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Treasury market is starting to suck for the US...

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  • Treasury market is starting to suck for the US...

    The Treasury startled the markets with an announcement of new supply in the so called belly of the Treasury curve. The specter of supply which had been widely discussed just became cold hard reality.The Treasury is reopening four issues which had been previously issued as 10 year notes and which have since rolled down the curve. (If there is a potential blogger in the room, some variant of roll down the curve might be a catchy name.) They have reopened each of these issues for a cool crisp $10 billion: 4. 125 05/15/15; 4.25 08/15/15; 4 02/15/15; and the 3.5 02/15/18.
    The May 2015 and the August 2015 notes are being sold today and the other two will be sold in auctions tomorrow.
    Separately, the Treasury had previously announced a $6 billion reopening of the 10 year TIPS bond with an auction today.
    That is $46 billion dollars of securities, most of which were not expected , crammed into a rather compact period of time. By the time this is over the belly of the Treasury curve will be in need of a financial Heimlich maneuver to dislodge the supply.
    The auction of the May 2015 issue was an amazing occurrence. The Treasury gave the dealer community about an hour to underwrite $10 billion of supply. That was a big mistake. I always kid that in the underwriting process it is the job of the dealer community to shoot the taxpayer in the big toe. In this instance they amputated a leg instead.
    Let me explain. There once was an active and deep market for off the run Treasury paper. An off the run is an issue offered by the Treasury at another time which has now rolled down the yield curve. Several of these issues mature in about 6 years. They were originally sold as 10 year notes. They have lost on the run status and qualify as off the run.
    So the first issue in the queue was the May 2015 issue. Unfortunately, I do not have precise yield levels but will try and back into the answer. The auction average was 3.31 percent. I am told by participants that the 3.31 percent yield was 40 basis points cheap to the level which prevailed in the market prior to the auction. The point is that in order to rustle up the $10 billion of bids to clear the $10 billion auction the Treasury had to reach 40 basis points from market levels.
    In bond market jargon that 40 basis points is known as a “tail” or the number of basis points from where the issue was to the level at which it stopped. Most auctions come “on the screws” which is more jargon for the notion that they come essentially where they are trading at auction times. A typical “sloppy” auction might “tail” 2 basis points. There are 5 basis point tails and I can recall 10 basis points and even 15 basis point tails. They are rare. Extremely. In all my years I can not recall a 40 basis point tail and shall proclaim this the record holder.
    Now to place that in dollars and sense terms for the taxpayers of the USA I offer this. On that bond every basis point is worth a little more than $600 per million bonds. Multiply by 40 basis points and you get $24,000 per million. The auction size of $10 billion equates to 10000 million. Multiply by 24,000 and the product is $240,000,000.
    In a market to market sense it cost the taxpayers that enormous sum to underwrite the auction today.
    There are three more of these coming in rapid succession. Each will be priced at the new expensive for the taxpayer levels.
    I would say that the Treasury paid too much money to rectify the delivery problems in the street.
    I have written too much so this will be brief.
    As I mentioned earlier in this lengthy screed, the Treasury is selling $6billion reopened 10 year TIPS today. I mentioned yesterday that the breakeven spread had moved to 125 basis points. (One reader took umbrage at that analysis with some valid points but so be it.) That spread had collapsed prior to the auction to about 100 basis points which means that taxpayers are supplementing bonus pools on that issue also.
    http://acrossthecurve.com/

  • #2
    Re: Treasury market is starting to suck for the US...

    Great post and very educational Phirang. Thanks. Tip of the iceberg relative to what's to come? Scary prospect.

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    • #3
      Re: Treasury market is starting to suck for the US...

      Could someone please translate that into english? I get the overall gist, but am not an expert in the mechanics of treasuries. There are probably some subtleties and implications I am missing.

      Thanks!

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      • #4
        Re: Treasury market is starting to suck for the US...

        As I understand it, the Treasury is forcefeeding Mr Market its debt instruments. At some point Mr Market may puke.
        It's Economics vs Thermodynamics. Thermodynamics wins.

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        • #5
          Re: Treasury market is starting to suck for the US...

          If I understand it correctly (no guarantees), they had to offer +40bps to place the bonds. IOW there's not an unlimited appetite for this stuff after all, and at some point yields blow up.

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          • #6
            Re: Treasury market is starting to suck for the US...

            So, this may be a warning sign that interest rates have bottomed?

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            • #7
              Re: Treasury market is starting to suck for the US...

              I think so. We are witnessing the process of paper wealth destruction. Holdings get rotated into various 'safer' classes, eventually into govt debt and cash. Then that too gets marked down. Treasuries are the last bubble, I think. BRIC and GCC type players will be needing to sell treasuries to support their domestic economies. Without them to buy, this is the curtain call for the dollar IMHO. This implies shockingly high interest rates as the currency is defended.
              It's Economics vs Thermodynamics. Thermodynamics wins.

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              • #8
                Re: Treasury market is starting to suck for the US...

                Originally posted by *T* View Post
                I think so. We are witnessing the process of paper wealth destruction. Holdings get rotated into various 'safer' classes, eventually into govt debt and cash. Then that too gets marked down. Treasuries are the last bubble, I think. BRIC and GCC type players will be needing to sell treasuries to support their domestic economies. Without them to buy, this is the curtain call for the dollar IMHO. This implies shockingly high interest rates as the currency is defended.
                I totally agree.

                The game now is "liquidity" meaning sell stuff and use the cash to pay off loans or flee into treasurys.

                When that is done, this liquidation panic, then there will be morning after when investors realize they are getting eaten alive by inflation. Then there will be a HUGE runup in PMs. There has to be. And in oil and other tangibles I think.

                The thing is, people may not trust the futures markets and may want real tangibles or shares in real companies...it could get REALLY rough.

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                • #9
                  Re: Treasury market is starting to suck for the US...

                  Originally posted by *T* View Post
                  As I understand it, the Treasury is forcefeeding Mr Market its debt instruments. At some point Mr Market may puke.
                  Yes by Mr market is not allowed to puke because the clowns are massaging his neck to make sure everything goes to the tummy.

                  I seen something similar in a PETA movie about the cruel treatment of top quality turkeys for Thanksgiving

                  In this case the financial-PETA clowns are doing the force feeding of Mr Market ;)

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                  • #10
                    Re: Treasury market is starting to suck for the US...

                    Originally posted by $#* View Post
                    Yes by Mr market is not allowed to puke because the clowns are massaging his neck to make sure everything goes to the tummy.

                    I seen something similar in a PETA movie about the cruel treatment of top quality turkeys for Thanksgiving

                    In this case the financial-PETA clowns are doing the force feeding of Mr Market ;)
                    Are they massaging his neck or putting a gun to his head?

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                    • #11
                      Re: Treasury market is starting to suck for the US...

                      Originally posted by $#* View Post
                      Yes by Mr market is not allowed to puke because the clowns are massaging his neck to make sure everything goes to the tummy.

                      I seen something similar in a PETA movie about the cruel treatment of top quality turkeys for Thanksgiving

                      In this case the financial-PETA clowns are doing the force feeding of Mr Market ;)
                      Dollar Fois gras? we know what happens to the goose. His liver turns to pate and he gets cooked.

                      I think this game has worked in the past, but we are already seeing signs of stress in the Treasury market. We'll see who is right in the next year or two.
                      It's Economics vs Thermodynamics. Thermodynamics wins.

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                      • #12
                        Re: Treasury market is starting to suck for the US...

                        Comment


                        • #13
                          Re: Treasury market is starting to suck for the US...

                          JK - what happens to currencies most typically through history, when the long bond denominated in that currency begins to collapse? I see this long bond collapse preceded the gold confiscation and dollar reflation carried out by Roosevelt?

                          Originally posted by jk View Post

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                          • #14
                            Re: Treasury market is starting to suck for the US...

                            Originally posted by Lukester View Post
                            JK - what happens to currencies most typically through history, when the long bond denominated in that currency begins to collapse? I see this long bond collapse preceded the gold confiscation and dollar reflation carried out by Roosevelt?
                            the only example of long bond collapse that i know is the u.s. in the early 80's. there was a brutal recession triggered by volcker's tightening, short rates went over 20, long rates over 15. by 1985 the dollar was so high that the plaza accord was required to cap it. of course, this whole scenario was predicated on long rates following short rates up in an anti-inflation campaign.

                            in the graph, the crash in bonds occured because people wanted to get still more liquid- only cash and t-bills would do. i'm not sure what happened to the dollar at that time, but the dollar then was as good as gold. i think we need to stick to fiat systems in our analysis.

                            fwiw, i'm assuming long rates will rise because of inflatonary fears and also as part of a run out of the dollar. the high rates will then be compensation to those who choose to hold or buy long-dated instruments. if they are attractive enough, they will moderate - but not prevent- the dollar's fall.

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