On Friday Fannie and Freddie paid a dividend of $66 billion to the US Treasury. This is a huge windfall for the government and the US taxpayer.
Normally when the Treasury gets a tax windfall it pays down debt over the next couple of weeks. Those paydowns are cash credits to the accounts of the holders of the paper, often Primary Dealers or large investors. Those paydowns are usually immediately put back to work in the markets. The reduction of Treasury supply in the weeks of the paydowns also means that there’s insufficient supply to absorb all the Fedbucks being pumped through dealer accounts under QE. It’s a case of all that cash with no place to go. So typically asset prices rally in those weeks. The fair haired child asset class this year has been US stocks.
Will these GSE dividend payments be put to similar use? It could be a very bullish couple of weeks if so. Stay tuned.
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I’ve been watching the Fed’s operations every day ever since it started publishing them daily in 2002 along with its balance sheet and the commercial banking system balance sheet. I also closely follow Treasury operations, revenues, and outlays weekly. As the famous financial philosopher L. Berra wisely said, “You can observe a lot by watching.” I invite you to watch along with me, and observe a lot.
This week’s Treasury Update is : As Treasuries Swoon, Fed Governors and District Presidents Pee Their Pants and Cry To Mommy – Professional Edition
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