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)


(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.

Transitory? US Export Prices Soar By 18% YoY (Exporting Inflation To The World!)

I wonder if Biden’s Press Secretary Jen Psaki will argue that inflation is transitory … again?

Well, the US is exporting inflation to our trading partners. US Export Prices by end use rose 18% YoY.

Of course, with the Biden Administration shutting down energy pipeline and drilling, it is not surprising.

Then we have the advance retail sales numbers for October. Growing at 16.3% YoY with massive monetary stimulus still in play.

Then we have Federal Reserve Bank of St. Louis President James Bullard saying that the central bank should speed up its reduction of monetary stimulus in response to a surge in U.S. inflation.

You mean like what Mankiw’s specification of the Taylor Rule model suggests??