FAST FIVE: "Terrible" 52-Week Auction Confirms Plunge In Market Liquidity

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If investors are mostly happy to exchange money for Bills, it is generally said that liquidity in the financial system is ample; if however investors are unwilling to part with their “cash” in order to fund the US Treasury (as a reminder, in a time of chronic budget deficits, Uncle Sam has to issue debt to fund its operations), then there is a liquidity shortage.

In fact, according to Bank of America the liquidity shortage over the next two months – a period in which as shown in the chart above the Treasury would aggressively be issuing bills – would be so acute, that the Fed may be forced to launch QE, a conclusion which JPMorgan echoed just days later.

Worse, the bid-to-cover of 2.66 was not only sharply below the 2.87 from last month, it was the lowest since 2008.

For those wondering how to keep track of just how tight funding conditions are becoming, look no further than the repo market, because while the glut of cash has recently softened overnight repo rates, the market may be starting to shift with overnight GC trading around 2.20%/2.18% Friday, ICAP data show; curiously on Tuesday it dipped down to 2.15/2.07 after opening at 2.26/2.24.

“Liquidity should dry up [this] week as recent bill auctions settle on Tuesday, and Thursday's bill and coupon auction settlements raise a combined $34.7 billion,” Stone & McCarthy analysts said.

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