Thanks to Professor Anthony Sanders for the kind mention in his post about the US Treasury Kabuki Theater. This is an issue that is so crucial to our understanding of markets that I have been covering it in depth every week for the past 13 years. I jotted down a few thoughts in response to his post and a few others I have seen around the web over the past couple of days.

As a result of the debt ceiling there was a $62 billion paydown of outstanding T-bills settled last Thursday. It was the biggest paydown of Treasury debt that I can recall at least since 2011 when the government paid down $200 billion in SPF funding sitting at the Treasury, put aside out of of TARP cash.

When the Treasury pays down debt temporarily, it literally does a direct deposit into the accounts of the erstwhile holders of the expiring paper, most of whom are Primary Dealers and other large institutions. They are then stuck with no place to go with it because with the paper expired and not reissued, they can’t roll over their holdings. Suddenly they had $62 billion in cash in their accounts, all dressed up with no place to go. We saw the results in stocks, bonds, T-bill discount rates of zero point zero zero and bid//covers at the weekly T-bill auctions that went absolutely through the roof.

I warned before this week that the scheduled T-bill paydown due to settle last Thursday could trigger a market meltup and that T-bill rates would be suppressed. That cash also pushed yields down until Friday, but traders then misinterpreted the stock rally as a signal from stocks to take profits on bond trades. The Primary Dealers also saw this coming. They loaded up their long coupon inventory through most of September. Nice trade for them.

There was supposed to be another paydown this week but the Treasury decided to soak up some of the excess cash floating around and the cash that would have been added to that this week with a previously unscheduled $15 billion Cash Management Bill offering  yesterday. So “No soup for you!” this week.