 billion over the course of three weeks, without even a flinch, is extraordinary.

2/23/14 The fact that the markets held up so well in the face of this wall of new supply is amazing. It stinks of mania, in this case, institutional establishment mania, which is even more dangerous than public mania. It also suggests that capital flight from emerging market turmoil, particularly in China, is once again boosting US markets. We have seen this phenomenon every time the European financial crisis has flared up—massive flows out of Eurozone bank accounts into the US, filtered through the US Treasury market and stock market.

Against the new supply last week, the Fed settled no MBS forward purchases and just the usual $9 billion in weekly Treasury purchases. In prior months the Fed’s purchases have equaled or exceeded net new Treasury supply. February is one of the few months each year when that is not the case. In the Fed’s absence, other buyers stepped in to absorb the onslaught of supply.

Bid/covers at the auctions were again amazingly strong given the heavy supply. The indirect bid fell but only because dealers and direct bidders were more aggressive. The new floating rate notes took some of the usual short term bill bid. The indirect bid tendered on the coupons was up slightly from the last round of the same paper, and was way up from this week last year. It suggests that foreign central banks were bidding (The Fed’s FCB custodial holdings are covered in a different section of the report).

Rates were mixed vs. the last round of auctions which is shocking and inexplicable considering the immense amount of new supply. We’re seeing panic levels of demand for “safe” Treasury paper. This is where foreign inflows enter the picture to artificially prop the market.