If there was any doubt that the Fed would proceed with tapering its monthly deficit monetization (i.e., $85 billion in POMO/S&P500 flow injection) over the next few months, those were just laid to rest courtesy of the Treasury's quarterly refunding statement [10]which was filed moments ago, and specifically its Marketable Borrowing Estimates.
The release was brief [10]...
The U.S. Department of the Treasury today announced its current estimates of net marketable borrowing for the July – September and October – December 2013 quarters:
- During the July – September 2013 quarter, Treasury expects to issue $209 billion in net marketable debt, assuming an end-of-September cash balance of $95 billion. This borrowing estimate is $14 billion lower than announced in April 2013. The decrease in borrowing relates primarily to changes in cash balance assumptions [1] offset in part by lower receipts and higher expenditures.
- During the October – December 2013 quarter, Treasury expects to issue $235 billion in net marketable debt, assuming an end-of-December cash balance of $80 billion.
During the April – June 2013 quarter, Treasury paid down $11 billion in net marketable debt and ended the quarter with a cash balance of $135 billion. In May 2013, Treasury had estimated $35 billion in net pay-down and assumed an end-of-June cash balance of $75 billion. The increase in the cash balance [1] was primarily the result of $66 billion in dividend payments received on June 28 from Fannie Mae and Freddie Mac under the Preferred Stock Purchase Agreement Program.
[11]
... but informative. It said that as a result of the GSE dividend, cash soared. But not only that: one also must recall that in the second calendar quarter of the year (3rd fiscal quarter of 2013) the original cash need was expected to be $103 billion only to become a $11 source of cash finally, as a result of the Treasury hitting the debt ceiling early and being forced to collapse its spending far earlier than previously expected.
[12]
But the punchline appears when one compares the LTM marketable borrowing needs from calendar Q4 of 2012 when the Fed announced the monthly Open-Ended $85 billion in monthly monetization, and compares it to what the TBAC and the Treasury now expect Q4 LTM borrowing needs will be in Q4 of this year. Bottom line: a 30% drop from $1134 billion to $782 billion.
[13]
This is a 31% drop in net funding needs, but more importantly to the Fed, the annual amount of Treasury issuance monetized soars from the pro forma 48% in December 2012 ($540bn of $1134bn) to a whopping 69% where it will be if all goes according to plan in calendar Q4 of 2013 when if the Fed did not Taper, it would monetize a record 69% of all issuance (and well over 100% of all issuance with notable duration).
In summary: a 30% drop in funding needs means a ~25% in monetization need (to avoid destabilizing the already illiquid bond market even more), or QE taper QED.
Of course, that the GSE dividend is a non-recurring event and will end as soon as housing resumes its downward path once the Fed lowers its monthly liquidity injection from $85 to $65 billion (or even $60 billion which is a 30% reduction and matches the funding need) is tangential, and is the reason why shortly after the Fed proceeds with tapering, it will very soon unleash far more funding needs once again, and be forced to Untaper.
Worst case, there is a Syrian war for that, and by "that" [14]we mean sending declining defense spending surging and thus giving Bernanke the carte blanche he will need to monetize much more.
We give the Fed 4-6 months before the reduced monthly flow of $65 billion, most likely starting in September, reverts to its original number of $85 billion or even rises above it.
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Much more here in two days when the full TBAC presentation is released to the public at 8:30 am.