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.