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Treasury supply continues to bulge, thanks to the yawning federal budget deficit, and the fact that the U.S. Treasury must raise $30 billion per month to repay the Fed.
That's because, under its program to shrink its balance sheet, the Fed is demanding that the Treasury pay back the money that the Fed lent to the U.S. government under QE.
On top of that, the federal budget deficit will top a trillion dollars in the 12 months since the new tax law and spending increases took effect.
The soaring deficit has been steroids for the U.S. economy, but the government must borrow that money before it can spend it. That means that a trillion dollars a year is now hitting, and will continue to hit the market in massive quarterly waves for years. And the money isn't there to absorb it without prices falling drastically. That means lower stock and bond prices and higher bond yields.
Right now, we are in the early stages of one of those waves, and it will decimate stocks and bonds.
Treasury Supply Broke the Dam… Now Wait As These Floodgates Open
I pointed out in August that the amount of new supply hitting the market has been breathtaking, higher than even budget experts at the nonpartisan Congressional Budget Office or Joint Committee on Taxation anticipated when the tax cut and Budget Busting Agreement (BBA) were passed early this year.
The media picked up that theme in September.
The Treasury Borrowing Advisory Committee supply forecast for Q4 issued in August was another warning of a coming tsunami of supply.
On Oct. 15, the Trump administration confirmed all of those warnings when it announced that the fiscal year 2018 budget deficit had blown out to $779 billion, with the tax cut and BBA impacting only the last eight months of that period. For the first four months of the fiscal year, tax revenues were higher, at the old higher rates, and spending was less than now.
For the first full calendar year after those two laws were put into effect, we can expect the deficit to exceed a trillion dollars. That means an average of $80 billion to $90 billion per month in new Treasury supply.
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But it does not come at an even pace. It varies widely depending on quarterly estimated income tax collections. One of those just passed on Sept. 15. That quarterly cash windfall resulted in a few weeks of debt paydown that helped the stock and bond markets at the end of September. Investor bullishness went through the roof as a result.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.