I don't think the Fed was counting on Boehner and the tea party "hanging tough" on the debt ceiling.

Now that we've officially reached it (see zerohedge.com today) things could get interesting.

The Fed announced plans to monetize an additional $93 B in debt over the next 30 days, as part of QE2:

http://www.zerohedge.com/article/fed-mon....

Up until today they've been playing a big game of "flip that bond" with the primary dealers. Essentially monetizing new treasury debt. With treasury no longer issuing new debt after this week, they'll have to resort to buying existing bonds.

So assume for the sake of argument that Boehner hangs tough until at least the beginning of June. We all know he'll cave in eventually, but not without putting up a show. Supply/demand logic suggests a greatly reduced supply of treasuries over the next 30 days, with the Fed keeping its foot on the demand petal.

What could this mean? I don't claim to know, but a few scenarios spring to mind:

T-bond prices soar, driving yields down

The lack of auctions acts as a reverse liquidity drain, meaning that the fed pours on the liquidity into an over saturated treasury market, forcing banks and hedge funds to chase risk and drive commodities back up after shaking out all the retail clowns

The fed panics and halts QE2 or delays the POMO until Congress caves in to O-bankster like a poorly built igloo in the July sun

Thoughts?

The Fed will NOT stop QE2, so I would toss that scenario.

As for what actually happens, I am not sure. But if the dollar soares then so do bonds I would guess because the money won't go to commodities or equities.

Quote:

With treasury no longer issuing new debt after this week

Someone better alert the carabinieri.