I have now segregated US treasury bond auction updates into their own separate post. This is the 7th 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 the previous Months’ posts below
(Prior to February Treasury auctions were tracked in the weekly forecasts)
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Since this is a repetitive series, the text that is repeated each month is in quote format.
Table of Contents
State of the Narrative
QT Tracker
Primary Auction Results Sep
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 initial segment in February as we simply have to cover the changes over the last month.
Quantitative Tightening has begun, As noted in July, QT became evident on the Fed’s balance sheet starting on June 22nd, which ironically is exactly when June’s treasury auction post came out. Looking at their balance sheet tracker we can now see the clear trend of the total assets held continuing to decrease
Now that Quantitative tightening is under way I will do my best to keep track of their progress in a repetitive way that can be followed along fairly easily. Of note, Quantitative Tightening will start with $47.5b of assets allowed to mature and the proceeds not being reinvested into the secondary treasury market. $30b of which will be treasuries, and $17.5b of which will be Mortgage Backed Securities. By next month (September/October) this will ramp up to $95b a month. $60b of which will be treasuries, and $35b of which will be mortgage backed securities.
So, the Fed is continuing to withdraw demand from the US treasury markets, but now we are also seeing foreign entities continuing to withdraw their own demand for US treasuries, as well as even selling off US treasuries to protect their own currencies. While at the institutional level many entities are moving towards simply holding cash (in the form of treasuries) rather than investing, as the return on even the 1 year US treasury note is 4.1%. Meanwhile, the outcome on investments other than bonds is extremely murky in the current macro environment. This institutional buying does not present enough volume to be able to offset the losses in demand that occurred when the Fed pulled out and when other national governments started being net sellers. So, the only conclusion (as I have been stating all year) is that bond yields will continue to rise.
Now lets look at the 2 year US treasury note:
I would bet that the jump in yields on Friday June 10th was either the Federal Reserve, or was from privileged parties that knew ahead of time what was going to be the beginning of QT the following week.
That is likely what that big vertical line was on June’s chart of the 2 year Treasury yield was. I’ve highlighted on the chart with a vertical dotted line below.
For continuity sake, below is the same chart of the yield from the 2 year US treasury note that I have provided in every single one of these treasury bond posts. Each post has been accompanied by an orange dashed line to better help you to visualize how much yields have grown over the course of a month.
As you can probably guess from my weekly update posts, this was a horrible month for markets, for FX, for ComEx, crypto at least managed to stay flat, but just a bloodbath overall. The rate on the 2 year above rose by almost 1% in just 1 month. For a government security, especially a Triple A rated government like the US to rise by this much in 1 month is unheard of. You have to go back to the 70’s and 80’s to find this happening in 1st world nations. We are truly in some historic times, and the toxicity is spreading to other countries as well.
Above is the 1 week chart for UK 10 year bonds (they call them gilt’s over there), and you can see that the exact same contagion is occurring. Not enough people want to buy them compared to how many the government needs to sell on a regular basis. To the moon, except in this case up does not mean good. Up means bad. Very bad. We’re already seeing several unscheduled market interventions and meetings occurring this week, these markets can’t be allowed to continue like this without major strife coming in western financial markets. But then again… these are the just desserts of 4 decades of Keynesian economic theory dominating fiscal policy…
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