Lee Adler in the Wall Street Examiner:

The Treasury is hitting the market with another record level of new supply this week. The Fed did a small add on Monday, but it will need to do a lot more, and it will need help from foreign central banks which may not be forthcoming, to prevent a potential meltdown in the financial markets. In the meantime the US Treasury continues to be incredibly lucky as a fear driven stampede into Treasuries continues to suppress short term rates and note yields. This isn’t likely to end well.

Treasury Auctions

The Treasury dropped a bomb on the market Thursday, announcing another big and unexpected CMB auction to be held this week. This time it’s for $11 billion for 30 days. This was in addition to the was in addition to the usual 4, 13, and 26 week bills, the now monthly 52 week bill, and 2 and 5 year notes just announced today.
The total offered is a mind bending $168 billion. This compares with a TBAC estimate of $153 billion, an overshoot of nearly 10% just a month after the TBAC issued its estimate. The total includes a frightening $67 billion in new supply hitting the market in one week, although the 2 and 5 year notes don’t settle until next week.
Including this week’s announcements, since May 15 the Treasury will have raised $355 billion in new
cash. If we take out the $150 billion one-time stimulus payments, that still leaves $205 billion in new
debt. At this rate the government would add more than $700 billion in new debt to the market over a
12 month period.

This is really getting out of hand. Thanks the general panic in the credit markets, cash continues to flood
into Treasuries, so we aren’t seeing any upside pressure on T-bill rates. The US government has been
incredibly lucky. Nothing like a panic to keep a Ponzi scheme on track. Who knows when this is going to
end, but when it does, it’s going to be ugly. Given the size of the slug new of short term supply that will
hit the market this week, the pressure was bound to show up somewhere, and on Monday it was in
stocks.

The Fed added $5.25 billion to the market on Monday, issuing $7 billion in overnight repos against $1.75 billion in expirations. The 5 day net rose to a drain of just $1.18 billion.
The Fed is going to have to do a lot better
than this in the face of the $67 billion in new Treasury supply that’s being auctioned this week, or else
Monday’s meltdown in stock prices may only be the tip of the iceberg. $36 billion of that will settle on
Thursday. The rest will come next Tuesday. The Fed normally would do a big add on Wednesday and
Thursday to grease the skids for such a large Treasury settlement. But lately they’ve only pumped in
the minimum necessary to help absorb the paper, and then withdrawn all of it within a day or so.

The Fed appears to have no interest in goosing stock prices, and in order to keep Fed Funds and OMO near
the target rates the Fed has needed to drain cash from the market. Fed credit outstanding is at its lowest
level in 3 years, with a big gap continuing versus stock prices. Usually that’s resolved by a fall in stock