We noted yesterday once again that The Fed was out en masse demanding investors sell their bonds because "bonds are in a bubble" but not stocks. The reason - as we have explained in great detail - is the repo market is broken due to massive collateral shortages (thanks to the Fed). Today, the Fed admitted it has a problem...
- *TREASURY ASKS DEALERS TO EXPLAIN REASONS FOR FAILS-TO-DELIVER
The tongue in cheek message of course is that the Treasury wants to know why all the dealers continue to be so short bonds (even as it urges 'investors' to sell). Furthermore, it is surveying dealers over the need to issue bonds of greater maturity than 30 years in order to fulfill collateral needs.
The U.S. Treasury Department is asking bond dealers whether it should consider issuing a security with a maturity exceeding 30 years.
“Please comment on the demand for long-duration sovereign products,” the department said in a quarterly survey of dealers released today in Washington. “Should Treasury consider issuing a security with a maturity greater than 30 years?”
The Treasury also asked the dealers to explain the causes for an increase recently in “fails-to-deliver” in the market for U.S. government debt. The survey was released ahead of meetings planned for July 31-Aug. 1.
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But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds).
Crucially, it should be inherently obvious to everyone that the moves we see in the stock market is not about mom and pop choosing to invest in the stock market (or not) as the 'cash on the slidelines' fallacy is "completely idiotic' but about the marginal leveraged machine (or human) quickly jumping oin momentum.
The spike in "fails to deliver" highlights a major growing problem in the repo markets that provide that leverage... and thus the glue that holds stock markets together.
Wondering why JPY and bond yields have diverged so notably from stocks in recent days... repo effects (it's just a matter of time before it hits stocks)...
So that explains why the Fed is so desperate to talk you into selling your bonds - most notably the short-end by demanding you listen to what Yellen said about raising rates.. as that reduces the shortfall of collateral that repo needs and restocks the banks with repo-able funds.
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The irony of course of the Fed explaining how rates will rise faster is that it spooks stock investors who have grown used to exuberant liquidity supply and roitates them to bonds... which merely exacerbates the problem the Fed has