BREAKING: Sovereign Bond Markets

The US Treasury Market Is Beginning to Behave Like the UK Gilt Market

Rates on US treasuries rose aggressively yesterday.

Dylan LeClair 🟠 @DylanLeClair_

Probably nothing.

This trend in rising rates has been playing out since late 2021, when the Fed announced that it was planning to begin quantitative tightening (QT).

Source

We saw something similar happen in the UK two weeks ago, which prompted the Bank of England to intervene and buy bonds in efforts to provide liquidity to the market, because the lack of liquidity had brought the UK pension system to the brink of insolvency. More on this in the article linked in the tweet below.

Ben Hunt @EpsilonTheory

In all seriousness, if you do not understand what is happening with UK pension funds and why UK 'leadership' is a complete and utter clown show and why this is the first shock of what will break our world, then you should really read this note.

epsilontheory.comA Brief History of the Past 10,000 Years of Monetary Policy and Why Last Week Was a Big Deal - Epsilon TheoryWhat we saw happen in the UK last week is the first shock, not the last, and all the massive pension funds and asset owners who have turned themselves into shadow hedge funds, full of swaps and leverage through the sweet whispers of Wall Street Wormtongue, will be our undoing. Read more

In other words, the Bank of England engaged in quantitative easing (QE) - a scheme that contributes to inflation - while inflation was close to 10% in the UK.

Many thought such a crisis couldn’t possibly happen in the US Treasury (bond) market, as it is one of the most liquid markets in the world. Yet, we’re seeing rates continue to rise on 1Y-30Y US government bonds, because there are not enough buyers for these bonds.

Below is a quote from a Bloomberg article entitled “The Fed’s Next Crisis Is Brewing in US Treasuries”.

Saifedean Ammous @saifedean

"The word “crisis” is not hyperbole. Liquidity is quickly evaporating. Volatility is soaring. Once unthinkable, even demand at the government’s debt auctions is becoming a concern."

bloomberg.comBloomberg - Are you a robot?

So, what does this mean?

It means that the Fed and/or large commercial banks (at the behest of the Fed) may have step in to provide liquidity to bond markets.

Why?

To paraphrase what megabrain Lyn Alden stated on a recent episode of What Bitcoin Did (link below), the government will always choose to save bond markets over preserving the value of its currency, because the failure of bond markets would have a cascading effect that would ultimately result in the failure of its currency.

So what does this mean for the US dollar and assets?

If the Fed steps in as a buyer of bonds, this will effectively weaken the US dollar. Just like what the Bank of England did two weeks ago, the Fed would engage in QE even while inflation is still high in the US (which may cause even more inflation).

This means that the bullish trend the DXY has been in since the Fed announced it was beginning QT (see chart below) would likely begin to reverse. And when that trend reverses, the downtrend in markets across the board - from bonds to equities to Bitcoin/crypto - will likely reverse.

Source

Kind of crazy to think that some of us US citizens were looking at Credit Suisse or emerging markets to blow up as a result of the Fed’s policy, but all we had to do was to look in our own backyard. Or maybe Credit Suisse, emerging markets and US Treasuries (and maybe some other entities, too) will all blow up! Who knows? I surely don’t! I’m just here trying not to drown in the wake of this madness.

One of the big questions on my mind is the following:

Frank Corva @frankcorva

Always a pleasure to share my thoughts with @RobLenihan5 at @TheStreet on behalf of @finder. The big question for today: Are #markets starting to price #Bitcoin more as a hedge against #fiat #currency devaluation and less as a #tech #stock?

thestreet.comCrypto Price Check: Bitcoin Prices Edging Up After CPI Runs Hot - TheStreetThe crypto-stock correlation has weakened somewhat, but it still remains positive, one analyst says.

We’ve been watching adoption of Bitcoin increase in countries like Turkey and Argentina (hell, even The New York Times admits it! - see tweet below) - countries whose currencies have been severely losing strength vs. the US dollar - but will that trend begin/accelerate in the “developed world” as fiat currencies continue to lose value? Some evidence from the UK has shown that it already has.

Neeraj K. Agrawal @NeerajKA

“Digital coins are prized in countries where the local money is volatile and where governments have made it harder for citizens to buy foreign currencies.”

nytimes.comCrypto Is Tumbling, but in Argentina It’s Still a Safer BetEven though cryptocurrencies have lost value, many Argentines see them as a less risky choice than their own currency, whose worth has plunged as inflation has soared.

That’s all for today! Actually, no wait… Want to hear a terrible joke?

Frank Corva @frankcorva

US Treasury markets are gilt-y, too. #bonds #treasuries #gilts

Zing! (Too soon? Sorry…)

Best,

Frank

Twitter: @frankcorva

Luke Martin @VentureCoinist

We are somewhere between: 1/catastrophic collapse of the entire global financial system that makes '08 look tame and 2/the bottom is in +/-10% I have absolutely no idea but I do know we are somewhere on the spectrum between those two.