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1. The money tied up in Treasuries by primary dealers to the tune of 114.1 B will be returned and may be leveraged by them to pump equities. They may have sold some or all of it–we don’t know how much. It could also be that 100% of it will simply be rolled into buying new Treasuries at the regular auctions instead of pumping equities. But I doubt it. Out of a total return of $185 B, I would be very surprised if a substantial portion did not show up in the markets.

2. If the Fed wants to keep its lending operations at the same level, it will need to increase the monetary base.

However, in the second case, it will be contributing to borrowed bank excess reserves, which we have not necessarily found to be correlated with equity ramps. Rather the permanent operations (separate from SFP–e.g. POMO) go into bank non-borrowed excess reserves, which is correlated to equity ramps. So 1, above instead of 2 will likely be the driving factor for equities.

On your second question, the SFP account at the Fed has only been used for lending, not permanent purchases. Had the Fed printed the money for its lending out to financial institutions (as opposed to using the SFP), it would have gone into the monetary base and could have been leveraged. Though this was a legitimage fear at the time, it was a non-starter because, as we found out later, banks did not lend with money that was lent to them by the Fed (at least in a way that would show up in the stock market). Again, it’s the permanent Fed purchases that matter, and the return of the SFP funds is a permanent action that is very similar to QE/POMO, which is shown to be correlated to equities ramps.

It seems like the liquidity that this money in the Feds SFP account was drained from the money supply last year and is now being re-injected as the Fed uses this money to purchase securities. Is that correct?

Why can’t the banks who receive money by selling securities to the Fed today (with the Fed using money in the special SFP account to buy them) loan it out and use leverage of 10:1? You indicated that if the Fed had printed the money they could use leverage on these excess reserves but they could NOT do it if the money came from the SFP account.

You state that the bills will mature without the requirement that the primary dealers will roll those bills at maturity.

You then posit that the primary dealers will use those funds to gun the equity market.

That is a nice fairy tale but makes no sense.

First of all it is quite unlikely that the primary dealer community would hold that bill for 70 days. They own the bill at a yield of 0.185 basis points.

For the sake of simplicity let us assume that they are able to finance them at percent. They make 18.5 basis point per day on their holding.

That would not be an efficient use of scarce capital in an era when balance sheet space is scarce.

In an environment in which the FOMC has promised cheap financing for an extended period, balance sheet would be allocated to buying the 2 year note (or some other instrument with a longer maturity) when it sags some place north of 1.00 percent. There is at least a little juice in that trade.

Foreign central banks and money funds buy piles of bills. I would bet my money that the bills were quickly distributed to those investors.

Separately, a dealer is not going to hold a security for 70 days.

Furthermore, in the auction of the bill which matures this week the primary dealers took just $ 24.3 billion so even if your far out assumption is correct, then the amount of leverage employed would drop rather quickly from the fanciful number which you cite.

Primary dealers are traders and as a general rule it is anathema to hold a liquid for the 70 days which the post suggests.