Last week the Treasury cut back the supply of the 4 week bills to $55 billion from $60 billion. Today they just announced another cut, to $45 billion. As a result of continuing massive demand for short government paper, the 4 week bill rate broke down from its range and closed at 18 basis points on Monday. The Fed’s magic wand may finally be going limp.
Perhaps my long espoused belief that the Fed can’t control rates will turn out to be correct after all. I was beginning to think that maybe they could pull it off because enough people were willing to play along with the illusion. But the jury may be starting to turn. As the BoJ and ECB continue to flood worldwide dealer/bank behemoths with cash, and NIRPitrage sends it cascading into the US, the Fed will be sorely tested to maintain the charade that it can control rates. It will be hard pressed to enforce the next “hike” if it even bothers to try. Certainly the weakening economic data (surprise, surprise—not) will give them an excuse not to.
At the long end, demand for Treasuries has been consistently declining. That did not matter much as Treasury supply was steadily falling from 2009 through 2015, but it will start to matter now. As Federal Revenues have fallen precipitously since the third quarter of 2015, the decline in new Treasury supply has ended. If the drop in revenues is not reversed quickly, Treasury supply will begin to trend upward. We don’t need to be expert economists to know what declining demand and increasing supply will mean for bond prices and yields. We’ll keep an eye on the charts for any sign of a yield breakout.
With indications growing that the world’s central banks have gone completely insane, investors are increasingly recoiling from playing along with the con. Money is moving into short term government paper in ever increasing waves as traders, banks and financiers become increasingly risk adverse amid the growing evidence that central banks have lost control, as if they ever had any.
Neither bonds nor stocks are likely to fare well under these conditions. It’s beginning to look as though all the trends are starting to move in the wrong direction.
This report shows and summarizes the trends in treasury market supply and demand as they are likely to impact the markets in the weeks and months ahead.
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