March US Treasury Bond Auctions
More Pain as Yields continue to Spike
I have now segregated US bond auction updates into their own separate post. This is the 2nd of a monthly series of posts updating the bond auction rates and bid to cover ratios. I have previously covered these within the weekly updates. I consider this to be the most important part of what I am covering on the substack and it is where we will see the first signs of distress within the market that the federal reserve cares about the most.
You can view last months post here.
Please refer to the Backdrop Post and trade with mindfulness.
Please refer to Definitions page for any terms or abbreviations that I use that you don’t understand. If a term is missing, please let me know.
Table of Contents
State of the Narrative
Primary Auction Results March
Bid to Cover Ratios
Interest Rates
Secondary market Treasury rates
Market Impacts
Conclusion
1. State of The Narrative
As usual we will start out with a State of the Narrative, this one will be shorter than the last as we simply have to cover the changes over the last month.
As covered previously, the Federal Reserve was scheduled to turn off the money printer on March 15th. I believe that they will at least stick to this based on the FOMC press conference that occurred this past Wednesday, but we won’t know until a few more weeks pass and we can see the status of the Fed’s balance sheet.
As noted by the GOAT, Peter Schiff, their final week included purchases of $46.3 Billion in treasuries, which makes this past QE cycle having completed with just over $5T in asset purchases from September 2019-March 2022, so just about $2.5T a year. If you are ever curious to view the Fed’s balance sheet yourself, you can as they post it online and it’s usually a few days behind their current purchases/sales.
To provide some sense of continuity about how the secondary treasury markets are performing over this period of time I want you to check out this chart which I will be updating every month. This is the exact same chart of the 2 year treasury bond yield that I shared in last months post, I have added an orange dashed line that begins at the exact spot where I posted last month. As you can see, treasury yields have done nothing but go straight up since then. From 1.4% interest on the 2 year note to 1.942%. And that was with the Fed purchasing over $130B in treasuries off of the secondary markets. When the Fed stops buying these on the secondary markets entirely, what do you think will happen?
The only obvious thing that can happen, the yields explode further upwards. Of note, as I touched on in yesterdays post, the official statement from the federal reserves meeting this week removed the language entirely about the Federal reserve selling treasuries off of their balance sheet back into the secondary market. I suspect that this move was done due to how much pressure the treasury may already be exerting on to Powell and the Federal Reserve. This is a treasury market in free-fall and the Federal Reserve can’t afford to add more fuel to the fire. If the imbalance of supply and demand on treasuries is this bad already, how much worse would it get if the Fed increased the supply for sale even further? For anyone depending on using the dollar to buy and to value their income, the implications of this are chilling, and no matter how many university educated economists claim that no one could have seen this coming, the math is incredibly obvious and was incredibly obvious even back in 2008. I may not have figured it out until 2015, but I’m just a dumbass, these experts have no excuse for not knowing this even now.
As is typical, I write this paragraph up blind. I have not yet looked at the primary auction performance for the March treasury bonds yet, and again… I simply don’t have to in order to know how they performed. Even a 3rd grader can understand the implications if shown a simple trend and phrased in terms they can understand. Replace treasury bonds with a lemonade stand and it becomes glaringly obvious that if this kids only customers are his parents giving money to the neighbors to buy his lemonade that ultimately his business is doomed. The neighbors are happy, they get free lemonade, but the household becomes much poorer since the parents are buying the materials to make lemonade on the front end, and then paying people to pretend to be customers on the back-end. You don’t need to go to college to understand this… you go to college in order to forget this.
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