Last year the US Gov. borrowed 173B in Q2. The estimate for this year was roughly 103B. Yesterday, thanks to increased taxes and sequestered spending, the Treasury said it would PAY DOWN 35B in debt from April to June. The first pay down since 2007,many in the game are unfamiliar with the activity. Several consequences jump out at us:
The present default position of the Fed's LSAP has increased, or they need to TAPER a bit to maintain their present percentage of issuance take up. Market participants-some who vocally espoused the view-have not equated the rapidly falling deficit (and now slightly lower debt) with the robust index prices. We argued during the faux Deficit/Fiscal Cliff crisis that merely changing the direction of the trend and growing the economy (even at this slow pace) would be plenty for capital markets. It has been, but we now run the risk that private sector borrowing is not ready to make up the fall. On a practical level the paydown means TAXES are too high. What will be heralded as the fruits of a "balanced approach" is, in reality, the evidence of over-striding.
All of this plays into the debunking of Rein/Rog and the grass roots upheavals against austerity in other countries. As @groditi and I discussed yesterday the collateral shortage "story" will continue to bob around like Ben Gardner's head. The good news remains essentially locked in the capital markets and very little leaks to the general economy. QE, as we have said before, is the Neutron Bomb of monetary policy-the assets are fine, the people are toast. We turn our calenders to May tomorrow.
Sidebar: Sallie Mae had to pull a 3.5% issue (225m) for lack of demand. That's a failed auction in the largest public debt pool.