We’ve already covered that fact that the supply of Treasuries will increase in 2018 as a result of the tax cut package and the fact that the Treasury needs to sell new debt to raise the cash to pay off the Fed when it redeems holdings under its program to shrink its balance sheet.
Meanwhile, the demand for Treasuries has been declining. This is a lethal combination for the bond market. We’ve been expecting this for months, and we’ve started to see the impact on the bond market in recent weeks.
One of the most important factors has been the fact that the Primary Dealers continue to be mispositioned. They are suffering losses as a result.
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