Stealth

Two weeks ago, while we were enjoying the results of the trade negotiations, and the subsequent market response, the treasury auctioned $120Bn of bonds but was able to place only $78Bn at reasonable yields. The Fed came to the rescue and bought $43.6Bn of US Treasuries, including $8.8Bn in 30 yr bonds and $20Bn in 3-year Treasury bonds in a single transaction, raising questions about the demand dynamics in recent auctions. It’s not QE, which should have been formally announced, and it’s definitely not QT, because they’re easing, so they call it “stealth QE” which means that the Fed is injecting liquidity into the financial system in small sporadic interventions without formally labelling it as quantitative easing. These purchases indicate that the Fed is actively engaging in the Treasury market, potentially to stabilize yields and ensure smooth functioning of financial markets. The fact that the Fed monthly runofff has decreased from $25Bn to $5Bn, and now may be intervening in auctions, is telling us investors are mostly on the other side of the trade, in other words, they’re net sellers at these yields. If yields go up and there is no marginal buyer, our deficit widens even more. If there is intervention, we’ll bring inflation back and the dollar will suffer. Choose your poison.

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