US Govt Continues Issuance With a 30Y Auction Today
M2 +$1Tn YoY
Ok guys just a quick note on yesterday’s US Government 10Y Auction and today’s upcoming 30Y auction. Yesterday’s auction resulted in a 4.25% 10y coupon rate and after strong consecutive stop through auctions, this one came with a 1.1bp tail.
What this means is that the when issued rate just prior to the auction say is trading at 4.230%. (when issued is a proxy for the new auctioned note prior to its auction) if the auction high yield comes out at 4.241% this would be a 1.1bp tail. The Bid to Cover was also well below the recent six month averages, so all in all not a good auction. Surprising us actually but then again, the 10Y is the long end of the short end, so a lot of yield curve dynamics at play here.
Take a look at the graphic of the results and we want to focus upon the SOMA uptake by the FRB (We like to use this acronym instead of FED or FOMC):
This $14.25Bln is essentially “net new money creation.” Yes we know if you ask the Ai trained bots if this is money printing, they will all come up with some excuse as to why its not akin to money printing.
However and only because the term “money printing” seems so archaic as everything is done electronically now, it seems this is the reason why the Ai bots don’t really consider this money printing, because its not done physically! So I suppose we just call it digital crediting!
Anyway this new $14.25bln is ADDING TO THE MONEY SUPPLY and despite it being an OMO or Open Market Operation, it is a direct monetary infusion, because the FRB credits the reserve accounts of the primary dealers (banks) that sell the securities to them. This is done electronically via the Fed’s balance sheet, increasing the level of bank reserves in the banking system.
This process effectively increases the money supply indirectly, as banks can use these reserves to lend or invest, amplifying the money supply through the money multiplier effect.
Most Ai based programs when asked will not consider this purchase by SOMA as a “direct creation of money.” However, the initial purchase does indeed increase the FRB balance sheet and long time readers know, Magnelibra will always view this as QE-Lite.
As far as the accounting entries for the FRB when they conduct SOMA Security purchases we know they show up on the H4 report under “Securities Held Outright,” however the offsetting liability shows up in “Other deposits held by depository institutions” shown below:
Yes we know the FRB is continuing to run its balance sheet down and it now sits at $6.7Tn down -$542Bn over the last year in total, but “other deposits” has grown by $120.99Bln over the last year and we will expect this to start to accelerate as time moves forward.
M2 has grown by $1Tn in a years time as well, which shouldn’t be to unexpected considering all the risk free interest being taken up at the expense of the US Govt, or should I say all future tax payers!
So when you see risk assets continue to defy traditional economics, well an increase in the supply of money has a way of offsetting things now doesn’t it.
Alright so enough on money and supply, today we have the $25Bln 30Y auction and here is a look at the chart. Considering yesterday’s 10s tail, we aren’t sure this one will result in the same action. The long end is kind of out there on its own, however 4.75% to 4.875% coupons may entice a few duration hedgers we believe. The chart structure is also positive technically for the 30s:
If we take a look at the CME Fed Watch Tool, we can see that there is a 91.2% expectation for a 25bp rate cut next month. However we feel the FOMC will start to lean toward a more 50bp rate cut and it will be justified as perhaps the Sept. NFPayroll report may post its first negative number in over 5 years. Anyway expect over the coming month the expectation for a 50bp cut variety perhaps start to increase:
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We added a chart late yesterday to our post, but figured will post it here again for those that missed it. We read through and viewed the latest NY FED Household Debt and Credit data, well let’s just say the student loan default rate numbers were atrocious but this chart, for us says a whole lot more:
What this is saying is that we are at the start of a very bad trend, and this trend is not confined to just one age group, its hitting everyone!
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