Your Treasury-Fueled Windfall Ends Today – Here’s What to Do

There’s something very unique – and a bit sinister – about today, April 19.

Would you like to know what is fueling this stock market rally?

Since March 29, the Treasury has poured $114 billion of its cash hoard back into the market by paying down debt.

That windfall ends today… Thursday, April 19. From then on, Treasury supply will just keep building.

This is as good as it will be for stocks right now. And that means you have some actions to take before the end of the month…

The Sordid Truth About Where This Cash Buildup Came From…

Remember the buildup of the Treasury’s $500 billion rainy day fund? The TBAC (Treasury Borrowing Advisory Committee) has long recommended that the Treasury build such a fund.

The Treasury has been working toward that goal, but it has taken a little detour since March 29. At that point the fund had reached $334 billion. As of April 12, it had dropped to $225 billion, a drop of $114 billion. The Treasury used that cash to pay down debt, which then had the effect of goosing stock prices.

Was it intentional? I’ll let you be the judge. But just note that at the end of March, the stock market was threatening to break down. Then, voila! The magic hand with the stinky fingers, the US Treasury’s hand, appeared.

But from April 19 until the end of May, the TBAC forecast calls for approximately $125 billion in new supply. This will add to the pressure from the Fed siphoning $30 billion a month from the system under its balance sheet “normalization” program.

Remember, in the bad old days of QE, the Fed printed and pumped enough money into Primary Dealer accounts to fund every dollar of new Treasury supply. Today, they’re not only funding zero new supply, they’re actually taking money out of the system and forcing the Treasury to borrow even more, to raise the cash to pay off the paper that the Fed is redeeming.

At the same time, the Treasury may return to padding its cash account toward the goal of reaching a $500 billion cash kitty. If it does, it will be bearish. I’ll keep an eye on that data to see how that’s going. There’s no guarantee, of course. Treasury Secretary Mnuchin is a Wall Street wiseguy, and he apparently likes to use that cash hoard to mess with the market.

This business of the US government manipulating markets is just so sordid.

Mushrooming Treasury Supply Will Now Pressure Markets – Here’s What to Do

The monthly Federal budget deficit reached its best level in 2015. Since 2016, the deficit has been growing.


With the changes in the tax law and the Trump Regime’s massive increase in spending, those deficits are about to get a lot bigger. That has already begun to cause Treasury supply to mushroom.

Government forecasters and the TBAC project that deficits will increase for the foreseeable future. The Joint Committee on Taxation (JCT) of the US Congress says that the new tax cuts will add $280 billion to the deficit this year.

The Congressional Budget Office (CBO) just confirmed that we’re headed for massive increases in the deficit. This statement stands out in their April 9 report.

The deficit that CBO now estimates for 2018 is $242 billion larger than the one that it projected for that year in June 2017. Accounting for most of that difference is a $194 billion reduction in projected revenues, mainly because the 2017 tax act is expected to reduce collections of individual and corporate income taxes.

Remember that this is for the fiscal year that ends in September, not a full calendar year.

This increase in the deficit will cause an increase in an already heavy Treasury supply forecast, which will pressure all markets.

Particularly shocking is that the CBO projects that revenue losses due to the tax cut will continue until 2026. Here are the CBO’s projected deficits for the next 10 years. It projects increasing deficits and thus increases in Treasury supply for the next 8 years.

In early February the TBAC released its estimate of new supply for the first and second quarters of 2018. The TBAC is a committee of Wall Street Primary Dealers and international bankers that tells the Treasury how much debt it will need to issue for the current quarter and the following quarter. It issues its reports in early February, May, August, and September. It recently issued a statement telling those of us who follow their reports that, “There’s nothing to see here. Move along.” Which means the opposite, of course. ¬†We need to keep paying close attention to what they’re saying. If anything, the Treasury has recently overshot the committee’s forecasts.

The February forecast called for $618 billion in net new supply in the first half of 2018. That would put the US on a pace for average deficits, and average new Treasury supply, of more than $100 billion per month immediately.

The TBAC even expected the government to need to issue $84 billion in new supply from mid April to mid May. That is notable because the Treasury normally pays down debt through that period. It uses the cash from the April tax collection windfall. Not paying down debt in late April is a sea change from the history of big paydowns over those four weeks that typically goosed the stock market. There would be no such benefit this year if the TBAC projection is correct.

Maybe the Treasury just accelerated the paydowns this year. Lo and behold, from April 5 to April 19 the Treasury is paying down $125 billion in outstanding debt. Most of that cash has already flowed back to the accounts of the erstwhile holders of the paper being paid down. The rest is coming on Thursday (today). Those holders include dealers, banks, and other institutions.

So, what happened? Stocks are having their April rally just a bit earlier than usual. More cash is coming on April 19 when the last of the paydowns settle. That could slosh around the market for another week or more, but then the tide will start going out again.

I would use the rest of April as an opportunity to aggressively lighten up on longs, and gather some shorts on the broader market.

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Lee Adler

4 Responses to “Your Treasury-Fueled Windfall Ends Today – Here’s What to Do”

  1. Lee, thank you so much for always keeping us informed !
    I am retired, and cannot afford to get killed in this market again !
    there are not many people you can count on for the truth, but I know I can count on you
    for your concern, and big heart !
    I look forward to ALL your comments, and thank you so much for Caring.

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