Treasury Supply

News That Matters

"Greece would survive, have new powerful friends, have bargaining chips that neither Europe nor America could ignore; China would have projected the use of the Yuan right in to Europe, and Russia would have more than a toe-hold for military power right inside NATO. If I was Tsipras or Varoufakis I would be on the phone right now."

Because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply.

While China is rather proud of the fact that it hasn't yet implemented outright QE, Beijing has now put in place a bewildering hodge-podge of hastily construed easing measures that can't seem to get out of their own way.

The big news overnight was neither the Chinese manufacturing PMI miss nor the just as unpleasant (and important) German manufacturing and service PMI misses, but that speculation about a rate hike continues to grow louder despite the abysmal economic data lately, with the latest vote of support of a 25 bps rate increase coming from Goldman which overnight updated its "Fed staff model" and found surprisingly little slack in the economy suggesting that the recent push to blame reality for not complying with economist models (and hence the need for double seasonal adjustments) is gaining steam, and as we first suggested earlier this week, it may just happen that the Fed completely ignores recent data, and pushes on to tighten conditions, if only to rerun the great Trichet experiment of the summer of 2011 when the smallest of rate hikes resulted in a double dip recession.

With equities having long ago stopped reflecting fundamentals, and certainly the Eurozone's ever more dire newsflow where any day could be Greece's last in the doomed monetary union, it was up to gold to reflect that headlines out of Athens are going from bad to worse, with Bloomberg reporting that not only are Greek banks running low on collateral, both for ELA and any other purposes, that Greece would have no choice but to leave the Euro upon a default and that, as reported previously, Greece would not have made its May 12 payment had it not been for using the IMF's own reserves as a source of funding and that the IMF now sees June 5 as Greece's ever more fluid D-day. As a result gold jumped above $1230 overnight, a level last seen in February even as the Dollar index was higher by 0.5% at last check thanks to a drop in the EUR and the JPY.

'... assuming equity prices rise by 10% this year, for their bond allocation to stay at 37% (same as of Q3 2014), US pension funds and insurance companies would have to buy $550bn of bonds in 2015."

What assures that the relentless low in TSY yields continues is that, courtesy of a market that is so broken and counterintuitive that for a record 6 years bad news is good news, and the worse the economy the higher stocks and bonds go, hedge funds will continue bidding up Treasurys, which they bought on hopes that this time the recovery will be right around the corner. And sure enough, as BofA reports overnight, hedge fund specs "sold 10-yr contracts increasing net short position to largest in three years. 10-yr contracts have now been sold in six of past seven weeks."

According to Goldman's own calculations, the demand squeeze for the High Quality Collateral that is global "Developed Market" Treasurys is about to go through the roof mostly thanks to central banks which will - even in the Fed's temporary hiatus from the monetization scene - soak up an unprecedented amount of Treasury collateral from both the primary issuance and secondary private market in their scramble to push global equity prices to unseen bubble levels and achieve the kind of Keynes-vindicating, demand-pull inflation that Russia was delighted to enjoy in the past several weeks.
How much?  The answer: a lot, as in a whopping 20% collapse in supply, once the ECB joins the fray!

Just like in April of last year, the simplest explanation why bond yields continue to defy conventional wisdom and decline is also the most accurate one. According to a revised calculation by JPM's Nikolaos Panigirtzoglou, the reason why investors simply can't get enough of Treasurys is about as simple as its gets: even with the Fed tapering its QE, which is expected to end in October, there is still much more demand than supply, $460 billion more! (And this doesn't even include the ravenous appetite of "Belgium".) This compares to JPM's October 2013 forecast that there would be $200 billion more supply than demand: a swing of more than $600 billion! One can see why everyone was flatfooted.

Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Sure enough, as we enter October's last week where the key events will be the conclusion of the S&P earnings season and the October FOMC announcement (not much prop bets on a surprise tapering announcement this time), overnight futures have experienced the latest off the gates, JPY momentum ignition driven melt up.

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...

Many were looking at today's $16 billion 30 Year bond auction to see if the same weakness that was exhibited by yesterday's tailing 10 Year would repeat. This did not happen, and in fact today's auction, concluding this week's offering of paper, was probably the tamest of the lot. With a When Issued trading at some 3.185% at 1 pm, the high yield of the auction came inside the WI, at 3.18% with 85.2% allotted at the high. The Bid To Cover also did not indicate any particular weakness, as the 2.74 B/C, just a fraction below January's 2.77, was well above the 12 month trailing average of 2.61. More importantly, unlike the Indirect weakness seen in this week's prior auctions, Indirects took down 36.4% of the offering: nothing to write home about, but also better than the 12 TTM of 34%. Directs were responsible for 14.5%, which left 51.2% for the dealer. Finally, while the pricing yield was the highest since the 3.23% seen in April of 2012, at this point what happens at the long end is largely meaningless, as the marginal buyer is virtually non-existent. Recall that as the Treasury itself said, "In Feb 2013, Fed Will Buy 75% Of New 30y Treasury Supply." And that is all that matters to quell concerns of any great rotation in or out of bonds.

We urge readers to read the bolded section below, which comes straight from this quariter's Treasury Borrowing Advisory Committee (i.e., Primary Dealers) presentation to the Treasury Department, and explain, with a straight face, just how the Fed will ever be able to not only stop monetizing debt and injecting $85 billion of flow into the stock market, but actually sell any holdings.

Who knows? not me.