The Treasury calendar was light this week with a paydown on Thursday sending $9 billion in cash back to the holders of the maturing paper. The Treasury market panic continued, but there were cracks beneath the façade. The indirect bid fell apart on the 4 week bill and was very weak on the 30 year TIPS. Considering the paydown, the weak indirect bid suggests that smart money is still fleeing the Treasury market, and it looks like the smart money, or maybe scared money or just short of money, is the foreign central banks (FCBs). That continues a year long trend, and it’s very bearish for stocks and ultimately will be for Treasuries as well.
The Treasury market buying continues to be driven by fear and loathing of everything else, which is entirely rational, but ignores the fact that Treasuries are no safer than the paper that investors are fleeing. The only thing keeping the Treasury game going, as with any Ponzi scheme, is that people are still buying the stuff. It sure has nothing to do with the fundamentals of US government finance, which is a joke. The US government uses the incoming funds from its debt sales to pay off earlier investors, and it skims the cream to pay its bills. We all know where this is headed, but first there’s a real likelihood that yields could head lower for a few more weeks.
I’m not sure what will drive it after QE ends on Thursday, but panic usually begets more panic. Part of the problem is that the Primary Dealers are right in the thick of those panicking. Look at dem! Dey panickin! My God Mortimer! He’s right! They are panicking! Apologies to Eddie Murphy and Ralph Bellamy. More on that below.
Next week’s calendar will be a real challenge, with a heavy slate of notes settling on Thursday and only $18-20 billion in POMO left to go to support it. This will be a critical test. If the market doesn’t hold up well, and in particular if the FCBs again show a pattern of weak buying indicated by the indirect bid, it will only get worse with the Fed out of the game. The technical indicators say that the Treasury rally will continue. That’s very bad news for stock market because it’s likely to be the source of much of the cash driving yields down.
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