We’ve been following the story of the US Treasury paying down outstanding T-bills since late February. $680 billion of paydowns led to a big turnaround and rally in longer term Treasuries as the Treasury pumped that money into the accounts of former bill holders and simultaneously removed that paper from the market. Some holders sought greener pastures in longer term paper, leading to the rally in the 10 year yield and other maturities.
In recent weeks we’ve taken note of the Treasury reducing those paydowns, and we saw a few hiccups on the Treasury market. But over the past week, the rally resumed, thanks to this being the Fed’s monthly MBS purchase settlement week. Then the Treasury piled on again on Thursday, announcing another $48 billion in bill paydowns for this week.
The Fed holds MBS settlements in the third week of every month, for forward purchase contracts it made over the past two months. This week’s settlements total $128 billion, which is yooge. They started last Wednesday (July 14) with a down payment of $83 billion. The second installment is for $15 billion today. They finish up on Wednesday, injecting another $29 billion into the accounts of the Primary Dealers from whom they buy that paper.
Then late last week, the Treasury announced, in its infinite wisdom, that it would pay down another $40 billion in T-bills tomorrow (July 20) and $8 billion on Thursday. Drowning in cash, enough fixed income guys turned blue and bought further out on the curve on Friday and this morning to send bond prices soaring and yields crashing.
Apparently the dealers and others have wanted nothing to do with stocks, so they ploughed all of the cash into Treasuries. The stock selloff exacerbated the yield rally, and vice versa.
Traders and pundits tend to talk rotation when these events occur. For now, they’re blaming a resurgence of COVID cases, which is unwarranted because with a majority of US and European citizens at least partially vaccinated, few people are dying. It’s just mindless panic.
But here’s where Treasuries are really headed, and why. And what you should do about it.
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