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Final Blowoff of the Last Ponzi Game

The Treasury had a heavy calendar this week, but the new supply won’t settle until May 15. After Tuesday, Treasury supply will not pressure the market until the end of month settlement of notes and bonds. But the market has other problems and they are big ones. This 2 part report examines key forces that impact US stock and bond prices each week. The Treasury part focuses on those directly affecting the Treasury market, with an eye to their impact on stocks. (Subscribers click here to download complete report in pdf format.) The second part, focusing on the Fed and the macro forces of liquidity will follow on Monday.

The Treasury will continue to benefit from instability in Europe. Clearly there are more defaults in our future. European investors and depositors will continue to flee their banking system for the apparent “safety” of the US. The JPM situation will raise additional fears. That will keep Treasury yields suppressed for a few more months. The short term technical target on the 10 year is now 1.68. That should continue to correlate with a bearish trend in stocks and it may or may not be the last word. It is difficult to forecast just how low yields will go in the final blowoff of the Last Ponzi Game Standing, the US Treasury market.

Tax receipts dropped sharply after the end of the 2011 collections on April 17. Withholding is back to just about even with last year in real terms. This suggests that the economy has stalled again. If this persists, it will spell bigger than expected Treasury supply. Apparently stocks would take the brunt of the pain that would inflict.

The Primary Dealers continue to maintain near record positions in longer term Treasuries. It’s unclear how much more support they can give the market from here. Their positions as well as long term cycle indicators are at record extensions. They’re likely to be distributing into the current buying wave. When they start reducing that record long position, that should be the signal that the bond bull market is ending.

There’s no sign of lessening institutional demand in the Treasury auction data, although banks are buying less as they become more capital constrained. The JPM situation will not help in that regard. Meanwhile the public, as represented by bond mutual fund flows, is still buying bonds like mad. This is part of Dr. Bernankenstein’s soulless and evil grand plan to force people to speculate and reach for yield, in a vain attempt to push the price of financial assets higher. The theory is that this will trickle down to the economy. We know that this policy is doomed, and in many ways counterproductive right now. People who spend their capital down to zero can no longer spend.

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