Courtesy of Lee Adler of the Wall Street Examiner
The following is an extended excerpt from the Wall Street Examiner Professional Edition weekly Treasury update. The subscriber link to the full report is at the end of this summary.
Last week was a light auction week with a net of just $3 billion in new supply settling on Thursday. That took the pressure off stock and bond prices. The fact that neither market could mount a sustained rally suggests that markets are weak. Stocks and bonds gyrated wildly but in the end remained in a tight range, in spite of all the bullish ballyhoo in the media. You would have thought that the Europeans saved the world on Friday. I don’t think so, and within the data there’s plenty of reason to continue to be concerned, if not scared shitless.
Withholding tax collections remain weak and the government had to raise $9 billion (11%) more than forecast last week. Next week the overshoot will be around $13 billion. That means that the economy is significantly weaker than government forecasters had foreseen just 5 weeks ago when these estimates were issued. The clues were available in the data at that time and I correctly guessed that the auctions would begin to balloon in size.
At the same time, foreign central bank purchases of Treasures are falling off a cliff again. But the markets aren’t paying attention or have not noticed these negatives because they have not had to. Massive tidal waves of panic capital flight have been overwhelming the Treasury market in never before seen numbers. The indirect bid tendered on the 4 week bill last week was a mind blowing $61.8 billion, or 5 to 10 times the norm! Even more startling, Primary Dealers (PDs) bid $268 billion on that issue. That’s over a quarter TRILLION! One third of the PDs are foreign banks. Seven of them are European banks. Is something rotten in Denmark, Brussels, Rome, and Paris? You bet your bippy.
Notably, the panic buying was limited to the 4 week bill. The indirect bid was weak on the 13 and 26 week bills. This is short term cash looking for a safe place to park, not long term investable funds. It remains to be seen if this panic will slosh over into longer term Treasuries. With the 10 year at a major inflection point near a yield of 2.10, the big week of auctions ahead could provide a watershed moment. If the 10 year moves above 2.10, the wheels could be coming off, with untold chaos immediately ahead. On the other hand a drop back toward the lows might buy a little more time, but not much else.
If yields do move above 2.10, the other thing to watch is whether stocks rally with that move or begin to decouple from the lockstep risk on/risk off perception where falling yields signal risk off and falling stock prices, and vice versa.
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