Today we will look at the U.S. Treasury market and how the Treasury department has its work cut out in trying to sell around $370 billion of treasury notes and bonds in the last three weeks of April 2021.
We will look at why the huge increase in the national debt will lead to continued massive issuance of new debt going forward and how it could put the rest of the financial markets at risk.
Lumber Shortage? Video by the Uneducated Economist: https://www.youtube.com/watch?v=9nW4d…
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See Full Video Transcript Below
Today we’re going to look at how the us Treasury is facing its biggest challenge since the collapse of Bretton Woods in 1971 or 50 years ago and yes it’s amazing what’s going on and we’re gonna go through some numbers through an article in the FT where they talk about this before I start though I’d like to say that Billy is fine he wanted to have the day off he’ll be back probably tomorrow for the Sunday live stream of course so let’s have a look at this article in the FT and I think it’s quite significant that even the FT is covering this they’re seeing this as a problem so here’s the story and I think it came out I think it was yesterday written up by someone called Kobe smith in New York and it says US government debt hit as analysts braced for 370 billion dollars in Treasury sales yes that’s how much the us Treasury has to raise in the last three weeks of April not for the year for the last three weeks of this month it says investors worry that demand may be insufficient to smoothly digest a record month of auctions I worked for about 20 years in the city of London and I was a futures and options broker and the major markets that I covered were government bonds I used to trade Treasury futures all the time we used to wait for the auctions they came out the results came out at around 6 p.m London it’s one of the most important events for the bond market just to let you know and I never remember seeing 370 billion issued in three weeks this was usually the amount that they had to issue for a year or so us government bonds were hit by fresh selling on Friday with analysts warning of further volatility ahead as the Treasury department seeks to offload more than 370 billion dollars of new securities over the next three weeks long dated Treasury yields rose back towards recent highs with the 10-year Treasury notes trading five basis points they call it 0.05 percentage points higher on Friday at 1.667 percent it’s almost 166 anyway the abrupt move ruptured a brief calm that had settled over the 21 trillion dollar market for US government that in recent weeks after the worst quarterly performance for long-dated Treasuries in more than four decades so there you go four decades earlier this week the benchmark 10-year yield hovered closer to 1.6 percent the pending surge in issuance has only he heaped on additional anxiety so this is a quote here it says it is too much supply too quickly at these current yields says Tom di Giloma a managing director at investment bank Seaport Global Holdings he added that potential choppiness could easily push the 10-year yield back to about 1.75 percent next week I would even say 2 who knows it could very quickly go up to 2 percent and why is the 10-year yield in Treasury yields why are these interest rates or yields so important well because US strategies are considered a risk-free investment so the yield on the 10-year Treasury is the risk-free rate of return and that’s what’s used to discount all kinds of prices in the stock market other bond markets all kinds of asset prices not just for the united states but for the world because the united states dollar is still the major reserve asset for every country in the world so here’s a chart where they talk about foreign investors to emerge as largest buyers of Treasuries behind the Fed it’s interesting that they don’t put a question mark here because who knows they might not be interested in continuing to buy Treasuries this is the estimation for 2021 anyways so you can see that the Fed is already the biggest buyer or the government itself is buying its own debt yes I know the Fed is a hybrid but for all intents and purposes the Fed and the Treasury are the same now and the bankers run the government the first test comes on Monday with the sale of 58 billion and three-year notes so as I’ve said I remember if we had 58 billion during a whole week of Treasury auctions that would be a lot back in the day but now just one of the days they have 58 billion in three-year notes and another 38 billion of 10-year Treasuries the deluge continues on Tuesday when the tragedy holds a 24 billion auction of 30-year debt the following week a new wave will add to the 120 billion in supply with a 24 billion sale of 20-year debt according to analyst estimates the week after that strategists forecast the Treasury will sell another 183 billion of securities with 60 billion coming in two-year notes another 61 billion in five-year debt and 62 billion at the seven year mark that brings total supply for the month to an all-time record of 373 billion according to estimates by Gennady Goldberg a rate strategist at td securities once the remaining auctions for inflation protected government securities and other notes are factored in given the enormous amount of supply continue to hit the market every month every Treasury auction should be viewed as a risk event Goldberg said the market should stumble right from the start of the week Warren di Galoma at Seaport global given the size of the forthcoming sales and the improving economic backdrop that has already damped demand for Treasuries strategists also noted that these were the first auctions since the Federal reserve rolled back the capital concessions is extended to banks last April which we’re seeing as aiding market functioning that’s the SLR right here’s the 10-year yield how much it’s risen already it has kind of settled down here a little bit in the last few weeks last couple of months but you can see how that 175 level is important investors haunted by February’s grim seven year auction which stirred concerns about the health of the Treasury market are paying keen attention to the upcoming sale of debts at that maturity in particular after what Ian Lingan and ben Jeffrey at Capital Market characterized as less dismal but still very weak offering in march so what could happen at these auctions that could create a huge problem well you could have a failed auction what’s a failed auction yes it’s when let’s say the tragedy offers 60 billion of two-year notes and there’s only 50 billion of bids so the bid to cover ratio is less than one I don’t think that’s ever happened to the us Treasury it’s happened in other countries I remember the German government having a failed auction of bonds but it’s very rare and right now the bits cover ratio is still fairly healthy it’s around 2 2 1 still but we really need to keep an eye on this lackluster demand from foreign investors could trip the balance once again towards chop your trading but some wall street executives are holding out hope that the higher levels of Treasury yields today compared with just a few months ago will peak their interest yes what they’re hoping here is that the higher yields are going to make foreign investors more interested in the bonds and notes from the Treasury but I would say the flip side of that is if yields accelerate too quickly to the upside that means that Treasury prices are going down and investors might not want to buy Treasuries because they could buy it this week let’s say with a yield of 175 a 10-year note and then next week is at 2 percent you lose on your principle very quickly there the auctions may not be smooth but they’re going to be digestible this is what Phil Campo really a portfolio manager at JP Morgan Asset Management is saying citing the relative attractiveness of Treasuries compared with their global counterparts yet as I said that’s true but it depends how much under control this market is how volatile it is right benchmark government bonds in Germany or Japan for example are trading around minus percent and 0.1 respectively that differential is likely to compel foreign investors to stay active in the market according to Avisha Takar a rate strategist at Goldman Sachs she estimates this buyer base will emerge in 2021 as the largest aside from the Fed which is snapping up 80 billion Treasuries each month and signal on Thursday a willingness to make technical adjustments while technical adjustments just means increasing that size printing more money I love that technical adjustments to its purchases to keep them roughly proportional to outstanding supply so yeah that’s really amazing the way they put that they’re basically going to increase the size of their QE if the amount of debt the Treasury needs to sell increases there need not be a problem if the Fed and Treasury work together to address potential imbalances said Stephen Major global head of fixed income research at HSBC so HSBC Goldman Sachs, JP Morgan how come these people don’t see the problem that we have here and they’re so like deluded well because they’re part of this system they want to keep it going and the way they basically say well the Fed is just gonna monetize extra debt is very euphemistically put I would say so now I’m gonna go through some numbers just to show you how much of a bubble we’re in at that bubble and we’re gonna go back 50 years because I think it could be the biggest crisis in 50 years you already saw that we had the worst quarter in terms of prices for long dated Treasuries and it’s not me saying it was the FT and what happened 50 years ago of course Nixon closed the gold window and it took the anchor off the monetary system what does that mean well it meant that the US could create that or print money out of thin air without having the corresponding amount of gold to back that currency and there’s no limit to the amount of debt that we could have in the system and if you look here back in 1970 just prior to 1971 the national debt in the US is 371 billion which is ironic because it’s the amount of sales they’re gonna have for the last three weeks of April in 1971 of course that national debt went up to 398 billion but I wouldn’t be surprised that going forward this year and next year we’re gonna that we won’t have months where the Treasury is going to have to sell at least 400 billion so that just gives you some perspective of how much debt there is out there the other thing I wanted to show you is that one of the problems back in 1971 is that the us was running out of gold the us Treasury because the us Treasury was inflating out of thin air the Federal reserve was keeping rates too low and there was inflation and foreign governments like France, Germany, Japan and Britain they wanted their gold because they knew what was happening the US was starting to run trade deficits even though as you can see from this chart the trade deficit of the united states really started accelerating after around 1971 as you can see after they took out this anchor from the monetary system and now we have record deficits so nothing is improved we’ve got 28 trillion in national debt the US debt clock is forecasting that by 2024 the national debt will be just under 50 trillion and yes I think it could be a huge problem going forward and April could be a really important month and am I saying everything is going to implode in April all hell is going to break loose it’s possible it could be the month where the avalanche starts the little you know the little snow flake triggers the avalanche I don’t know how long it could last how long it’s gonna be until this unravels so what could the consequences of this be well it could potentially lead to a currency crisis a dollar crisis um and by a dollar crisis I don’t mean against other fiat currencies I mean against gold and silver and that would of course be reflected in much higher prices and I think we are seeing kind of some symptoms and some things that are happening in the precious metals market and in commodities that are pointing to trouble that are pointing to loss of confidence in this currency because you need to understand that the flip side of this deluge of that is is the currency because in the fiat currency system the that is the currency that’s the flip side so the more that you issue the more currency you issue the less confidence people will have in that currency to hold its value people are starting to question whether the Federal reserve no or the paper dollar is a stable store value and there are a lot of little things showing up that are unprecedented one of them is the shortage in the silver market physical silver market the other one is in the lumber market um yeah the price of lumber has gone through the roof you can look at this chart here of lumber I watched a video by the uneducated economist yesterday he drove around a lumber yard and he said there’s no shortage here look at all the lumber the Indus lumber mill or lumber yard what does that mean he couldn’t really tell he thought it was very weird because there’s talk that there’s shortage of commodities and that’s why the price is going up well could it be that the owner of that lumber mill or lumber yard doesn’t feel confident about the paper dollar maybe the owner thinks that it’s better to hold on to something real than a currency that is quickly disappearing and I think these signs like in the the silver shortage the fact that there doesn’t seem to be maybe such a big shortage of lumber and despite that the price is going up these are signs that I’ve seen from reading books like fiat money inflation in France when their hyperinflation was kicking off in the 1790s farmers had the crops and the produce to sell but they knew that the asinines were basically shin plaster they’re worthless so they held back their crops they didn’t want to sell that for for a paper currency they would probably sell it for gold and silver but back then just like today there’s no silver around because people knew that there was a problem I think we’re in for a very interesting final three weeks of April in terms of what the Treasury market will do in terms of what the dollar could do precious metals yes a lot of people say that precious metals will get get hit if yields go up I’m not too sure because this is different this is not yields going up because the economy is picking up because there’s growth and everything’s fine I mean this is a more of faith and confidence in the Treasury in the US government and we’re seeing already prices rise really quickly we saw yesterday producer price index rose much more than expected it rose by over four percent year and year and by over one percent month on month the bureau of labor statistics they were so shocked that they delayed that statistical release from 8 30 New York I think it only came out at nine being in the markets for over 20 years I never saw I rarely ever saw the US government delayed their statistics were they concerned that if they came out with that number the market was gonna be rattled maybe and that’s why they held it off they called the Treasury the Fed and said look this number doesn’t look good please and like the guy from the FT article said every Treasury auction has the potential of triggering a major crisis and it’s not just going to be for April it’s going to be for the rest of the year so if you enjoyed this video make sure you hit the like button please share it far and wide think about subscribing to my channel if you haven’t yet and you can also follow me on Facebook twitter and all these other platforms below here I wish you all a great Saturday take care bye
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