Someone Is Getting Very Nervous

Tyler Durden's picture

A look at the stocks surge today and one would get the impression that not only should the government shutdown be permanent (closing the Fed would have a vastly different result on the S&P), but that the debt ceiling is completely irrelevant and immaterial for risk assets. One would get a far different impression by looking at today's just concluded 4-Week Bill auction. Today's outlier rate on the just priced $35 billion in 4-week bills can be seen quite dramatically on the chart below, and is evidence that someone (or someones) is getting quite nervous ahead of the events in the next few weeks.

What is going on here and why the spike? Recall what we said a week ago in "Here Is How To Trade The Debt Ceiling Showdown."

... there is a simple pair trade for those who would like to position for a contentious debt ceiling fight with an ETA mid-October and skip the bipolar and HFT-dominated equity markets. Recall that in the summer of 2011 when the last big debt ceiling debacle loomed and resulted in a last minute outcome that also led to the downgrade of the US by a rating agency that has since sold out, rates of bills due just before the debt ceiling D-Date soared, while those sufficiently after the ceiling interval tightened. Well, the same trade is just as applicable this time.


Sell October 31 Bills versus 12 Month Bills


Supply dynamics and potential market concerns around a debt ceiling stand-off in Washington should push the 1M1Y bill curve flatter... The October 31 bills are likely the most vulnerable, and should cheapen significantly versus 12 month bills in a protracted fight.


One-month and three month bills are already trading close to zero, having briefly traded negative last week. With bill supply to remain flat heading into the end of October, suggesting that supply should keep bills yields across the curve under pressure. With bill yields largely beholden to supply dynamics, the greatest scope for further compression is in year bills, which are currently trading around 10bp. Given historical relationship between bills yields and bills outstanding, year bills are roughly 3bp rich to supply-implied fair value, while 3-month bills are about 3.5bp rich.


This trade may be difficult to put on in size until after quarter end due to dealers balance sheet constraints. But as noted above, we believe that the market will not begin to fully price the risk to front end bills until about two weeks before the end date. We expect the opportunity to remain available at for the first week of October.

Sure enough, today is the first day of the next quarter (window dressing is over), and the bond market, if not so much the stock market, has finally awakened that the government shutdown is merely an indication of just how contenuous the debt ceiling negotiation very likely ill be, and that it is increasingly likely that the X-Date of October 18 may come and go without a deal, which just may result in a technical default on the nearest maturity Bills.

End result: today's auction was an absolute abortion and absent some deus ex machina agreement between the GOP and Democrats, one can expect the October 31 bills (and others just around them) to continue blowing wider as quietly but confidently those holding the most at risk paper exit stage left.

But that's not all. We also noted the following:

The last go-round, the 1m1y curve flattened to 3bp. Though the curve is just 6bp away from that right now, it is beginning from a starting point that is 10bp flatter than one month prior to the 2011 debt ceiling. The securities that the market viewed as “at risk” traded with yields above year bills, hence our recommendation to sell the October 31 issue rather than the current one month bills.



We think that the curve has scope to flatten to zero, if not further, depending on how close to the wire negotiations come.

As of moments ago, the curve has gone beyond flat and into "further" as the 1M1Y just went negative.

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maskone909's picture

i dont know... this is a short term reaction

government workers are a major sourve of velocity for that gubmint cheese. 

NEOSERF's picture

The budget WAR has been lost.  Now all that is left is for grandstanding, useless budget battles.  The Republicans seem to not understand that the war is lost.  All there is to do now is see how much spending is needed to at least maintain the status quo, fill a few potholes, cut a few benefits and wait til the final default.  This is a math problem now as the interest has a life of its own which won't be affected by petty frugalness.  We should be investing in whatever will make life bearable during rebuilding...

SilverIsKing's picture

"This is a math problem now as the interest has a life of its own which won't be affected by petty frugalness."

Well said.

bagehot99's picture

Excellent point.

But it is 'frugality' not 'frugalness'. 

Picking nits is how I overcome the overwhelming sense of dread within me, that idiots like Barack Obama induce.

kaiserhoff's picture

The rates are microscopic, but the Arb in me loves this shit.

Well done, Tylers.

My take home from this is not so much about politics.  Ain't nobody worried about inflation.

CClarity's picture

That's a "vote". Bill traders not sure they'll be paid by Treas within 30 days. Curve inversion coming.
Of course, no one will pay attention. But watch repo t-bills rates get Very weird!

Landrew's picture

When is the last time you said inverted yield the seventies? I can't believe it!

1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr     0.10 0.02 0.04 0.10 0.33 0.66 1.42 2.04 2.66 3.43 3.7
DoChenRollingBearing's picture

+ $100,000

You write interesting stuff, TSP...

Rathmullan's picture

OMO glitch. They weren't sure which "quasi" federal agencies to send the shutdown memo to so they pulled from a hat and sent one to the NY Fed.

cougar_w's picture

I feel silly saying this because history thinks I am wrong, but there will be no inflation.

I suspect the US aggregate GDP implodes this year or next in a run-away deflationary death spiral. We are so far out on the ledge on this one it blows my mind. Bernanke is printing like a crazed terrorist, with no effect. The amount of money and paper wealth being destroyed on a daily basis must be simply colossal.

He cannot keep it up. The moment he turns back the spigot the black hole of domestic implosion will suck America into the vacuum of economic deep space from which this country might not emerge for 100 years. And then, might not emerge as a country.

kaiserhoff's picture

I'll second that.

Wages are a black hole.  Small business is dead in the water.  Consumer debt is dropping thanks to write-offs and foreclosures, woo-hoo.

The Bernank can't produce profits or income, but he sure shot the shit out of interest income.

cougar_w's picture

What The Fed and the TBTF institutions did here may well one day be counted as among the greatest acts of collective insanity ever witnessed in human history.

lewy14's picture

Yes, but it was a brilliant insanity.

If someone had told you in Oct 2008 that two plus trillion would be printed over the coming five years, and had asked you what inflation would be then, and where the dollar would be, would you have guessed correctly?

Yes, Ben saw that printing would not create inflation. It would plug a hole, buy time, avert a panic.

So he printed.

Problem is... well, now what?

I see the status quo as a ship at sea, not taking on water, but throwing ballast overboard... becoming top heavy; one fine day a wave will come...

lewy14's picture

Down-arrowed myself for associating Bernanke with "brilliance", however qualified. Was pretty sure someone was going to do it for me, but I had to step in.

bubblemania's picture

Why can't Bernank keep printing, I saw Bullard on CNBC a few months ago and he said they were far from the limits of expanding the balance. The FOMC lookes to Japan as the model, more than 250% debt to GDP, QE for 12 years; there is no hyperinflation there or any other disasters. The Keynsians are just getting started.

Tall Tom's picture

Actually there is a difference between the Weimar Republic Hyperinflation and the Hyperinflation which I forecast for the United States.


The people in the USA do not have the Wages nor the Savings to fuel a Hyperinflationary Event. I will give you that as a caveat because it is the Truth.


However there are $12 Trillion Dollars sitting in the vaults of Foreign Central Banks. And when they lose CONFIDENCE in the US Dollar those $12 Trillion will come back to the USA shores seeking every Good and Service not nailed down.


That is where the Potential Energy is stored for a Hyperinflationary Meltdown of the United States Economy. While we can control the spending of our own population we cannot control the divestiture of Foreign Central Bank holdings of US Dollars.


Think about it.

Rick64's picture

 The biggest and most important difference is the reserve currency status. It's the enabler.

Ness.'s picture

It's the enabler.

Until it's not.  Coming soon to a "theater" to you.  What type of theater (Aurora or Iran)?  Stay tuned...

Landrew's picture

I totally agree! The shear destruction of capital is something I never thought possible. To print that much money with zero effect makes me question how far this goes, money funneled to Spain, Italy, Japan? Nothing makes sense mathmatically nothing at all. 

Arius's picture

..Greece, you forgot Greece ... thats where all this started with those lazy greeks.  if they had not been in trouble so many times this thing would have never started and everything would have been all right.

mick_richfield's picture

Go tell the Spartans,

stranger passing by,

that here, obedient to American law

we lie.


TruthInSunshine's picture

Regarding the interesting & highly debatable comments dealing with the inflation -vs- deflation topic:

The banking/financial sector is being kept on life support via consumption of the fiat credit Bernanke is depositing into their till on a perpetual basis.

That is where electronic fiat has been going to perish for the last 4 years; a VAST black hole of fiat credit destruction, to offset the still ginormous shadow banking liabilities.

What will trigger a tsunami of deflationary waves is when Bernanke's "Virtuous Circular" (circular in logic, too) equity market reflationary effort gets kneecapped since there's no "there" there (nothing of inherent value exists there; it's a 100% faith based Ponzi scheme that inevitably will topple - AND IT'S BUILT ON AN UNPRECEDENTED MOUNTAIN OF LEVERAGE).

HardAssets's picture

"the black hole of domestic implosion will suck America into the vacuum of economic deep space from which this country might not emerge for 100 years. And then, might not emerge as a country."

That, would be a sign of the utmost stupidity. You see, none of it is real. Its all bullshit, paper and keystrokes stored in computers. The banksters and their paid off whore politicians have used their little games to bankrupt people in their fiat paper ponzi scheme. And now people are willing to enslave themselves, their children, and grandchildren because they actually think the 'debts' are real ?  (They didn't loan you anything - - they made it up out of thin air. And, theyve been stealing hand over fist for decades.)

This will be a test of how stupid people are and how effectively the 'schools' & media have brainwashed them to be slaves. If they had any sense the banksters and traitor politicians would be in jail and the 'debts' would be repudiated and the productive capacity of the people restored. Create a country with low taxes/government interference and truly free markets and it will thrive.  People are imprisoned by their own limited vision.

seek's picture

I agree, there won't be inflation. There will be hyperinflation. It's normally preceded by the deflationary death spiral you mentioned. We are following the pattern very closely now.

DoChenRollingBearing's picture

Indeed, deflation and then hyperinflation seems to be the normal pattern in history.  Reinhardt and Rogoff's This Time is Different shows us bubbles and their aftermath for some 800 years.  Small taste: the aftermath is ugly and goes a long time.

"And there is nothing new under the sun."

Ecclesiastes 1:9


That is why diversification is so important.  Not just owning gold.  Silver too!  Cash.  Guns & ammo (never know).  Food & water (ideally the ability to produce both, which I do not have).  A place to go if you can...

Getting your spiritual life in order cannot hurt either, but that is a topic for some other time...

Deo vindice's picture

Great question. Doesn't the word 'budget' imply a limit on spending? Does it not imply a restrictive boundary on one's purchases?

What limit and what restriction is there if every time I want to spend money I just either print or borrow more with no moral compulsion to repay it?

Using the term 'budget' is a misnomer for what is actually going on with our governments, which is nothing short of a wild spending spree with someone else's money without the slightest intention to ever pay it back.

tbd108's picture

The proper word is "whoopee."

DoChenRollingBearing's picture

@ Deo v

I am pleased you decided to stay with us here.

Deo vindice's picture

Thanks DoChen. It was in a search for you that led me here.

So it's kind of your fault ;-)

cougar_w's picture

The "war" won't be over until there is no tax income over which to fight.

Or, the war will end when the States no longer recognize the Federal governement and go it alone, keeping all their taxes at home and providing critical services themselves.

Then, key Counties will pull away, killing their respective States.

This is going to be a very important process. It might happen very quickly.

kchrisc's picture

There will be blood and guillotines.

cougar_w's picture

If that was all there was, I'd be grateful. But I'm afraid someone out there has got a lot worse than that up their sleeves. 

Jack Napier's picture

What you are describing, knowing or unknowingly, is a shift toward anarchy. Self-governance on the individual level is probably too extreme to have a functional and productive society (though I may be proven wrong), but county level governance? Count me in! If I'm going to pay for somebody's clown car I'd prefer they are within arm's length.

Bananamerican's picture

or neck's length as the case may be...

NidStyles's picture

I'm just fine governing myself. Thanks for trying to convince me to accept the lesser evil though.

cougar_w's picture

My expectation is that regardless of what happens at the Federal level, the Federal government is now toast. Finished. Stick a fork in it. Washington DC can continue to collect itself, various shady agencies can pretend to provide services, but the model appears to have utterly failed. Only mindless momentum will carry it forward, and not for long.

State governments will attempt to replace some of the functions provided by Federal government. This will be a matter of necessity and opportunity, nothing more. States will take over large and critical flood control and irrigation projects, highway systems, financial and corporate regulations, and basic border integrity. Though all of these at a vastly reduced scale, reduced to the point where we will wonder where they went.

There are some very wealthy Counties, but they will not want to add to the State's coffers any more than the States will want to provide for the Republic. My guess is the wealthy Counties will become the new Singapores; city states with considerable economic and political throw, their independence enforced by economic tyranny. Wealthy Counties and States will be run by strong men, as history has always required. How they manage their internal tensions -- and their own will to conquest -- will determine how peacefully the death of the Federal government will be attended.

I worry that there will be a vast number of failed Cities, and many failed States, and these will quickly overwhelm any progress at scale anywhere else. These failures will be the source of a very dangerous army of roving destitute and hopeless horde, easy prey to tyrants and criminal organizations. They will have no place to go, and will be stung by a memory of entitlements lost. They will not be difficult to whip into a destroying frenzy, and they will not visit mercy on anyone (or any City, or any State) that finds itself in their furious cross-hairs. And as other Cities and States fall new numbers will add to the destitute, more furious and bitter than before.

Anyone who is eager to see the start of this has not thought it through. There is the potential for events that are very very bad. Historically, events that might prove unimaginably brutal and destructive.

Given human nature I harbor no hope for a soft landing, or the continuity of anything I recognize today as important.

Wahooo's picture

Which cities have the best natural defenses?

cougar_w's picture

These days, none. Because almost all cities of any size are now dependent on external inputs, for everything, and are easy to throttle. Remoteness will be no defense either because large numbers of people cannot live in remote places. These might even count among the first enterprises to fail as technology leaves them high and dry.

If the fire ever kindles as I describe it will move freely over the land devouring everything in its path until virtually nothing is left. A few hamlets will escape by virtue of being small, scattered and beneath notice. By the time the rioting masses grow desperate enough to seek them, those same masses will be on the verge of death from war, disease and famine. So the best defense is probably to be small, poor and meek.

It is a bleak picture. It might not come to such and I hope it does not, but because we refuse to face our failure as a nation we are vulnerable to fate and so I have to suspect we will go where fate requires us.

Reaping the whirlwind.

Two Theives and a Liar's picture

Joel Skousen has researched this topic thoroughly:

Have seen the book as well. Well worth a look!

wahrheit's picture

I own the book and it is well worth the price for its thorough research and detailed maps.  I think cougar_w's future vision, while bleak, is an accurate portrayal of an unfortunately likely outcome.  Expect the best but prepare for the worst, particularly on the social relationship angle (my biggest weakness, admittedly).  JW Rawles of's "American Redoubt" is probably the best geographical location for such a worst-case scenario.  The fictional depictions in his books "Patriots" and "Survivors" are highly recommended.  I balk at the Christian values idea of common ideological ground but it makes some sense with regards to having a moral common ground when relating to otherwise unknown folks and the trust factor.  I wouldn't want to be in the same foxhole, so to speak, with the sociopathic likes of the average Wall Street Dimon/Corzine types.

RafterManFMJ's picture

Cougar I'd like you to handle the marketing for my SUMB (shallow underground militia base).

It's not to late to buy in and assure your family a burrow of safety!

Mitzibitzi's picture

Anything on an island in a river or the sea, or in forks/pockets in steep mountain ranges. Cities on hills with flat terrain surrounding them. Cities surrounded by desert (shit for food supply and access to water but great for siege defence, if you can keep the fuckers out past the 10-14 day point)


cougar_w's picture

So you pick Manhattan? Or maybe Boulder? SF is on a peninsula, kind of like an island, but 800 miles too close to LA.

All these places are already toast.

Forks or pockets in hidden places, that was what I was alluding to as too small and poor to notice.

I wish I knew the answer. But I have not a clue.

Burticus's picture

Besides Plan A, urban survival, and Plan B, woods n' water, you better have a Plan C, South America.

NidStyles's picture

Plan D steal a plane/boat get somehwere else no matter where that is.