Hey There Income Hunter,

Around these parts, Mark Sebastian is known as your only option for all things options … 

Today, I’m going to show you the Fed’s ONLY option as it attempts to delay an inevitable deep recession and financial meltdown. 

The Fed is very good at one thing … creating new ways to provide liquidity to the US Treasury bond market. 

During Covid our central bank was like squirrels. First it scattered trillions of dollars throughout the financial system. Then it printed way more money than was needed.

Finally the Fed created ways of storing the excess funds so that during times like this it could tap into them.

It may delay the inevitable but it will not be a long-term solution.

Here’s how to avoid getting sucked into their shenanigans.

The Fed’s Emergency Nest Egg

The emergency nest egg is the Fed’s reverse repo facility (RRP). It’s been around since 2000, but it only really started being used after the great financial crisis of 2008.

The facility allows non-banks, mostly money market funds (MMFs), to lend and borrow funds against Treasury and mortgage bond collateral. 

When Covid hit, the Fed realized it was their opportunity to print unlimited amounts of money and they could use RRP as the vehicle to control the excess cash in the system. 

Getting MMFs to lend to the Fed at higher interest rates than one-year Treasury bills was easy.

Today, there is $2.4 trillion sitting at the Fed, very close to a record high. 

The Fed’s Plan to Keep the Money

The only way the MMFs will take the money out of the Fed is if they can earn a better return in short-term Treasury paper. 

That means once the debt ceiling is passed, the Treasury will need to borrow close to a trillion just to refill its general account at the Fed. 

This is what will happen …

The Fed will lower the RRP rate that they pay the MMFs, which today is below the Treasury Bill rate.

Then Janet Yellen will issue what the Treasury calls “cash management bills,” and the MMFs will gladly buy up to $2 trillion from her.

This maneuver will add liquidity to the bond market, which is what the Fed will need to continue doing to infinity and beyond. 

What’s the Trade?

So, between tapping into RRP and stealth QE, the Fed will be able to avoid the debt crisis for maybe six more months ..

During that time the economic numbers and inflation should continue coming down, which is good for bonds. 

A bullish strategy in TLT will return nice gains to at least the 108 level and possibly higher. Here is the technical setup. Notice the breakout above the 200-day moving average (red line):

The time is right and TLT can easily break above 108 if we get the weaker inflation data I expect in the next couple of months. 

The window is open into the summer and then we will be talking about shorting bonds big time. So take advantage now.

Live and Trade With Passion My Friend,

Griff