09 Dec A WEAK 3-YEAR TREASURY AUCTION
Tuesday a record $56 billion of the three-year Treasury note was auctioned. The demand was “poor,” falling 1.5 standard deviations below the one-year average according to Bloomberg. The Treasury is projecting a 18% jump in 2021 issuance, the result of the unrelenting demand for funds by the government.
As noted yesterday, Bloomberg wrote “Treasury returns in 2021 could post its worst performance on record, the result of extremely low yields that even a modest sell off will have an outsized impact.” Following yesterday’s poor three-year Treasury auction the Newswire further stated that there could be negative returns across the entire Treasury 2-30-year spectrum for only fifth time in history.
Wow! How will this impact equities given the outsized influence interest rates have upon stock valuations?
According to various sources, retail investors now account for over 20% of equity volume up from about 15% a year ago. As noted last week retail investors now account for over 50% of option trading. Yesterday the CBOE reported the ratio of volume traded in puts versus calls fell to the lowest since July 2000. This implies extreme positioning to the upside.
In years past surges in retail participation was regarded as bearish. Will it be different this year?
I reiterate my long-held view growth will continue to surprise on the upside as the economy continues to reopen, a reopening that could create demand pull inflation given broken supply chains, record money supply growth and $4 trillion of excess banks reserves earning no interest. I think a better gauge of monetary policy is not the fed funds rate but the interest rate the Treasury pays on excess bank reserves.
Such an environment should permit Main Street to out perform Wall Street for the first time in 10 years, perhaps akin to the returns generated from 2000-2006.
Commenting about yesterday’s market action, led by energy equities rose on stimulus and vaccine optimism. The Treasury market was relatively lower.
Last night the foreign markets were up. London was up 0.26%, Paris up 0.19% and Frankfurt up 0.86%. China was down 1.12%, Japan up 1.33% and Hang Sang up 0.75%.
The Dow should open flat ahead of a potential stimulus deal and vaccine optimism. The 10-year is off 7/32 to yield 0.95%.