Alarm! Treasury Dealer Short Positions Another Red Flag for Liquidity As Stock Market Surges On Realization The Fed May NOT Taper (And Fausti Oversold Omicron Threat)

Alarm!

(Bloomberg) — The recent drop in primary-dealer holdings of front-end Treasuries is another warning of potential market dislocation heading into the year-end liquidity vacuum.

As of Nov. 24, primary dealers — which are mostly the large banks — were on the whole betting against two- to three-year Treasuries rather than buying. They had net short positions of just over $9 million, near the most bearish levels since 2017, signaling a pullback by buyers that provide crucial liquidity for older Treasury issues.

The positioning in the front-end of the curve “suggest less demand from the dealer community to fund off-the-run long positions,” Barclays strategists Anshul Pradhan and Andres Mok say in a Dec. 3 note. Off-the-run Treasuries are notes and bonds created in past years and traded less frequently than the newest issues; they’re the biggest part of the market and make up most of the Federal Reserve’s daily asset purchases, which are being scaled back. 

Short positioning increased on a relative basis as a result, “which may also have crowded demand to borrow particular issues over others,” the analysts wrote. 

Those forces together could contribute to an increase in market dislocations.

 Jerome Powell’s hawkish pivot shocked financial markets. A week later, stocks are higher.
The S&P 500 staged its biggest rally since March to wipe out losses from the past week. The speculative fringe that was a smoldering wreck Friday was soaring Tuesday. An index of meme stocks rallied more than 4%, while one composed of airlines added 1.6%. A gauge of newly public companies advanced more than 4%, SPACs jumped more than 2% and even cryptocurrencies rallied, with Bitcoin powering back above $51,000.

It’s a stunning about-face for risk assets that went into a tail spin after the Federal Reserve chair suggested he favored accelerating the removal of monetary support. What follows are takes from market-watchers on why the market is looking past the Fed’s potential change in policy.

Also, the realization that Fausti was chicken-little and Omicron is not the planet killer.

Or could it be that with China easing, the US will be forced NOT to taper. Or taper only ever-so-slightly.

With the Dow up another 500+ points, it looks like no one is taking Powell and the Gang seriously about tapering. Or Fausti for that matter.

NIAID Director Anthony Fausti.

Agita! Treasury Secretary Yellen Expresses Openness to Defusing Debt Ceiling Without GOP Votes (CDS At $15.97, So No One Is Really Worried, Janet!)

Somewhere over the Alps, T-Sec Janet Yellen is fearmongering over a possible US debt default if Republicans don’t kowtow to Democrat’s desires to raise the debt ceiling.

(Washington ComPost) — SOMEWHERE OVER THE ALPS — Treasury Secretary Janet Yellen on Sunday said Democrats should be willing to approve a fix to the nation’s debt ceiling without GOP support if necessary, an approach senior Democrats ruled out during a recent standoff over the issue.

In an interview aboard a government airplane between Rome and Dublin, Yellen castigated Republicans for refusing to help raise the debt limit but acknowledged Democrats may be able to address the issue without GOP support through the Senate budget procedure known as reconciliation.

Senior Democratic leaders were adamant that the debt ceiling be resolved on a bipartisan basis last month. Senate Republicans have uniformly insisted that Democrats should alone be responsible for raising the nation’s debt limit. Congress probably will face a deadline of Dec. 3 to act, though the exact date is uncertain.

Well, Janet, the market (Credit Default Swaps for US) doesn’t seem to be worried about raising the debt ceiling.

Likewise, the CDX 5Y IG for the US investment grade corporate bonds is near historic lows. Even Yellen can’t make that rise.

The yield curve is flattening as The Fed gets ready to taper.

Only a career academic and politico Bambina like Janet Yellen would try to drum up agita about a US debt default when Democrats can cram down most anything through “budget reconciliation.”

Just relax Janet, put on some headphones, and listen to Redd Volkaert instead of your habit of fearmongering.