An Alternative View On Recent Treasury Weakness

Tyler Durden's picture

The general dogma seems to be that the recent Treasury weakness reflects either a) risk-averse bondholders rotating to stocks because everything is fixed and it seems better to buy something at its highs than its lows? or b) China is punishing us for the rare-metals challenge. We posit an alternative, less conspiracy-theory, less-conventional-wisdom (who is buying the Treasuries you are selling and who is selling the stocks you are buying reprise) perspective on the recent Treasury weakness. Its supply-and-demand stupid. The last few weeks have seen massive, record-breaking amounts of investment grade USD-based corporate bond issuance, at the same time dealer inventories for corporate bonds are at multi-year lows and Treasury holdings at all-time-highs. In general to underwrite the massive corporate bond issuance, dealers will place rate-locks (or short Treasuries/Swaps in various ways) to control the yield and sell the idea of the 'spread' to clients (which is where most real-money buyers will be focused on value. We suggest that the almost unprecedented corporate issuance and therefore need for rate-locks has provided a significant offer for Treasuries that the dealers (who are loaded) and the Fed (who is only minimally involved) was unable to suppress. The key question, going forward, is whether the expectations of a much lower issuance calendar will relieve this marginal offer in Treasuries and allow rates to revert back down?


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spiral_eyes's picture

I think it's simply supply and demand: the Fed aren't buying enough treasuries to keep prices high. With the ASEAN nations liquidating, the Treasury is getting some heat.

And with QE being really all about lowering the cost of servicing debt, I see a round of QE on the horizon.

Vince Clortho's picture

QE ... As opposed to the under-the-table printing currently under way?

Stanwick's picture

Theys gettin out they moneys so theys can buy Apple. Long live the United States of Apple.

Spider's picture

Hmmm doesnt explain why all supposedly safe sovereign bonds (German 10-yr yields up by 7% on the day - ... something else is going on here.

Cognitive Dissonance's picture

Plausible deniability.....bitches.

There is always an alternative and plausible explanation for any event. Manipulation depends upon it, even manufacturers it, in order to continue to manipulate. It is the key ingredient to keeping the herd from bolting when they smell danger in the air.

nope-1004's picture

For sure.  Painting the tape in PM's is also a way of showing that "timing was right for a correction".  The whole farce is being controlled.


GeneMarchbanks's picture

The author presupposes that the buyer of each is one and the same investor.

Somehow I'm skeptical that's the case.

CrashisOptimistic's picture

You youngsters may not remember the phrase "windfall profits tax".  It was pointed at oil in the 1970s.

Time to point it at Apple.

trav7777's picture

dude, it was pointed at oil like 2 years ago...

Nevermind that oilcos are well below-average in profitability on the SP500.  An average software or services firm such as Oracle is like 3x as profitable.

But people are stupid and oil companies make great scapegoats.

deKevelioc's picture

Hey Trav, click here for a surprise.  LOL




Vint Slugs's picture

It's all over for the T Bond market.  Just as Pimco incorrectly loaded up on the short side and put a bottom in the market in December2010-January 2011 so they have loaded up on the long side and put a top in the market during December 2011-February 2012.

Lost Wages's picture

Isn't it possible PIMCO is one of the entities selling?

JPM Hater001's picture

The floor is dropping out on PM's - Silvers down almost 5%.  Surely a matter of Margin Account settlements.  Which posits...why exit hard currency (albeit paper PM's) and stay in the market?  They could have sold stocks and bonds.  I'm betting the real downside today is triple digits if not propped up by the Bernanke.

Vampyroteuthis infernalis's picture

PMs are priced through paper ETFs and other financial innovations. Investors have driven them up through their markets and fraud just like everything else. ZH has shown this over and over again. This paper market will implode along with everthing else when the herd tries to find the exit doors.

I believe PMs have value (the best) when the SHTF moment hits. For now, it is a sucker's game.

And please junk away at the truth.

trav7777's picture

what's that smell?  smells like silverbugz getting blowtorched

alexwest's picture

#?last few weeks have seen massive, record-breaking amounts of investment grade USD-based corporate bond issuance

aint buying it... any historical precendent? is it first time of 'massive, record-breaking amounts'? could we see any relevance to historcial record?

my theory is simple.. PEOPLE ARE NO STUPID .. USA fed gov cant run 1.5$ trln , or 8/10 % OF gdp deficits 4EVER.. it might be a time when people are wakening up..


TruthInSunshine's picture

Why did Jamie Dimon...errr JP 15 billion USD of its own stock yesterday, and where did those proceeds come from?

If you answered that it was done, at least in part, because corporate debt will never be this cheap to float again, and that buying back shares of stock (thus benefitting all of the corporate rank who are vested) is a smart thing to do from the perspective of insiders at JPM, you win a cookie.

Oh Bernank, just admit you can't stem the rise in tnote yields w/out a major, global catastrophe that has the herd running for preservation.

Lost Wages's picture

I think Bernank is more than willing to incur a major, global catastrophe if that is what it takes.

JohnKozac's picture

China's decrease bond purchases could be their answer to Barry's trade lawsuit against them re: the rare earth metals.

The laws of physics ALWAYS hold:


TooRichtoCare's picture's just the realisation that QE aint gonna happen...which is why Gold is down, the dollar is up, and Treasuries are getting pummelled.  And soon, the idiots on the equity side will figure that out, the Stress Test rally will be seen (in hindsight) as the blow-off top, the parabolic rush into AAPL will be seen as the capitulation of dumb money that just "had to be involved", and it'll all come crashing down.  And it'll then turn out that all the people who've been calling for a correction to this market rally will actually not have positioned for a selloff at all!  And that's when it'll get ugly...

And then we'll have the economc numbers revealed to have been far more weather-related than anyone officially had thought...and non farm payroll and construction activity and retail sales etc will all come back to reality, which is basically.... shite! 

Dow back to 10,500.

BigJim's picture

QE will only happen when everyone thinks it won't be happening. Because that's when it'll most need to happen.

It's a happening thing.

johnjkiii's picture

Just bot TBT but it's not a trade on faith that TBonds will sell off longer term. This is probably just a correction as the Fed takes a breath and let's the market TWIST a while. Supply is at $23 - the prev. top - and I'm out. Bennie has a legacy to protect and he will have the printer all oiled, cooled and ready for the next run.

Dr. Engali's picture

Supply and demand? What's that?

jcaz's picture

Issuance will ramp up if the market smells raising rates, because it's always the same old panic drill when corporations think they might miss the bottom of the yield give-away.....  Plus they think they're smart enough to issue debt to buy back stock before it gets "too expensive"....... Always ends in tears.......

Everybodys All American's picture

How are you going to try to make sense out of the entire bond market when the Fed has always been the buyer of last resort? Interest Rate Swaps, Primary Dealer arm twist, and other bs has skewed common sense to irrational.  Flattenened yield curve and possibly the end of operation twist means only one thing. Higher rates are coming and it's going to smoke the canary.

earleflorida's picture

with china's export growth slowing, they'll need less us paper

Ps. also gives china a reason to pull the plug


Lux Fiat's picture

Yes, with China's current account surplus shrinking, and being redirected to some degree into commodities, there is less money to recycle into Treasuries, particularly notes and bonds. 

Same with Japan - they are going to have to liquidate Treasury holdings, versus continue to add, as pension funds have to draw down, trade deficits mount, and they scramble to fund their own budget deficits.

Europe will be/is facing similar issues.

That, and smart money can see that so far the US isn't serious about addressing it's fiscal imbalances, except through fiscal repression and currency debasement - which doesn't exactly make Treasuries attractive.  Especially now that the precedent has been set with Greece.  If we stay on our present fiscal course, it's a matter of when, not if.

All those sizeable foreign surplus pools that found their way into Treasuries are shrinking, and likely will continue to do so for some time.

Quinvarius's picture

Thank them for the gold takedown if the debt market collapse is for real.  Steal sovereign gold, dump it, blow up a commodity broker to scare people.  I guess that is their new paper plan.  But I can keep gold in my closet, so it doesn't do anything but let me in cheaper.

Bam_Man's picture

Japs and Chinese no longer buying as much because of their own problems (trade deficits).

Given the insane amounts of new issuance, that's all it takes.

slewie the pi-rat's picture


listen: up till right about now, we have been conditioned to the man behind the curtain going either

  • "risk0n" or
  • "risk0ff"

but now, i submit to you there may be no more risk0ff

he simply can no longer afford it!

JoeStocks's picture

Big inflow to bond funds last week. Of course domestic equities showed another OUTFLOW.

aztec two step's picture

This is very unusual as the Treasury commentary here is often infantile and conspiratorial. The author of this piece has it right on. I would add one additional note. The world is long the belly of the curve for carry and roll down.  for the most part they believed that the Fed's promise to keep rates at zero would preclude rates on their holdings from rising. Now that rates are indeed rising the principal loss will soon exceed the expected positive carrry on the trade. Ergo portfolios are dumping those positions to save their seats.

OC Money Man's picture

China and India have negative balance of payments.  This is resulting in a sell down of their liquid assets to support their own banking illiquid assets.  The world is on the verge of "stagflation".  Why is this complicated?

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