Treasury demand is likely to outstrip supply in the weeks ahead. But it will be a setup for the next big short. Here’s why. And that tells you what to do about it.
They hit the ceiling this week. The Treasury skipped the announcement of the usual mid-month 3 year and 20 year note auctions. That means we now face reduced Treasury supply until the debt ceiling is raised. That a big bullish impetus for the duration of the impasse. But it will only be temporary. Then what?
Demand indicators for the Treasury market weakened modestly over the past month. These trends don’t yet exhibit the usual precursors of improvement. If the weakening persists, bond prices should break to the downside within weeks, and stocks should follow.
The Treasury has about $100 billion in cash on hand, thanks to strong tax collections in March. That’s a typical level for this time of year. It’s enough to fund a couple of months of deficit spending. Then it gets its big annual windfall in April. That could carry the government over for another couple…
Treasury demand indicators are a mixed bag this month. The Primary Dealers positions are the most important. They’ve been getting shorter.
Something big has changed. In the January 20-March 15 period, instead of raising lots of cash as usual, the Treasury is raising zero new cash. In fact, it is actually paying down debt over that time. Here’s what that has meant, and will mean, for the markets.
The proposition that the Treasury market is supported by deep and robust demand isn’t supported by the data that we watch. Demand has been in a secular downtrend since 2010.
When the Obama Administration built up a $400 billion pile of cash, it wasn’t expecting to hand it over to Donald J. Trump.
I am not exaggerating when I say that this market has reached one of the two most important inflection points of our lifetimes.
The rationale for the recent runup in Treasury yields is that that the economy will strengthen under El Presidente Cabeza Grande Trump. Supposedly El Presidente’s wise and stimulative policies will make the economy grow 5%. Hey, if El Presidente Cabeza Grande says it, it must be true! And the Wall Street pundits, with their infinitely…