Pageviews past week

Friday, July 17, 2015

2015 Is Truly Unbelievable in the US Treasury "Market"

The largest, most liquid global market is almost surely a fraud.  Why would I say this???  Well, something quite strange is happening in 2015...truly inexplicable by any "market" metrics.  In 2015, the Fed holdings of Treasury debt have remained unchanged, Foreigners have net sold $83 billion, and the Social Security and like "Intra-Governmental" holdings have net decreased by $73 billion.  In the meantime, the US federal government has continued to run a deficit of somewhere (by budget year end in September) of around $500 billion (edit...seems this is due to debt ceiling and Mr. Lew raiding all US fed pensions rather than auctioning off new debt?!?).


This means that we are to believe US domestic sources (US based banks, US pensions, US insurers, US private buyers, etc.) have been on a buying spree not only scooping up all the new Treasury issuance but also picking up the $155 billion in reduced holdings by foreigners and flagging intra-governmental holdings.  This means by year end these domestic buyers are on course to buy up to $650 billion in US Treasury debt at historic low rates (bankrupting themselves in the process due to the low returns vs. plan payouts 3 to 4x's higher) all without even liquidating (aka, selling) anything with which to raise this half trillion.  Astounding!!!


The chart below shows the annual US federal deficit (inverted) versus the 10yr US Treasury yield...and 3 of the 4 groupings of Treasury buyers...Federal Reserve, Intra-Governmental Holdings, and Foreign Holdings...Notice 2015 is the first time this millennia that all 3 sources are net flat or down.  And (feign shock here), interest rates are still in line with where they began 2015.  Absent the buyers who purchased roughly 80% to 90% of all Treasury debt since the GFC of '09...rates have barely made a peep?!?

Anybody really think banks, pensions, insurers, etc. are buying all the 10yr paper they can get their hands on at 2%'ish to ensure they underperform their peers and 7.5% redemption targets???  Hmmm...but if not them, I wonder who's buying all that low yielding paper and who could do it without selling anything to do so???


Extra Credit - Look who still runs a huge annual trade surplus with the US but no longer recycles those dollars into US Treasury debt.  Wonder what they use all those dollars for since 2011?

*Treasury data via TIC and all remaining data via Fed's FRED and Treasury dept.

9 comments:

  1. You might want to recheck your data, foreigns have added 200b over the past 1 year 1Q15/1Q14.

    ReplyDelete
  2. My data is same as TIC's...my chart shows buying last year ('14) but through the first 5 months of '15...Foreigners selling.

    ReplyDelete
  3. The answer is easy: QE3 never stopped. The fed is still buying the crap.

    ReplyDelete
  4. Numbers never lie, the law of averages never fails, reversion to the mean always happens and fundamentals should never be bypassed.

    ReplyDelete
  5. Chris - Excellent article. Also, read an article last week about the 10/15/14 movement in the UST market. Inconclusive to say the least. Any thoughts on the multiple standard deviation movement seen on that day?

    The above analysis leads me to conclude it could be our time to follow the German bond market and the market forces yields up in a 4 to 5 std deviation movement. Lack of demand and excess supply usually leads to big moves. Thoughts here?

    ReplyDelete
    Replies
    1. Standard deviations make sense and are very meaningful in a true market...however, the treasury notes, bills, and bonds are trading in a centrally controlled market that as needed can be entirely overridden...so some occasional wild swings of market activity corrected by central control shouldn't be a surprise...

      My guess is that with total debt in the US in excess of $100 trillion and asset prices like residential and CRE dependent on ever lower rates, a significant upward move in interest rates would be a national security threat across private and public markets...and markets would be overridden or closed before this is allowed to undermine the con game façade that exists. I expect no significant sustained rate hikes or market adjustments though the occasional spike may be of use.

      Delete
  6. Great article. Um, perhaps the occasional spike is now caused by words as opposed to action. Talking up rates seems to be the best the FED can do, and it's served them well, despite diminishing effect. But I do wonder what is happening to the Chinese surplus. Any ideas?

    ReplyDelete
    Replies
    1. still my best guess what is going on...

      http://econimica.blogspot.com/2015/03/china-sells-treasurys-yields.html

      Delete
  7. Cluez - You are right the buying has not stopped. The Fed is still purchasing UST for all maturing debt. The balance sheet isn't expanding but it isn't shrinking by not rolling over maturing debt.

    http://www.newyorkfed.org/newsevents/speeches/2014/pot141007.html
    http://www.zerohedge.com/news/2015-03-08/feds-210-billion-hangover-no-one-talking-about

    Gives you an idea about interest rate normalization and maturing UST debt on the Fed's balance sheet. With the data Chris has provided coupled with the fact there is approx. $400 Billion in UST debt maturing in 2016-2017 on the Fed's balance sheet. So when is the Fed raising rates and allowing maturing debt to not rollover? Haha loaded question so proceed with caution.

    ReplyDelete

Note: Only a member of this blog may post a comment.