T bill issuance continued its upward climb in April despite the Treasury doing a massive mid-month paydown using all that cash it got from mid-April tax receipts.
Dealer takedown of the bills at auction was flat, as the Fed increased its cash withdrawals from the banking system under its bloodletting, aka “normalization” program.
Cash is the dealers’ lifeblood. Sure, they can leverage up, but cash is the basis for that. Under QE, there was always more cash. Under the Fed bloodletting, dealers will have less and less cash to play with.
Meanwhile demand for T-bills from investment funds continued to soar. Since the funds weren’t heavy in cash, this demand must come from them liquidating other investments. Therefore, the declining availability of cash, and the associated rise in interest rates will continue to suck the lifeblood from stocks and bonds as more funds opt to hold T-bills in lieu of bonds and equities.
The Fed has published a schedule of increased draining operations through October of 2018. Then it will maintain a crushing pace of withdrawals until it achieves a “normalized” tight reserve position on its balance sheet. That should take until mid-2020.
Over the next 2 years, dealers will be starved of cash and other buyers won’t be able to pick up the slack because they too will have less cash on balance. Bill rates will continue to rise, as they have been, and stocks should come under increasing pressure. The Fed will be forced to rubber stamp rising money rates by announcing increases in the Fake Funds target rate. That’s a shell game. The real action will be in the secondary market ratees of various maturities of T-bills, where the rise has been relentless, and should continue to be.
Today, I want you to look closely at this chart and notice who isn’t buying!
That flat purple line and the slow moving blue line are very bad news for the Treasury market (and, via ripple effect, for the stock market, and for you).