Once upon a time, the US Treasury had to borrow a lot of money…
OK that’s all the time. Unfortunately, now more than ever. And that’s a very big problem, despite the fact that it doesn’t looks so bad right now. After all, Treasuries have staged a massive rally for a month now. It’s all good, right?
Well, not so much. Here’s why.
Demand for Treasuries at the regular auctions has risen more than the increase in new issuance lately. Both stocks and bonds have rallied over the past week. Accompanying that has been a gigantic surge in bank buying, and lending by non-banks.
This doesn’t bode well for the sustainability of the rally. Banks have a poor record of market timing, and rallies driven by leverage, as opposed to cash, grow increasingly fragile.
The problem for the Treasury market is that these stock liquidations come in waves. One of those waves has just ended. Within the next few weeks, the underlying shortage of money liquidity relative to Treasury supply will reassert itself. Treasury prices will start falling and yields will start rising again.
However, another plunge in stock prices could drive more Treasury demand. The markets remain very thin in both directions. Over the past 5 trading sessions the volatility has mostly been to the upside. But we can’t make a bet in that direction because of the underlying dynamics of the Fed pulling $50 billion per month out of the banking system. That exerts continuous drag, which will sap demand. Timing is the tricky part, which we must leave to technical analysis. I cover that for stocks in the Wall Street Examiner Pro Trader Market Updates and for bonds in the Treasury Market Updates.
Meanwhile, Primary Dealers, the guys who essentially own and run the Wall Street casino, and who have special relationships with the Fed and Treasury, aren’t doing so well.