Since October 19 the yield on 10-year treasuries has fallen 40 basis points, most of which happened in the last three days. What’s going on? 
Four Days Ago the Wall Street Journal reported Bond Yields Slip After Treasury Announces Debt Auctions
- Auctions of 10-year notes will increase by $2 billion after being bumped up by $3 billion in the last adjustment in August.
- Thirty-year bond auctions are being increased by $1 billion, down from a $2 billion increase last time.
- Auctions of 20-year bonds are being left unchanged
The Journal posted a chart similar to the one I created above but theirs is only through Wednesday, November 1.
Today, the WSJ reports Markets Got an Unexpected Boost From Washington. Will It Mark a Turning Point?
The Treasury Department handed investors a happy surprise last week. Now the question is how far they can run with it.
Yields, which fall when bond prices rise, were also pulled lower by soft economic data and hints from the Federal Reserve that it likely won’t raise interest rates again this year. But it was the Treasury move that many saw as the crucial catalyst.
As it turned out, Treasury on Wednesday not only announced smaller-than-expected increases to longer-term debt auctions but also suggested that it was willing to overstep informal guideposts for how much in short-term Treasury bills to issue.
Just based on dollar amounts, the difference between what Wall Street had anticipated and what Treasury delivered was small. But investors embraced what they saw as the underlying message.
The Underlying Fundamentals
- A reduction of $1 billion in 10-year issuance is meaningless in any practical sense.
- The Congressional Budget Office (CBO) estimates a greater than $1T annual budget deficit for each of the next three years. I suggest it will be far greater.
- And the Fed is reducing its Treasury holdings by $60B per month on a scheduled Quantitative Tightening (QT) schedule.
The Medium-Term Daily Picture
On a daily chart, the rally in 10-year treasuries hardly seems significant. Yields were heavily extended and they have not yet fallen to the trendline no matter how you draw it.
Many suggested the huge rise in yields was due to China was dumping US treasuries but that is not the case.
Three-Point Simple Explanation
- US Treasury yields were very extended because economic data had been trending stronger than expected.
- More recent data was weaker than expected.
- The Fed stressed multiple times in its November 1 FOMC Q&A press conference that it has done significant tightening already. This was an indication it was on perpetual hold unless stronger data came in.
It’s possible there is some psychological change based on a $1 billion reduction, but the simple explanation better explains the picture.
Point number one explains the rise (with market participants front-running expected Fed actions in front of it). Points 2 and 3 above explain the rally.
ISM Manufacturing Plunges to 46.7 Percent. New Orders, Backlogs in Contraction
The biggest portion of the rally started on November 1. On that date I commented ISM Manufacturing Plunges to 46.7 Percent. New Orders, Backlogs in Contraction
That chart alone is sufficient to explain the rally in bonds. And check out the ISM panelist comments.
None of the top six manufacturing industries reported price increases in October. Eighty-nine percent of panelists’ companies reported ‘same’ or ‘lower’ prices in October, compared to 87 percent in September,” says Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®).
A Prices Index above 52.9 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.
That comment by Fiore was by itself enough to trigger a huge bond rally. Then the Fed Chimed in.
Some thought Fed Chair Jerome Powell was hawkish. Not me.
A Hawkish Interest Rate Hold by the Fed or Something Else?
Also on November 1, but following the ISM report, the Fed’s FOMC met to determine rates. The statement itself said nothing, but the press conference was another matter.
I asked A Hawkish Interest Rate Hold by the Fed or Something Else?
Hold Bias, Not a Tightening Bias
I watched the entire press conference and do not see a tightening bias.
I see a stated hold bias.
We have a jobs report on Friday and there will another one before the next meeting.
I think hikes are done.
The Market Thinks the Fed Is Done Hiking Interest Rates, So Do I
Mish analysis of CME Fedwatch futures positioning data.
On Thursday, November 2, I made my “I think hikes are done” conclusion above into a post: The Market Thinks the Fed Is Done Hiking Interest Rates, So Do I
The market reaction to yesterday’s FOMC meeting was decidedly dovish. The notion the Fed will get in another rate hike just went out the window.
My observations and conclusions were before the hugely underperforming jobs report on Friday. This brings us to …
Job Growth Slows to 150,000 Employment Drops by 348,000
On Friday, November 2, I reported Job Growth Slows to 150,000 Employment Drops by 348,000
Not only were payrolls much weaker than expected, but government jobs accounted for a third of them.
Nonfarm Payrolls and Employment Levels
Full time employment has barely risen all year (green highlights).
Those charts fully explain the rally in bonds. Add to those charts a mass of hedge funds and speculators betting on more hikes and having to unwind those trades.
So, you can believe the WSJ explanation, any number of Fed manipulation theories, or you can believe mine.
Debunking the China Dumping Theory
Until the past week there was a relentless selloff in US treasuries that sent bond yields soaring.
Rumors and articles surfaced that China dumping Treasuries was the reason.
I discussed the situation on October 4 in Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not China
Has China sold any US treasuries? Likely not. Much of what China holds is hidden in State Owned Enterprises and custodied Treasuries.
How Sustainable is the Rally?
There are two competing forces, a weakening economy and massive debt issuance. Either one can win, but for now I think the top in yields is in.
In addition, factor in the possibility the Fed has already tightened too much. If so, they will be very hesitant to cut rates out of fear of stoking more inflation.
If you subscribe to this theory, 10-year treasuries are attractive for a trade.
Under What Conditions Would China Dump US Treasuries?
And finally, to understand the conditions under which China might dump treasuries, please see Under What Conditions Would China Dump US Treasuries or Dollar Holdings?
Amusingly, the conditions are nearly the opposite of what most dollar bears think!
The Fed increased FFR to 5.5 percent to match the 50 year average from the early 1970s. The Fed halted QT in October 2022, leaving 10-year Treasury yields alone. This gave Yellen time to help finance Biden’s $2.5T initiatives through Fed fiat of 10-year Treasuries at lower rates. QT resumed in less than a year, when inflation wasn’t controlled by the hike in short interest alone. 10-year rates attained their long term historical average of 4.6 percent, the remainder is investor speculation. Inflation has not been controlled, and rates will rise, because the historical averages are not during just the inflationary periods. And Yellen has only financed half of Biden’s initiatives.
I remember reading somewhere that the Fed will not cut rates in the event of a market decline but would reintroduce QE while continuing to keep the rates high. They were presenting this as some kind of a trick that the Fed can do to keep the dollar high. What are the implications of such a move? Can the Fed pull off such a trick without any cost?
QE may be dead forever, even if not certainly not any time soon.
At the 10 year close of 4.57 the real yield is 2.18 and 10 year inflation expectations is 2.39. This seems overly optimistic to me. The market seems to have covered shorts and got themselves long and not very well positioned for the new supply at the recent low yields. Given this and the recent high volatility I’d be surprised if the high yields aren’t tested again before they break out of the bearish channel.
wishful thinking by mish. the inflationary cycle due to insane imperial pursuits and scumbags running the show. in world history when the ruling class becomes the financiers and military men, it’s always curtains……….we are failing as an empire. the deficits will be unpayable as will the interest on the outstanding debt as bonds are marked to market……….i’d buckle up for a 10 to 20 year doozy of a bear market in bonds and currency. not to mention expect incoming drone attacks here. amerikans ain’t police of the world, we are the gangsters and bullies…….flim flam men.
SPX 1M lazer : Aug 2004 to July 20026 lows, parallel from Dec 2004 high.
Last week SPX tested the Lazer from below. Oct bar flopped lower. The trend is down,
unless cancelled. 4.999% LOL.
TGA ammo truck to blow up. If Mike Johnson shuts the gov, JP will raid u. Vote : NO !
5% on a 10 years treasury would be ever so fc kn historically ‘healthy’ wouldn t it ?….But then again who wants ‘healthy’ these days in a utterly SICK world ?!
MOOD. It drives everything. The recent rally in the long bond indicates this 3+ year bear market is near the beginning of a 12-18 months consolidation. There are still ~15 years remaining to interest rate top of the 60 year cycle. The next 6 weeks will be a good time to lock in good rates on CD’s and US treasuries with a duration of about 24 months.
Fed policy front-runs the market by ~1.5 years, the market front-runs the real economy by 6-9 months.
That means 2022 Fed hikes are only beginning to hit the real economy and the market now projects rate cuts within the next ~10 months.
The Fed isn’t going to cut unless there’s a reason to, even if they did now it won’t stop policy latency from 2022.
Some of the best market forecasters I know, with access to info & resources I could only dream of are bearish right now.
Bill Ackman stated this week that economic conditions are plummeting rapidly – he also exited his treasury short, Michael Burry bet against the SPX this Summer while the market was rising. Dalio and Cohen are also bearish, Buffet has slimmed BRK holdings over the past year.
Also, M2 money supply is dropping at a never before seen rate, the only close comparison was the Great Depression, most barely pay attention to M supply because it has always gone up without correction for nearly 100 years.
Meanwhile, retail traders are psyched about this “new bull market” because we look like we’re entering a breakout from a downward wedge pattern on Friday’s trading action.
(Retail sentiment is a contrarian indicator, the weekly AAII became obsolete when real-time trade flow started selling by brokers like Robinhood.)
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Q1 2020 tax receipts were $2.17T, then they peaked @ $3.13T in Q3 2022. Since then, they’ve been on a nosedive. Q3 2023 has yet to be announced, but Q2 was $2.79. If we get a recession next year, tax receipts will most certainly plummet back to $2.2T at most. With our annualized interest expense having just come in @ $981B for Q3, it’s downright scarry what this number will be in six months and then a year from now. We could be looking at $1.5T in interest expense and as little as $2T in tax receipts.
This should scare the SH!T out of everyone, except Congress, of course.
re: “M2 money supply is dropping at a never before seen rate”
From the standpoint of monetary authorities, charged with the responsibility of regulating the money supply, none of the current definitions of money make sense.
The definitions include numerous items over which the Fed has little or no control (e.g., M2), including many the Fed need not and should not control (currency). The definitions also assume there are numerous degrees of “moneyness”, thus confusing liquidity with money (money is the “yardstick” by which the liquidity of all other assets is measured).
The definitions also importantly ignore the fact that some liquid assets (time deposits) have a direct one-to-one relationship to the volume of demand deposits, DDs, while others affect only the velocity of DDs. The former requires direct regulation; the latter simply is important data for the Fed to use in regulating the money supply and AD.
The Treasury has just finished filling the TGA.
Here’s the upcoming issuance;
https://home.treasury.gov/system/files/221/TBACRecommendedFinancingTableQ42023-08022023.pdf
thanks
Wow! The amount of new money is nuts, especially for 11/30. Those bonds will mostly need to be bought by the US public. Expect a yield spike.
$35T in debt by the end of Q1 ’24.
YES! THAT’S NUTS ALRIGHT!
David Rosenberg says that the rapid drop in longer term treasuries rates is due to short covering. He says that there is a record short position.
What caused the short covering?
A: Worsening data
B: Fed comments
C: Both of the above as I posted
And I did note “market participants front-running expected Fed actions” higher based on previous strong data.
Short covering was a result, not a cause. But I do not have the exact statement from Rosenberg.
“David Rosenberg says…”
Now there’s a name I’d forgotten, I remember him back in 2008 – “Rosey”.
He made a name for himself for timing the ’08 crash.
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Like throwing darts. Whoever wins makes a name for himself “by perfect timing”.
This time, predict the timing way tougher, 2008 is a historical era when sane rules still applied, but not anymore.
See SVB and the amount of fresh fiat doused on it.
“See SVB and the amount of fresh fiat doused on it.”
I’d forgetfully commented on the huge surge on Fed balance sheet last March the other day, speculating the Fed’s been buying the market up.
Someone corrected me, stating that was the small bank bailout (SVB).
So, yes, the Fed’s been buying the market up.
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OR! The Fed just doesn’t want to raise rates under almost any circumstances, especially going into an election year. THAT’s the #1 driving factor, IMHO!
Until October with the hit of the UAW strike, the job gains have been very respectable. When we’ve had sub 4% inflation for ever since the COVID recovery, we’re not going to get huge job gains. We’re operating at the margins.
PCE since May has been rising on a monthly basis. Given the middle east tensions, oil isn’t going to fall through the floor and could easily see an above $100/brl run before the end of the year.
Personally, I think PCE inflation is forming a bottom, and I don’t see significant headwinds in the economy outside of the middle east situation going sideways.
What matters is what the jobs picture looks like in January. Will the monthly increases drop below 100K with a trend towards the negative? Will we see an uptick in layoffs? Without REAL MoM decline in employment, then the last mile of inflation isn’t going to get conquered anytime soon. There’s still TOO MUCH money sloshing around.
Sometime in 2024 & with higher for longer, I expect the monies flowing out of reverse repos into treasuries to eventually dry up. We’ve gone from $2.2T down to $1.071T in only 5 months. If this keeps up, most of that money will be gone by the end of Q1 ’24. I think that’s when the liquidity crisis begins, especially if the economy doesn’t slow like EVERYONE seems to think it’s going to.
I think we’re in that calm before the storm which comes sometime in 2024. We’ll be at $35T in debt sometime on Q1 ’24. And, I think this recent runup in yields is a prelude to what’s to come, a return to selloff in treasuries.
FYI. For any wanting a more indepth analysis on the Ukrainian war, I’d recommend the following blogger.
https://simplicius76.substack.com/p/zaluzhny-pens-oped-for-the-economist?utm_source=profile&utm_medium=reader2
I think that the top in yields is close unless the Fed starts QE. QE will of course lower yields even more but it should be inflationary, at least for asset prices. Then we are toast either from inflation, higher rates, or both.
Sounds to me like we’re in for a serious bout of stagflation. Huge deficits, loosing monetary policy and crashing economy.
Now, you’re talking, Alex!
Crashing economy will lead to higher unemployment and crashing prices.
Crashing economy will lead to lower tax reciepts and higher expenditure on welfare and attempted economic stimulus by government spending. How will they fund 4 trillion dollar deficits with low bond yields?
Via the Fed’s yield-curve control, you dingbat.
Not all prices are going to crash. Insurance (Health, Home and Auto) are going to continue to have significant increases. Some food (primarily fresh produce) will remain high due to supply and demand. Floods, droughts and hurricanes drastically affected crops.
It will be a divine recession. Those who produce will do ok, unearned income will take a beating
One can only hope!