An avalanche of new debt is about to hit the treasury market. Not just this week, but for months and possibly years to come as the U.S. economy plunges into a deep, prolonged and nasty recession full of government sponsored bailouts and stimulus packages. This massive new supply of debt will hit the markets just as demand begins to wane. The rest of the world is now much less able and willing to support both the reckless U.S. consumer and government.
As equities (S&P 500, grey area) slid into the abyss thru June and July, fixed income couldn't find the usual safe haven bid. Instead, yield consolidated using the 4% area as support. Expect a break out to higher yields as supply overwhelms demand.
The US dollar will continue to stabilize as it becomes apparent the rest of the world hasn't in fact 'decoupled'. With the Fed done cutting, the 'dollar down bubble' may abate. This will help crush commodities...
The oil price insanity is probably over. Oil may rally, but fail at the old high before plunging below even $50 or $30 a barrel.
Should commodities collapse, and they will, the single major source of funds propping up the U.S. debt markets will suddenly slow to a trickle. After some lag, this would translate into less demand for U.S. government debt as the flow of 'recycled' petro-dollars slows, resulting in an agonizing spike in yields...
Fewest Treasury Traders Since 1960 Hit Taxpayers (Update4): “For the first time since 1960, when it created the network of securities firms obligated to buy and sell Treasury bonds, the U.S. government has the fewest bond traders making markets in its debt and a bigger burden for American taxpayers financing record federal deficits.”
That can lead to only one thing: Higher interest rates and greater volatility…
“Fewer firms bidding for U.S. bonds means “you're going to have sloppier auctions,” said Mark MacQueen, a money manager in Austin, Texas, at Sage Advisory Services, who traded Treasuries at dealer Merrill Lynch & Co. in the 1980s. “The taxpayer and the government are paying more no matter what happens.”
While the interest rate on the benchmark 10-year Treasury note today is less than half the 9.14 percent yield of 20 years ago, the dwindling number of dealers and contraction of credit markets means that yields on 10-year notes sold this year have averaged 1 basis point higher than in pre-auction trading, compared with no difference in 2007, data from Stone & McCarthy Research Associates in Skillman, New Jersey, show. In the three years before 2007, such sales drew a yield just below the pre- auction rate.
