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The Gathering Storm In The Treasury Market

The Gathering Storm In The Treasury Market

Summary

  • Our analysis provides kind of a Grand Unified Theory (GUT) of what is currently taking place in global financial markets
  • The massive borrowing by the U.S. Treasury is crowding out emerging markets capital flows
  • The structural factors that have kept long-term interest rates low and term premia repressed are fading
  • We expect a measured move in the 10-year Treasury yield to 4.25 to 4.40 percent, much sooner than the market anticipates

Reagan proved deficits don’t matter.” – Dick Cheney

Memo to Dick Cheney:

  • Deficits and the public debt are starting to matter. Really. 
  • It is now more strikingly true than ever given the U.S. public debt-to-GDP is more than 3.4x higher than when President Reagan took office.  

Emerging Market Debacle 

Go no further than the debacle currently taking place in the emerging markets (EM), which began in the second quarter of this year, to witness the consequences of the U.S. Treasury’s trillion-dollar-plus demand shock for global funding.

 

Treasury_EM_Currencies

 

EM_Relative FX Vol to DM

In a closed financial system and a non-QE world,  price (interest rates) would adjust to move the capital and debt markets back to a more sustainable equilibrium.   The rise in interest rates would force the government to borrow less as higher interest rates crowd out other spending.  Also, the supply of loanable funds to the government would rise as savings increase.

That is not the world we now inhabit, however,  where global financial repression by central banks has resulted in a “rent control” like shortage of dollar funding.   The shortfall is now being plugged, in part, by the residual capital flows, which had been chasing yield in the emerging markets over the past several years.

That is the sucking sound you have heard since late April.

…click on the above link to read the rest of the article…

Banks Rig Treasury Market

Banks Rig Treasury Market

Boston’s public sector pension fund accuses all of the biggest US banks  – the so-called “primary dealers” which transact directly with the United States Treasury Department and “have a special obligation to ensure the efficient function” of the American treasury bond market – of colluding to manipulate the $12.5 trillion U.S. Treasury market.  The complaint alleges:

Defendants employed a two-pronged scheme to manipulate the Treasury securities market. First, Defendants used electronic chatrooms, instant messaging, and other electronic and telephonic methods to exchange confidential customer information, coordinate trading strategies, and increase the bid-ask spread in the when-issued market to inflate prices of Treasury securities they sold to the Class. Second, Defendants used the same means to rig the Treasury auction bidding process to deflate prices at which they bought Treasury securities to cover their pre-auction sales. Recent reports confirm that traders at some of these primary dealers “talked with counterparts at other banks via online chatrooms” and “swapped gossip about clients’ Treasury orders.

By engaging in this unlawful conduct, Defendants maximized the spread not only for transactions in the when-issued market, but also between their buy (auction) price and sell (when-issued) price.

***

This conduct lined the pockets of Defendants while raising prices to investors trading Treasury securities in the when-issued market, investors trading Treasury security-based futures and options, and investors transacting in instruments benchmarked to the prices of Treasury securities determined at auction, including certain bonds and other asset- backed securities and interest rate swaps.

Given the tight correlation between the Treasury securities prices in the spot market and futures markets, Defendants’ manipulation of the auction prices for Treasury securities also directly and proximately caused injury to individuals and entities that traded in Treasury futures and options on U.S. exchanges, including the Chicago Mercantile Exchange.

High-frequency trading has also long been used to manipulate the treasury market.

 

…click on the above link to read the rest of the article…

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