Lee Adler
Since my last Primary Dealer position update at the end of August, the research/marketing arms of Goldman, Citi, BofA, UBS, and Morgan Stanley recommended buying Treasuries. These firms are all Primary Dealers. There’s supposed to be a firewall between research and the trading desks. But connect the dots. Dealer inventories are choked with Treasuries that are losing value. The research departments tell the public to buy Treasuries because they are now a bargain. That sure looks like marketing their proprietary inventory, doesn’t it?
Crash helmets and life vests
Total tax revenues grew in September but outlays grew more. The Federal deficit is trending toward an annual rate of $2.7 trillion, which translates to a quarterly average of $675 billion in net new Treasury supply, with no improvement on the horizon. This is a crushing burden for the Treasury market, which should cause bond prices to trend lower, and yields to trend higher, indefinitely.
When Kevin Warsh came aboard as Fed chair, he let it be known that reducing the Fed’s footprint in the markets was one of his goals. No more QE market interventions. No more forward guidance. He would move forward by going backward, to the good old days, when young traders stood by the news ticker on Thursday afternoon waiting for the word from Dr. Doom, Henry Kaufman, and Dr. Death, Al Wojnilower, on how they read the Fed’s tea leaves, from changes in M1.
Treasury Just Sent Piles of Free Money to the Markets
The Treasury supply surge was trimmed this month, as the Treasury spent cash to pay down T-bills and double up buybacks. It did not help. Treasury prices cratered and yields surged. Significant chart levels have broken, and another breakout, through 5% on the 10 year appears imminent. The implied measured move target of that would be x.xx%.
The rest of the investment universe has caught up with us and is now deeply concerned about the bond market. Well known pundits have expounded on the problem, attributing it to all sorts of tangential and meaningless issues. Meanwhile the problem is exactly as we foresaw over the past couple of years, supply. Simply by watching the trends of the data that matters, I forecasted that the inflection point would come in July. That was a few weeks early, but close enough.
We are now in the belly of the beast. Get used to it. Continue to avoid the bond market in any form. And be wary of the potential for contagion.
This report updates the current actual real time government revenues and outlays through the end of August. A marginal improvement in the data changes nothing. The danger remains extreme.
The Treasury will at least double its debt buyback program, but the details that matter most, including how large the increase will actually be and how it will be financed are yet to come. The bigger question is whether it can meaningfully offset near-record coupon issuance. Will it have the intended effect, or adverse unintended consequences. Dealer positioning in this regard is of Primary importance. This week’s Primary Dealer Positions and Financing update looks at where dealer balance sheets, repo financing, and futures hedging stand as the pressure from the tsunami of issuance continues to build unabated.
Treasury supply has surged to $400 billion in new debt in a single month, and the Treasury has announced it will AT LEAST DOUBLE its coupon buyback operations as Treasury yields threaten to break out while bond prices would concurrently crash. The buyback scheme is a panic signal that fails to account for the fact that it xxxxxxxxx xxxxxxxxxx xxxxxxxx xxxxxxxxx xxxxxxxxxx beyond the insane xxxxxx xxxxxxxx xxxxxxxxxx must already bear.
T-bill Coneheads Must Consume Mass Quantities Despite soaring Treasury borrowing and massive monthly issuance, markets have absorbed the supply through surging interest income and liquidity.…
Ten days ago, I was stunned when the stock market did exactly the opposite of what I had forecast for July and August. Based on monstrous Treasury supply pressure that we knew was coming, I had expected a gathering crunch, not just for Treasuries, but also for contagion into other assets.
Not only did that not happen, stocks broke out, and even gold and precious metals started to recover. The Macroliquidity™ model, which I have tweaked and adjusted through the 26 years I have been publishing these reports, failed to foreshadow the stock market breakout. It correctly identified that the bond market would increasingly tighten. That part has played out, although so far somewhat more mildly than I thought. But the stock market breakout to new highs was a shock to the model.
I agonized over it. What did I miss! And then I had a flash of recognition.
The latest Daily Treasury Statement data delineates an unsustainable explosion in outlays and a definitive breakdown in tax revenue growth. But yesterday’s stock market breakout creates an acute point of tension versus the Macroliquidity™ model, and would force a critical reassessment if the rally continues beyond today.
Primary Dealer fixed income holdings have fallen since March, and most of the decline appears to be mark-to-market losses. The Treasury keeps adding supply, of which the Fed absorbs only a fraction, leaving dealers to take their share, required by their special status, as bond prices erode and the 10 year yield pushes toward 5%. The result is a deleveraging cycle in dealer balance sheets that raises the risk of forced, disorderly liquidation across markets.
This report shows where the cracks are in the Primary Dealer holdings, financing, and hedging statistics through mid-July. It also includes a look at hedge fund positions in the bond market, which are another canary in the coal mine of deteriorating liquidity conditions across asset classes.