Watch the Treasury Market
Money makes the world go around,
The world go around,
The world go around.
Money makes the world go around.
That clinking clanking sound,
It makes the world go around.
Money, money, money, money.
Money, money, money, money.
Money, money money.
Money, Money - Joel Grey and Liza Minelli - Cabaret (1972)
…..
The market for U.S. Treasuries is the largest, most liquid, safest and most trusted investment in the world. At over $30 Trillion in size with maturities ranging from 30 days to 30 years, there is plenty to go around. Since the dollar is the world’s reserve currency, Treasuries are often used in international transactions and foreign governments own them for a number of reasons, including managing their own currency’s value. Banks, pension funds, insurance companies have all used them to store money for decades. U.S. Treasuries are the most important asset and market in the world.
So, we should pay attention when things in that market are changing or may be changing. And changing they are.
The yield on Treasuries used to be very stable over a day or a week or a month, particularly on the long end of the maturity curve. But lately, the yield even on a 10-year bond can change dramatically in just one day. This sort of volatility in what is supposed to be the most stable asset on the planet is concerning. Why so much up and down and in and out?
At one point last year, there was a lack of liquidity in the world’s most liquid market. If you were buying $10,000 worth or even $10 million worth, you would not have noticed. But, if you were buying or selling $1 Billion of them (which many big institutions do), you had a problem doing so. The Federal Reserve had to step in to fix it. Again, this isn’t supposed to happen.
Kevin McCarthy in confident he will reach a deal on the debt limit before the nebulous deadline. I hope he is right. It wouldn’t surprise me if we “go over the cliff” for a few days before that deal is reached and voted upon. For our purposes here, let’s assume a deal does happen soon.
Since we reached the debt limit last year, what the treasury has been doing is borrowing money from all kinds of other places in the federal government to cover the shortfall over the last six months. It’s a little like your checking account is out of money so you borrow from savings and maybe your IRA until your next paycheck comes in. But when a deal is reached, the treasury has to pay all that internally borrowed money back. Right now, that is estimated to be about $1 Trillion.
Additionally, the deficit is running about $2 Trillion a year right now. So, we will need to borrow another $1 Trillion to cover the continuing deficit between now and the end of the year. Also, the Federal Reserve currently holds a little more than $5 Trillion in Treasury obligations but has committed to reducing that by about $60 Billion a month in its fight against inflation.
So, that’s about $2.4 Trillion in brand new Treasury debt that the government needs to sell between the debt limit resolution and the end of the year. Somebody needs to buy that debt. Well, you say, the Chinese and Japanese and other foreigners will buy it like they always have. Except that they stopped buying and started selling about a year ago. Foreigners (governments and individuals) currently own about $7.5 Trillion in Treasuries, which is down about $200 Billion from two years ago.
So, if somebody needs to buy over $2T in brand new Treasury Notes, Bills and Bonds (each has different maturities and ways of paying interest) and foreigners and the Fed don’t buy any, who will?
You will. You, and other American investors of various sorts.
How is that going to work? In a time when the economy is sputtering and the money supply is declining, what effect will this have on interest rates and the economy? It is very hard to say. The point is not that I know what will happen. I don’t. But it is something we need to watch carefully. The market for Treasuries literally affects the value of every other asset that exists.
I will and will report on what I see. We may get a better idea of where things are going when we see how these new debt instruments are absorbed by the markets.
That said, at some point in the future, the Treasury will issue debt and there will be no buyers unless the rate is dramatically higher. Or, Treasuries will absorb so much of the nation’s savings that there will be no room left for private sector growth. I’m not saying we are at that point or that we will be at that point this year. But at some point, that will happen. It has to. That is why the House Republicans are fighting so hard to just slow down the growth in deficits. We don’t want to ever get too close to that point.
One last tangentially relating thing. We all pay attention to Biden’s nominations for cabinet positions and judgeships. But, scant attention is paid to his nominations for the Federal Reserve. News flash – they are awful. They are being chosen by race, gender and ethnicity rather than competence or background in the field. In fact, most of them are academics who have spent zero time in the real world, and they are labor, race and climate activists. I think the current Fed Chairman, Jay Powell, has made some mistakes. But, he is qualified and is trying to do the right thing. It is a tough job.
Biden’s appointees, on the other hand, are not qualified and often want to guide monetary policy towards climate activism, social justice and diversity goals. They are not in charge now, but more and more of them are getting confirmed and it is something to watch out for.
Money does make the world go around. It is the measure that we humans have devised to value things and the labor to produce them. We are in some uncharted territory as far as economics is concerned. Like any time that you are walking in an unfamiliar place when it is dark, step carefully and pay attention.
Lest you fall. And we don’t want that.
I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free