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Not much has changed since our last look at Primary Dealer data 4 weeks ago. The script is playing out. It’s Greek tragedy, because we know what’s coming. I’ll recount what we’ve already said, and add plot embellishments from current data that the Fed posted Thursday, that’s up to date through 10 days ago.
The bottom line is that the financial market is moving towards a crisis. Fast. It will continue to do so as the Fed cuts QE first to zero, then goes in reverse. It will do so even more as the Fed shrinks its balance sheet by allowing maturing paper to be paid off rather than rolled over. If they do that, the pressure on on Primary Dealers will only get worse. They have not established the net short positions needed to manage it.
On average, their positioning is not good for a decline in bond prices (rise in yields.) Some Primary Dealers are probably well positioned. That means that some, if not most, are not. Those who are not well positioned are almost certainly already in trouble.
This won’t end well.
This report has the charts and analysis to prove it.
I’ve opined to stay away from the bond market for the past 18 months. Has that now changed? And what about stocks?
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