The Treasury finished pounding the market with supply for this week, unless they do a surprise auction tomorrow. The auctions held today will settle on Monday. Today they settled $50 billion of the new paper. Tomorrow will come another $30 billion, and then $40 billion on Monday. We saw the results of this pressure again today in the stock market. Most shocking perhaps was that the Fed drained $20 billion in OMO today. Under the circumstances, the 6.5% drop in the Dow today isn’t surprising. Nor is it surprising that note yields are skyrocketing. This is only the beginning on that score.

Sickeningly, there’s likely to be little letup given the amount of supply that must be settled tomorrow and Monday and the certainty of more CMBs and various and sundry other forms of government paper raining down on the market next week. Another sign of the distress in the market was the explosion in the fee on TSLF swaps to 305 basis points. The market is simply coming apart at the seams, and I blame not the unwillingness of banks to lend to one another. I blame this cascade of Treasury supply. The US Government is exacerbating this mess.

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