Bloomberg asked if the US Treasury strategy of repressing bond volatility is creating the potential for an abrupt move higher, taking yields and the curve with it. Some have commented about the intense volatility, but this volatility has been within a defined range. Longer dated Treasury yields are around early year levels. The two-year Treasury yield, however, is decidedly lower.
Bloomberg used the analogy of wildfires. Both wildfires and the Treasury market are self-regulating when left alone. However, both can be victims of micromanagement that gives the impression of stability which ultimately leads to instability [aka a Minsky Moment]
The Newswire states a policy of micromanagement in California that puts out the small fires that burns off undergrowth is the inverse of other countries (i.e. Mexico) that leaves small fires alone to exhaust themselves. Thus, when a fire erupts in California, the result can be catastrophic especially when Santa Anata winds push into the fire laden regions. Stability leads to massive instability.
The Treasury’s objective with buybacks is to support liquidity and cash management. The policy is to purchase less liquid off the run securities and replace them with on the runs. In a recent statement, the Treasury Department announced that they would conduct buybacks in the longer dated off-the-run maturities to four times a year versus two.
Moreover, the amount is rising. Buybacks thus far this year total about $138 billion compared with $79 billion for 2024 according to Treasury statistics.
It is hard to tell how much the buybacks are having on bond market stability. There is less Treasury demand from bond funds, who are increasingly using bond futures to hedge their duration and unwanted off-the-runs are clogging up dealer balance sheets.
Moreover, the proliferation of ETFs utilizing derivatives/futures is not completely understood but is believed to be hindering liquidity, requiring the Treasury to provide this needed liquidity.
The government is funding its massive deficit utilizing short term Treasury issuance. Bill issuance soared in late 2022 and remains greater in gross terms than long term bond issuance.
It is believed that rising bill issuance in inflationary
How will this unfold? Is the recent spike in long term yields in both Japan and England a harbinger of things to come as both countries pursued similar policies? Moreover, both countries require massive auctions to fund their expanding welfare state.
Curtailing federal spending is not a priority in Washington for doing so could be akin to political suicide. Unfortunately, the odds rise every day that a major crisis could occur if federal spending is not reduced.
Commenting about yesterday’s markets, led by the technology—the catalyst of which was higher British rates, traded lower between 0.5% and 1.0%. Tarriff uncertainty and FOMC intervention added to fears. Treasury yields were higher across the spectrum because the British bond market causing a nominal steepening in the yield curve.
Commenting on what it is worth department—or perhaps what it is not worth—NVDA has declined about $340 billion or 7% since it released earning four days ago. Shares are still up almost 78% from their April lows and are still the largest company in the world by far with a capitalization of about $4.1 trillion compared with second place MSFT at a value of $3.72 trillion.
NVDA’s decline is more than the value of 475 members of the S & P 500. Chevron, which is the 26th largest company in the index, has a capitalization of $328 billion. Next is Coke with a value of $296 billion.
To paraphrase the infamous quote from Winston Churchill “Never has so much money been trusted into one company.”
Futures are markets are still discounting a 25-bps reduction at the September FOMC meeting, a view that could be validated by this week’s release of several high-profile economic statistics.
Yesterday’s release of the ISM was marginally in line with weak expectations.
Last night the foreign markets were mixed. London was up 0.53%, Paris up 0.94% and Frankfurt up 0.76%. China was down 1.16%, Japan down 0.88% and Hang Seng down 0.60%.
Futures are bifurcated as Dow futures are flat and NASDAQ up 0.5% as GOOG was buoyed by the news that it would not be forced to sell its Chrome browser.
The sovereign global debt rout also slowed underscoring the fragility of the ever-rising demand for funds to feed its heavy public spending. The 10-year is off 2/32 to yield 4.27%.
