The markets have done as we expected, but not for the reason we expected. The meltup could have been worse, and may still yet get worse. But the Treasury figured out how to keep new Treasury supply flowing to market even though we’re at the debt ceiling. That slowed the rally. We’re not sure why…
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.