Hey There Income Hunters,
I frequently talk about the Treasury’s General Account (TGA).
It’s the US government’s cash balance held at the Fed …
Whenever the Treasury issues securities and has left over funding, they deposit into the TGA.
There was almost $1.8 trillion available to Jenet Yellen when she was appointed as Treasury secretary under Joe Biden.
As you can see in the chart below, it did not take long for Yellen to inject it directly into the economy …
Well, there’s a big problem now.
Yellen must reverse $500 billion to increase the balance to $800 billion, according to the Treasury statement earlier this month …
To recap, the Treasury injected $1.5 billion into the market this year on top of the Fed’s $120 billion A MONTH in bond purchases
Now Yellen must issue additional Treasury securities in the months ahead to increase the balance to $800 billion, as she mentioned in the Treasury’s early August statement
The delay in passing the debt ceiling is a problem for the Treasury, as it delays the department from issuing new net debt. …
(Treasury can issue regular auctions to meet its monthly spending requirements as long as it doesn’t add new net debt.)
The problem arises once the debt ceiling is passed. That’s when Treasury will have to issue a lot more NEW debt and use the proceeds to increase the TGA balance back up to $800 billion.
Quantitative Tightening No One Is Talking about
According to the Congressional Budget Office (CBO), Congress has until October or November to raise or suspend the debt limit.
Without an increase, the Treasury would be out of money by the first quarter of the fiscal year beginning Oct. 1.
Once the debt limit is passed, investors will have to absorb a lot more US Treasuries. That means we could see the supply of bonds rise just as the Fed is buying less and the economy is slowing.
This is the scenario that may force the Fed to apply yield curve controls, meaning the central bank would use QE to purchase as many bonds as needed to cap yields at low levels.
But before yield curve controls are deployed, bond yields will rise significantly
Trade to Watch for
iShares 20+ maturity Bond ETF (Ticker: TLT)
Notice the trend change as TLT failed at the short-term downtrend resistance. It may be failing to hold my first support at 149.50.
The golden cross, meaning the 50-day moving average crossing above the 200 DMA, classifies the medium-term trend as positive …
However, a failure to hold the 50 DMA opens the door to set up a bearish option strategy into the end of the year.
Bring It Home
Trading on the Fed and macro forces puts massive wind in your sales.
September and October are seasonally volatile months, so it is time to focus …
Option Pits Trading Legion will be broadcasting Griff’s picks every Thursday in September …
You’ll get picks like my recent purchase of the KraneShares China internet ETF (Ticker: KWEB) …
I purchased KWEB 55 calls at $1.05 and closed them yesterday for a 138% gain in 6 days.
KWEB reached a low of almost -60% from the high — an prime example of how buying China after the regulatory tech wreck was a low risk/high reward pick.
Looking ahead, the Beijing Winter Olympics are coming up in February … you know President Xi’s plan was to take pain now and show-off gains later.
I am still holding the 45/50 KWEB call spread and will look to roll the call spread higher in the days ahead.
Until then …
Live and Trade With passion My Friends,