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Treasury Yield Curve Interpretation Is Like Freud’s Interpretation of Dreams – Utter Nonsense

Treasury Yield Curve interpretation is Wall Street’s sport of the moment. Everyone is getting in on the act. The consensus seems to be that falling yields are forecasting a slowing economy. Or worse, a recession.


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Yes, the real time Federal tax collections data does suggest that the economy is slowing, but that’s not why Treasuries are rallying and yields are falling.

This is something I’ve been talking about for months in my regular Liquidity Trader reports on the Treasury market. It’s about excess cash being forced back into the market amidst a shortage of paper to absorb it.

The Real Reason for the Treasury Yield Curve Inversion

There are two reasons for this.

Thanks to solid April tax collections, the Treasury’s cash account was bulging. It hit a near record $423 billion on April 30.

At the same time, the debt ceiling had been reimposed in March. That means that the Treasury can not increase its borrowing to pay the bills. So it must spend its cash.

But instead of paying the bills directly, Slick Sam Mnuchin uses the money to goose Wall Street. He’s using the cash to pay down outstanding Treasury bills. When he does that, the erstwhile holders of the expiring bills get their cash back. And they have nowhere to go with it.

Since April 2, the US Treasury has paid off $136 billion in outstanding T-bills. That’s $136 billion that it stuffed back into the accounts of dealers and institutional investors. But there are no bills for them to reinvest in. There’s an artificial shortage. The Treasury isn’t reissuing them. Too much cash. Too little paper.

No doubt Slick Sam and the Don prefer that dealers and investors use the cash windfall they’re getting to buy stocks.

But nuh uh.

Stocks are at nosebleed levels, and the dear leader’s insane rants and incoherent policies are beginning to scare even the most craven Wall Streeters. So the recipients of the cash say thanks, but no thanks. I’ll stay with the safe haven risk off stuff, just go out the duration curve a bit. And they buy 2 and 5 and 10 year Treasuries.

Voila, strong demand!

And thus, higher prices!

Which means, lower yields!

That’s all there is to it.

Supply and demand.

All the other speculation about it… Well ours is not to reason why! Ours is to follow the money or die!

Uh Oh- The Treasury is Running Out of Cash Fast

Now I want you to think about this. As of Friday, the Treasury’s cash balance had dropped to $246 billion. The Treasury has spent $177 billion of its cash hoard is LESS THAN A MONTH!

Treasury Yield Curve Interpretation - Dwindling Cash

At this rate, it will be out of cash by the middle of July!

Then what?

Congress will raise the debt ceiling and Trump will sign it. The Treasury will start borrowing hand over fist again. It will need to repay the internal accounts it has been raiding. It will need to rebuild its cash account. The market will get hit with a torrent of new debt. Hundreds of billions in new paper. And this time, not enough cash to absorb it. Then what will happen to yields?

Think about it.

Meanwhile, I’ll continue to give you the play-by-play along with color commentary, and recommended strategy for playing the long game, in the Treasury market and Federal budget updates over at Lee Adler’s Liquidity Trader.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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