The yield on the 10Year US Treasury is known by most investors to represent the real cost of capital/borrowing.
In short, it is the most important yield in the world, as it prices the cost of the world’s reserve (undeserved) currency.
Thus, when the yields rise, the cost of debt rises, and in a world awash in USD-denominated debt, such rising yields are like approaching shark fins to stock and bond markets.
Yields, of course, rise when bond prices fall; similarly, yields fall when bond prices rise.
Thus, markets like to see strong and natural bond demand to keep yields low and markets healthy.
Recently, there have been signs of rising demand for UST’s, which should be good for the bond markets, right?
Well, not so fast:
Recent numbers from the Treasury International Capital (TIC), for example, indicate that YTD foreign investment/demand in 8-month USTs has reached a solid $556B.
Does this mean that Powell and Yellen’s deliberate plan to rase rates and strengthen the USD has succeeded in enticing foreign buyers (suckers?) to purchase US IOUs as the proverbial best horse in the international glue factory of otherwise negative-yielding sovereign bonds?
As hinted above, the answer is no.
But given such ostensible rising foreign demand for Uncle Sam’s IOU’s, shouldn’t bond prices be rising and hence yields and rates falling to more comfortable/affordable levels?
In fact, yields on the 10Y UST are fatally climbing—so what gives?
Well, the hard reality is that USTs are in fact unloved and oversold rather than in high demand.
The more alarming issue in the Treasury market is the lack of buying interest from central banks, all of which suggests that the real, sticky and once politically-dependable buyers of The Great Satan’s increasingly unloved IOUs are no longer drinking the Great Satan's Kool Aid nor trusting Uncle Sam’s bar tab.
Another reason bond yields are rising and bond prices are falling is that the Fed is not only raising the Fed Funds Rate, it’s also tightening its balance sheet—which means it’s dumping treasury supply into the open market.
This new tidal wave of bond supply pushes bond prices down and hence their yields (and rates) painfully north. In short, the shark fin is getting bigger and faster.
Folks, rising rates (i.e., the cost of debt) are no joke in a world that lives atop the biggest debt bubble in recorded history:
What’s even scarier, in my opinion, is the bigger picture (and shark) behind Uncle Sam’s unloved IOU’s, namely the $3.9T worth of those bonds currently held by other foreign nations (think China, UK, Japan, EU etc.).
As I see it, a lot more of those USTs are about to get dumped.
As winter gets colder and energy gets scarcer, and as the intentionally strong and weaponzied USD unloads more and more inflationary, debt and currency pain upon America’s foreign enemies and friends alike, many of those duped/wounded countries holding UST’s today will be selling them this winter to keep from freezing as their currencies melt away.
Like Japan, more and more nations will be forced to dump more and more USTs to strengthen their currencies (which the deliberately rate-hiked and hence strong USD have crushed), so that they will in turn be able to buy oil and gas from the East.
Hmmm…it looks like all those sanctions and strong USD ideas in February are backfiring as predicted at even greater speed, no?
I wonder how smart (and poorer) the Germans and other NATO partners are gonna feel come winter as those energy prices spike and their Dollar-crushed currencies tank?
Like Japan and the UK, the EU will eventually both pivot to QE and dump USTs to strengthen their Dollar-bullied currencies and find some cash to buy energy.
Already, the Swiss National Bank is begging for (and receiving) billions in Fed swaps.
As more countries dump UST’s, their yields rise and hence their rates rise, causing even further harm to a debt-soaked nation, Main Street and securities market.
As warned so many times, the ticking timebomb of both US and global debt is a like an open barrel of gasoline to which rising yields and rates, described above, are an obvious and slowly approaching blowtorch.
As the hawkish (and apparently pyromaniac) Fed sends global markets and USTs into a tailspin, the debt gasoline and rising yield/rate blowtorch will collide; thereafter, the entire and debt-soaked global system slowly burns alive.
Will more QE save the Great Satan? Well yes, but Hell No.
Money Printers, as Powell knows, can theoretically save everything and every market—from stocks to bonds to Malibu real estate–except they can never save the purchasing power of the money they print or the markets they “accommodate” or inflate.
In the end, printing money can benefit markets, but too much of it kills currencies (and sends gold and precious metals to the moon).
www.npr.org
