It is no secret that money paid to Primary Dealers via the Fed's POMO monetization tends to immediately find its way in risky assets, most notably stocks. Yet one of the major complaints against the Fed's QE Lite by the permabull brigade, is that the amount of weekly monetization is just far too low to make much of a dent on stocks, even assuming massive leverage and the deranged computerized feedback loop algos that take the smallest move and make a tsunami out of it. Well, according to Morgan Stanley, the Fed will make sure that over the next three weeks hedge fund LPs are happy, that redemption requests are sparse, and that September wil be an up month for all those levered to the hilt and chasing beta: for September/October the Fed is now expected to monetize double the amount of bonds in Aug/Sept. In other words, the Primary Dealers, aka Fed Lites, will be using tens of billions of brand new Fed printed money to chase the highest beta stocks they can find. And they will most certainly be using made up government data to facilitate this pursuit.
From Morgan Stanley's Jim Caron:
Our MBS strategist, Janaki Rao, highlights that the Fed MBS portfolio paydown for the Sept/Oct period equals a higher than expected $24.6bn which will be offset by higher than expected Fed purchases of USTs to keep their balance sheet from shrinking. Recall that the Fed's stated goal is to keep it's balance sheet from shrinking as mortgage and agency bonds they bought during QE mature or roll-off. The Fed's stated goal is to keep their balance sheet at ~$2.05Tr which is why they are replacing the run-off of MBS and agencies holdings with UST purchases.
The significance is that the speed of refinancing in mortgages (and therefore the speed of purchases of USTs) is 2x faster than both our and market expectations. So, any stimulus that may come as a result of MBS refinancing has been brought forward. The $24.6Bn is substantially higher than the $11.8bn estimated in the Aug/Sept. period and will thus mean greater UST buying in the September/October period.
One final point, Fed purchases of USTs are not the ultimate governing factor driving yields. But it may instead be a headwind against rising yields. Note also that we expect the Fed to overweight their purchases in the 5-10yr sector.
Good luck to all.