Art Cashin Warns Bernanke Fans "Be Careful What You Wish For On The Deficit"

Tyler Durden's picture

The venerable UBS floorman asks (and answers) an interesting question. With the re-institution of the payroll tax and higher level rates and with spending lowered by sequestration, will the Treasury need to offer fewer bonds? And if so, will the Fed remain steadfast in its purchasing 'size' (good for bond bulls since secondary demand will increase) or reduce its 'size' to meet the lower monetization needs of the Treasury (bad for equity bulls since flow is all that matters.) Thoughts below...


Via Art Cashin, UBS,

Do Fewer Bonds And A Steadfast Fed Equal Even Lower Rates? – That was part of the question we posed last Tuesday. If the Fed's refunding needs temporarily shrink (fewer bonds issued) and the Fed keeps buying at its announced pace ($85 billion a month), won't that drive bond prices higher and send rates even lower? Here's how we postulated that early last week:

There May Be More Here Than Meets The Eye – FOMC Version – While most of the media will be carefully monitoring every phrase, nuance and hint of body english going into – and out of – Wednesday's FOMC meeting; traders will also be looking elsewhere. That elsewhere is the report of the U.S. Treasury's refunding needs for the coming quarter.


Up until now, a rather profligate group (both sides) in Washington has been spending money hand over fist. To cover that spending, the Treasury has been issuing and selling bonds at a frantic pace. As they try to stimulate the economy, the Fed has been buying those bonds almost as quickly as the Treasury can grind them out.


Traders wonder if things have changed. With the re-institution of the payroll tax and higher level rates and with spending lowered by sequestration, will the Treasury need to offer fewer bonds? Would such a limited supply force the Fed to be more aggressive just to buy the same $85 billion a month? What would that do to the bond market? What might it mean to yields? Traders may get the answer Wednesday morning – long before the FOMC statement at 2:00.

Well the answer's in and several very smart people are beginning to explore the question. Here's a bit of what David Kotok wrote over the weekend – alluding to a Jim Bianco piece:

Let's go a step farther. Bianco points to Treasury officials' projections for borrowing in 3Q 2013. They estimate that borrowing at $223 billion. That number is much lower than its counterpart in any of the years since the financial crisis triggered the new Fed QE policy. If we assume that the Fed continues its present $85 billion a month QE policy in 3Q, we can argue that the combined actions of the Fed and the Treasury will mean no net impact on the publicly held Treasury supply. Half a year will go by without any net new Treasury debt being placed in the market.


New debt issuance since the financial crisis has been lower than in prior comparative periods. In the combined third-quarter projection and second-quarter realization, we see, as a result of declining net issuance of federal debt with market pressures reduced by hundreds of billions of dollars. At the same time, Fannie Mae and Freddie Mac are still embroiled in their restructuring debate, and their issuance, too, is much less robust than it was prior to the financial crisis.


Where are we going with this thought? Well, it appears that, while the Fed continues to absorb new issuance of federally backed securities, the amount of new issuance is declining on a net basis. That helps explain lower interest rates. Simply put, the price goes up when you have less of something produced and more of it purchased. When it comes to bonds, that means that yields go down.

Next, David's partner, Bob Eisenbeis, approached the reduce refunding from a slightly different level:

Two critical concerns and issues arise.


First, it won’t be long before only 30% of US Treasury obligations will be in the hands of private citizens and domestic financial and other institutions. This trend, combined with recent evidence that the US Treasury may actually begin to pay down the outstanding public debt, portends a squeeze on the outstanding supply of Treasuries, bidding up of their prices, and continued downward pressure on Treasury rates across the term structure.


Second, the squeeze will force institutions into less liquid financial instruments in their quest for liquidity and collateral. Fed studies the last time there was concern during the Clinton administration that there might be little or no outstanding public debt concluded that only mortgages and mortgage-related securities had markets deep enough and liquid enough to provide a potential substitute.


Knowing, as we do now, just how fragile mortgage markets and the market for mortgage-related securities can be, we question whether such instruments could be an effective substitute without substantial ex ante haircuts.

Net/Net, given diminished new supply of bonds, the Fed may have to adjust course or risk, driving the yield on the ten year Treasury below 1%.

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LawsofPhysics's picture

Buy the bonds before the primary dealers (Fed) does, then sell...

Buy the equities before the primary dealers (Fed) does, then sell...

Buy the _______ before the primary dealers (Fed) does, then sell...

Pushing fucking paper promises while adding nothing of real value...

This should end well, not.

By the way, there isn't going to be any "diminished supply of bonds" considering the government's liabilities moron.

Jekyll_n_Hyde_Island's picture

What crack-smoking, economics-education depraved, self-dishonest financial lunatic is a BernanQE fan?

  Hedgefund jockeys and equities muppets?


  Shit.  The phrase just makes my blood boil.  BernanQE fan.


mayhem_korner's picture



You just summoned Dr. Krugman.

BeepBeepImAJeep's picture

Beetlejuice taught me that you have to say his name 2 more times before it becomes a problem.

espirit's picture

Meh, Matrix Metrics.

The Bankruptcy of the United States of America.

LawsofPhysics's picture

A fine rant that accomplished nothing.

NotApplicable's picture

I love how Art goes through all of this without asking THE obvious question. If there's such a demand for quality assets, then why oh fucking why does the Fed need to buy ANY OF IT?

Of course, we all know (including Art) that the true crux of the issue is that Uncle Sugar will die without ZIRP, while we'll all (or at least 99% of us) will die with it, and it's obvious where the killing will occur.

I also love how Bob matter-of-factly states that the supply of privately held bonds will be reduced to 30% without regard to the fact that it's because Benron is holding the other 70%.

Stoploss's picture

Art, just say job creation is bad for the bond market, it's what it boils down to.

Taxes up/jobs up = issuance down = bonds are intended to be held for yield, and they're not, now.

Plenty of room for price to go higher and yield to go lower, since they have become a medium term trading vehicle.


Never forget price rules...

kchrisc's picture

""Mr. Speaker, we are here now in chapter 11..."

Governments do not go into bankruptcy, they go a plundering and killing.                     hujel

Kaiser Sousa's picture

the vid is a little long but brings the point home quite well..

the cause is a noble one even if it ultimately fails...

i normally dont participate because i believe that only violent resistance to the Fed  and this government it controls will bring about change...u be the judge...i signed on...

Breaking Inequality

Fish Gone Bad's picture

This line is insane:

i believe that only violent resistance to the Fed  and this government it controls will bring about change

Have you looked at the size of the US military?  Not to mention all the other agencies that just hang out and lurk.  Good luck in putting a bell on that cat. 

Kaiser Sousa's picture

continue to live n fear of ur masters....

and slave onward.....

insane, perhaps...but not a coward like most...

mirror, mirror.......

TNTARG's picture

Enlight me.

How much gold does de US have?

Where is it?

Does it belong to the STATE?


"All the gold in the world:

That is about 1/3 of the size of US National Debt.

That is slightly more than the additional debt incurred during the Obama presidency, so far.

That is about the amount of the addtional debt incurred during the 10 years prior to Obama. 

That is the amount spent by the US Federal government in just the last 21 months.


Think about that."

(A comment from


Gonna steal some mountains here and there? (Already in progress... But not enough).

Austerity? Mmmmmm...

I'd love to read some comments about it.


kchrisc's picture

Violence is the only option, NDAA all but confirms it, and will be very difficult and bloody--just ask the Iraqis and Afghanis.

To say otherwise is to be ignorant, or naive, of what the US gov and their bankster masters have been doing the past 50 years, especially the last 13, around the world and within the US.

To say otherwise is to also be ignorant of your responsibility to your self and American heritage: " is their right, it is their DUTY, to throw off such Government..."

"Sheeple get sheered and then ultimately eaten."


kchrisc's picture

The guillotine or masonry wall will catch up with him someday.                  hujel

Hippocratic Oaf's picture

You'd be surprised what retail etc. is chasing as far as yield.

Premium far as the eye can see.

DirkDiggler11's picture

Don't waste your tie pondering these questions. The Govt will continue to spend money as quick as the treasury can crank out the bonds, I will assure you of that. Never underestimate a politicians desire to spend everything he or she can to buy each and every vote.

mayhem_korner's picture



They don't need to buy the votes...just the people who administer and count them.

Vooter's picture

Which is exactly why no one should vote...EVER.

kchrisc's picture

If the government is criminal then to vote, or participate in any way, is to be complicit in their crimes. That your vote "won't matter," and it won't, is in consequential.


NoDebt's picture

Exactly right, Dirk.  If not this year (as they scramble to unwind the sequester a piece at a time) then next year the "big one" starts to make landfall- Obamacare.  We'll have so much red ink Krugman will get a chubby just thinking about all the bonds that will need to be issued and instantly monetized by the Fed.

Negadeficitophobia:  the irrational fear that the government will ever curtail the rate of expansion in deficit spending.

Cognitive Dissonance's picture

It all works well.......until it doesn't.

<I see dead markets.>

LMAO's picture

Well, at least you see markets.

That's more than I can see.

mayhem_korner's picture



On the pic on the home page thumbnail for this post - who is Ben giving the finger to?

mayhem_korner's picture



Well, I'm going to reflect it right back to him with my wall of .9999 silver coins.

Conax's picture

Congressmen, the press, spectators and us.

fonzannoon's picture

assuming any of this is correct, the 10yr at 1% is bullish because America fuck yeah. Debt ceiling? National debt 17 trillion?  1% bitches. Take it or leave it.

and besides, if this is correct, the fed will just CONTINUE to buy stocks.

The Invisible Foot's picture

The chase for yield continues!

Mercury's picture

...will the Treasury need to offer fewer bonds? And if so, will the Fed remain steadfast in its purchasing 'size'...?

 All that only matters if the Fed's excuse/logic stay the same in the face of changing circumstances.

Peter Pan's picture

Is it just me or am I right in thinking that there is a fixation with paper creation and paper flows, as a means of remedying the problems, which are bound to fail?

fonzannoon's picture

we are still working on whether the "bound to fail" part is true.

moneybots's picture

"we are still working on whether the "bound to fail" part is true."


100% of booms end in a bust.

100% of bubbles burst and deflate.

100% of manias end badly.


bound to fail is 100% guaranteed.



lotsoffun's picture

yes - and in the meantime - they are all making fortunes and buying the dips and selling the ups and gaining the flow and laughing at the muppets who just think that

everything is wonderful because the 401k is up again.. and so their pension must be funded and their soc sec. and soon - their house will be a jackpot again soon.

at some point lloyd and jamie are going to sweep the chips off the table and even big bad bama isn't going to know when they are going to do it.



Bam_Man's picture

or risk, driving the yield on the ten year Treasury below 1%.

You say that like it's a bad thing...

LawsofPhysics's picture

...if you are paid in or hold wealth in any other fiat, it isn't.  If you hold dollars, well that's a different kind of paper promise altogether.  But why stop there?  If low rates are good, negative rates will be even better, right?

CrashisOptimistic's picture

Were this all magic . . . successful magic . . . then why are there taxes?  Why not have Bernanke fund it all via printing?

This is all bogus.  Oil will be the mechanism for calling the bluff.  It's been held off so far by collapsing US oil demand/consumption (not the same thing) but eventually you can't reduce consumption anymore -- and when that time arrives there will be nothing anyone can do.

silverserfer's picture

Just what exactly does a ben Bernanke fan look like?

RobD's picture

This trend, combined with recent evidence that the US Treasury may actually begin to pay down the outstanding public debt


How it that possible unless we run a surplus? I'm I missing something?

NoDebt's picture

Pssst.... over here..... I got some fresh Venezualan inflation in right off the boat.  It's PRIMO!  You wanna get high?

Nah, you're not missing anything.  It's bullshit.  Unless Ben decides to simply "forgive" the obligation on all those bonds he bought (real, actual, barenaked monetization of debt) the numbers only climb.

Inthemix96's picture

Anyone else feel like pining this poisened dwarf cunt down and drilling his eyeballs out with a blunt zip bit?

After punching the little bastard senseless with a crow bar?  All the while peeling the twat faced fucker with my blunt tattie peeler?

I've had a shit day at work like, could just be me.

Fuck you bernsplankes

ToNYC's picture


Some say the world will end in fire,
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

Robert Frost

the grateful unemployed's picture

the Fed is now the USG's off balance sheet solution to the deficit. they took Iraq off balance sheet, which might have worked if the 1Trillion dollar price tag didn't turn into 2.2 and probably 6. its very hard for Congress to get a hold of spending when the books are held somewhere else. bernanke grins like the hero, but he is really the goat in all this. or should i say the mule, since the TBTF banks are the ultimate destination where this bond machine sends the loot. for individuals who have money in the TBTF banks, the hot potato belongs to them, which squares the circle.

the real problem with the rate pound down, is that it forces the Fed to curtail the interest it pays the TBTF banks for lending the money back to them. bingo, circle broken. they may just decide to monetize the stock market instead, which will brings cries about socialism, nationalizion of private industry. too late, the rat is out of the rat trap.

NotApplicable's picture

Why do you call this the real problem? It's their damn game plan. They will own everything, while the rest of us will own nothing.

the grateful unemployed's picture

real problem as in their real problem, or why it will fail, (hence be careful what you wish for, lower rates are not a good thing if you are publishing an inflation target policy)