2.75% for the 10r Treasury WAS the line in the sand that was drawn back in June. If you recall, it only took a month or so for rates to go from 1.60% to 2.75%. On a percentage basis this was a huge 60% jump off of the lows. Today after 4 or 5 tries in the past, bonds have sold off and pushed yields above 2.80%. Also if you will recall, CNBC and their “market mavens” tried to spin the yarn that rising rates had nothing to do with “tapering”…no, rates were going up because the storm had passed and the economy was strengthening.
“No and no.” The storm has not passed, it is clearly visible on all sides as we have merely been living in the storm’s eye that was created by unlimited free money and no, the economy is surely not strengthening. Today the Treasury released the “TIC” data that shows what the capital flows were for the month of June. Lo and behold…they sold. They sold EVERYTHING from stocks to bonds to Treasuries (and we also know that the world was a massive buyer of gold and silver during this time).
This is a very important development to understand. Foreigners are no longer supporting our deficit spending and that baton was passed off to the Fed many moons ago. Not only are they not “buying,” they are selling and sold $67 billion ($85 billion after adjustments whatever that means?) in June. So now the Fed has even more weight on their shoulders, they not only have to buy what the Treasury is issuing (in double secret fashion because of the debt ceiling) AND also what is being sold by foreigners.
The selling in June was an obvious catalyst to the rising rates and the Fed’s buying (including the $85 billion per month QE) was not enough of an offset. As a side note, the Fed has now “lost on paper” over 1/4 of a $trillion or roughly 5 times the claimed capital at the beginning of the year. But not to worry, higher rates won’t hurt the “recovery” or the stocks and real estate… neither will Obamacare hurt job creation (sarcasm). My point is this, rates going higher at this point in time will hurt everything up to and including the balance sheet of the Fed itself AND the cash flow abilities of the U.S. Treasury as they will need to pay more in interest on borrowed funds.
I think it will be quite interesting to watch as this all unfolds as to whether or not (I’m betting on “not”) Treasuries catch a bid during a time of “fear”. They have historically ALWAYS received flight capital and capital has ALWAYS flowed into Dollars during crisis. The next opportunity for this phenomenon is probably only 30 to 60 days away. We have the G-20, debt ceiling debate, German elections, Fed “non” tapering and the dreaded months of September and October coming up…and interest rates are rising everywhere in the world.
I will leave you with a couple of questions. What do you suppose the reaction will be if U.S. Treasury securities get sold off and sold off hard in the face of the next crisis? Would that not create even more fear? “Real” fear as in the type of fear that “control” has been lost? And if Treasuries are part of the problem and do not catch the “flight to quality” bid then what will? Could it be that gold will catch this bid…at a time that physical inventories have already been depleted? What might that look like with panic buying out of “fear” and little or no product available for delivery? Will price rise just a “little?” Just as the equity landscape in 1987 looked entirely different 6 weeks after the late Aug. equity highs, I suspect the global financial landscape will not even be recognizable by year end 2013 as inflection points are crossed.