Transcript of FORGET THE DEBT FLOOD: Why Yields Hit 3-Year Highs as Treasury Buys Its Own Debt!
Wall Street Truthbombs
0:00Washington is quietly buying back its0:02own long bonds this coming week and0:04almost nobody is talking about it. By0:07the end of this video, you're going to0:08understand exactly why the 10-year0:10Treasury is sitting at its highest level0:12since October of 2023 and what it means0:15for your money. And I'm also going to0:17show you why the story that you're going0:19to hear all week, the one about a flood0:21of new government debt drowning the bond0:23market, is not actually what's0:25happening. What is actually happening0:27though, is far worse. Now, last Friday0:30morning, the labor market said that the0:32economy added 162,000 jobs in August.0:35Wall Street was looking for about0:3756,000. Unemployment held at 4.1%. The0:41headline beat every single estimate on0:43the street, and the bond market didn't0:45throw a party. The 10-year yield0:48actually pushed up to 479, and earlier0:50in the week, it touched 4.81%.0:54That is the highest it has been since0:56October of 2023. The Dow dropped more0:59than 260 points and traders stopped1:01arguing about when the Fed cuts.1:05Finally, they started arguing about1:07whether the Fed has to hike. So, here's1:10the story you will get when the desks1:12come back from the long vacation1:14weekend. Treasury sells a three-year1:16note on Tuesday, a 10-year reopening on1:20Wednesday, and a 30-year reopening on1:23Thursday. The deficit is ginormous.1:27foreign buyers are walking away.1:29Therefore, the flood of supply is1:31crushing the bond market. Well, it's a1:33clean story and it fits on a Chiron,1:36which is that little banner that TV uh1:38stations put on the bottom of their uh1:41broadcasts, and every anchor in America1:44is going to read it to you with a1:46straight face. It has exactly one1:49problem, guys. I have been watching1:53refunding announcements for more than 351:55years and this is the part that every1:58anchor skipped. Now, let's dig further2:02into this and it's complicated. But2:04before we do, please click like and2:06don't forget to subscribe. It's2:07important to be in the know about this2:10important plumbing stuff and this is2:11exactly where you learn about it. Okay.2:15In the August quarterly refunding2:17statement, the Treasury Department keep2:20uh kept its coupon auction sizes2:22completely flat. 58 billion in2:25three-year notes, 42 billion in 10-year2:28notes, and 25 billion in 30-year bonds.2:32The exact same numbers as the quarter2:34before. Treasury wrote that its current2:37auction sizes will leave it well2:39positioned and that it expects to keep2:41nominal coupon issuance steady for at2:44least the next several quarters. The2:46preliminary, excuse me, the primary2:48dealers, those are the firms that are2:50actually legally obligated to show up2:53and bid at these auctions, don't even2:55expect an increase until early 2027. So,2:59when someone tells you this week that a3:02wave of new issuance is hitting the3:04tape, they've not read the announcement.3:07Well, you know, Wall Street Truth bombs,3:08we read it. Now, hold that thought for a3:11second because here's the second thing3:13nobody is saying out loud. Quantitative3:16tightening is over. It has been over3:20since December 1st of 2025. The Fed3:23shrank its portfolio but by more than3:25$2.2 trillion. and then well it3:28completely stopped. Today the Fed rolls3:31over every dollar of maturing Treasury3:33principal right back into the auction3:36and it takes the cash coming off its3:38mortgage bonds and puts that into3:40treasury bills. The biggest foreller of3:43the last 3 years well pretty much went3:46away. That was the Fed. The Fed is not3:49draining the bond market anymore. It is3:52a buyer again. And then there is the3:55piece that made me sit up. That's of3:58course the shadow data, which is my4:00favorite. On September 9th, Wednesday,4:03the Treasury Department is doubling the4:05size of its long-end buyback operations.4:08We reported that a couple weeks back.4:10The cap goes from 2 billion per4:12operation to at least 4 billion,4:16specifically in the 10 year to 20 year4:18and 20 year to 30-year buckets, and it4:21runs through November 4th. Now, do I4:24have to repeat that? Probably not. But4:26I'm going to tell you this. On the same4:27day the government reopens the 10-year4:30note, it is also stepping up as a buyer4:34of its own long bonds. Now, I'm sure4:36you've heard about it already, but we're4:38going to get a little deeper into it4:39right now. So, pay close attention. Let4:42me explain the mechanics because this is4:44where people they get a little confused.4:46Rightly so, because it's pretty4:48confusing. A buy. Buyback is not debt4:52reduction.4:53Treasury is not paying down the deficit.4:56It issues new liquid paper at auction4:58and uses the proceeds to repurchase5:01older off ther run bonds that nobody5:04wants to trade. The debt stays. What5:07changes is where the duration sits and5:10who's holding it. For the full quarter,5:12Treasury authorized up to $ 38 billion5:15of these liquidity buybacks, plus up5:18to$2 billion more in shorter paper for5:21cash management purposes. Treasury calls5:24it liquidity support, and that's an5:26honest description, but when the issuer5:29doubles its bid for the long end in the5:31middle of a sell-off, well, that's also5:34information that we cannot afford to5:36ignore. So, let's add it all up. Coupon5:39supply is flat. The Fed has stopped5:42shrinking and is reinvesting. The issuer5:45itself is doubling its bid for long5:48paper. That's longer maturity bonds.5:51That is the official sector leaning in,5:54not leaning out. And yields went to a5:56three-year high anyway. That that, my6:00friends, is the whole truth bomb. When6:02the supply is steady and the official6:04buyers are helping and the bond still6:07falls, you're not watching an6:09indigestion problem, my friends.6:11Indigestion is temporary. You are6:14watching a repricing of what it cost to6:17lend this government money for 10 years.6:20That is the term premium that we've been6:23talking so much about recently. That's6:26the extra yield that investors demand6:28just for taking the time the the time6:31risk and in August it was running about6:3487%. For most of the last decade that6:38number was negative. Investors used to6:41pay for the privilege of lending long.6:44They don't anymore my friends and we6:46have seen this exact movie before which6:49is why this time should bother you a6:51little bit more maybe. In the autumn of6:532023, the tenure ran from under 4% in6:57July to roughly 5% on October 19th. That7:02was about 115 basis points in 2 and 1/27:05months and moved the Fed uh a move uh7:09the Fed Fed's own researchers, my7:11friends, put above the 99th percentile7:15of anything since 1990. And when they7:19decomposed it, the yields only the7:21yields only models attributed roughly7:2485% of that spike to term premium, not7:28rate expectations, term premium. The Fed7:32named three culprits. Let's go through7:34it. Quantitative tightening, heavier7:36Treasury issuance, and uncertainty about7:39the outlook. And the tantrum ended when7:42Treasury moderated its planned7:44longerdated issuance. And the data7:47cooled. Now look at today. Quantitative7:50tightening is finished. Issuance is not7:53heavier. It is flat and guided flat. As7:56I said at the top here, Treasury is not7:59just moderating long supply. It's8:01actively repurchasing it. Two of the8:04three things that caused the 20238:07tantrum are gone. And the third has been8:10answered in advance. The cure, my8:13friends, has already been administered.8:15and the patient is back at the same8:17temperature, my friends. So, if it's not8:21supply, who exactly stopped showing up?8:25Well, this is where Tokyo walks back8:28into the story. On September 1st, the8:31Japanese 10-year government bond yielded8:333.0% for the first time since 1996.8:37Think about what that does to a Japanese8:40pension fund. For 30 years, the only way8:42to earn a real yield was to ship capital8:46to New York and pay up for currency8:48hedging. And once you pay that hedging8:50cost, the American yield advantage8:52mostly disappears. Now they can just8:56stay at home, take 3% in their own8:58currency with no hedge and no crossber9:01risk and the data shows that they are.9:04In June alone, total foreign holdings of9:06treasuries fell $72.1 billion to $9.299:11trillion. Japan dropped 26.4 billion to9:151.116 trillion. China dropped 25.99:19billion to 66 633.49:23billion. That's down 13% from a year9:26ago. The domestic backs stop is much9:29better. American banks were still9:31carrying $326.79:33billion of unrealized losses on their9:36securities books in the second quarter.9:39216.99:40billion of that sitting in held to9:43maturity portfolios at roughly 10.5%9:47of advertised cost. A bank that is still9:50underwater on the last round of duration9:52is not volunteering for the next one.9:55Believe me. So who is left? Well, here's9:59your second piece of shadow data. The10:01stuff I love, and it is the one that10:03should get your attention right now. At10:05the end of 2025, hedge funds held10:08roughly $2 trillion of cash treasuries.10:12That is nearly three times what they10:13have held 5 years earlier, and it is10:16about 7% of all marketable treasury10:19debt. That is a record share. The10:22marginal buyer of American government10:24debt is no longer a foreign central bank10:26sitting on a trade surplus. It is a10:29leveraged fund running a basis trade10:32estimated somewhere between $350 billion10:35and $1.5 trillion. Funded overnight in10:39the repo market because overnight is10:42cheaper than term. A pension fund buys a10:45bond and holds it for 30 years. That's10:48it. A leverage fund, well, they just10:50rent it. That is the real fragility that10:53you have to understand right now at this10:55moment. The office of financial research10:57said it pretty plainly. If repo rates11:00spike or margin requirements jump, those11:02funds, those hedge funds may be forced11:05to unwind fast. And you know what fast11:08means for a hedge fund? Real fast. And a11:10disorderly unwind of leverage basis11:12trades could amplify volatility across11:15the cash and futures markets. Guys, this11:19is not esoteric stuff. I know it sounds11:21complicated but you must understand it11:24is so important because it underpins11:26everything that is going right now uh11:29going on right now in the macro11:31situation which impacts stocks and your11:34daily expenses guys we're not predicting11:37that that's going to happen I just want11:39to make it clear but we're naming the11:41structure and you have to understand11:43that the structure is changing it's not11:45the same as it was for the last probably11:4850 years now let Let me put this in your11:51wallet, right? Because this is what we11:53really care about at the end of the day.11:54The 30-year mortgages is not at 7%. And11:58you will see that number thrown around12:00all week. That's just a number that12:02shows up on TV screens. The Freddy Mac12:05survey printed 6.71% on September 3rd12:08and the Daily Lender quotes were running12:10near 6.89%.12:12You know, that's the honest number, but12:14it's pretty close. I mean, it's12:15definitely going towards seven%. And12:18it's certainly not the 4 and 3% that we12:21probably all remember in recent memory12:23from just a few years back. But here's12:26why it matters more than the headline.12:28Mortgages are not priced off the Fed12:30funds rate. I hope you know this by now.12:33They're priced off the long end of the12:35yield curve. The Fed can cut and your12:37mortgage well it can go up and it did.12:40We all watched that movie in late 2024.12:43If the term premium is resetting higher12:45structurally, then a sixhandle mortgage12:48is not a waiting room on the way back to12:515%. By the way, that's a little Wall12:53Street inside language. When we say six12:56handle, that means it starts with a six,12:59like a 6.5% mortgage has a six handle.13:02You'll hear Wall Street folks throwing13:04that around a lot. Now, you know, it's13:07the new floor, this one here, that I'm13:09talking about. and the same plumbing13:11that sets your auto loan, your small13:14business credit line, and remember,13:16small businesses make up the bulk of the13:18base of the US economy and the13:20refinancing costs on every single13:22commercial property loan coming due this13:25year. That is a whole other problem and13:28a whole other set of videos which you13:30will be getting from us soon at some13:32point. The same duration, excuse me, the13:35same arithmetic that hits the equity13:37book applies here. A higher long rate is13:40a higher discount rate. And a higher13:43discount rate hurts the companies whose13:45earnings are furthest out in the future.13:48You know what those are? That is long13:50duration tech. That's all the exciting13:52stuff that we talk about at cocktail13:54parties and that you probably have in13:56your portfolio. And if you don't, you13:59want to own them. So it's the14:01unprofitable growth basket.14:03Unfortunately, it is every AI capex14:06story that pencils out in 2031.14:09Meanwhile, the Fed funds rate is sitting14:11at 3 and a half to 3.75%14:14held steady in July by a visibly divided14:17FOMC committee uh with a headline14:20inflation at 3.4% and core at 2.5%14:24there's not a lot of room in there for a14:27rescue at the moment. Now, let me argue14:30against myself, right? because you14:32deserve that. The strongest case against14:35everything I just said is that a term14:37premium near87%14:40is not an emergency. It is high versus14:43the last decade, but it is ordinary14:46versus well the 1990s when I got my14:49start on the in the bond markets. And if14:52growth is genuinely strong, 162,000 jobs14:56is also strong. Then a higher long rate14:58is simply the price of a healthy15:00economy. and corporate earnings can15:02outrun it. Now, that is a legitimate15:05argument. Here is what would prove it.15:08If the 10-year can absorb this coming15:10week's reopenings with solid indirect15:13demand and still drift back below 4.6%,15:17I'm wrong. And this was just a data15:19driven repricing of Fed odds. Watch for15:22that. So, what do you actually watch15:25this week going forward beyond that?15:27Well, forget about the headline yield.15:30Watch the indirect bidder share on15:32Wednesday's 10-year reopening and15:34Thursday's 30-year. Indirects are the15:37closest public proxy we have for foreign15:41and central bank demand. If the share15:43slips while Treasury is simultaneously15:45doubling its own buybacks, well, that15:48tells you the private market is setting15:50the price right now. Then of course you15:54got to watch CPI, the consumer price15:56index which we get later in the week and15:58the FOMC of course on September 15th and16:0216th. That's a lot to take in my16:04friends. I hope you got it. Stay tuned.16:06We're going to show you more on that in16:08the days to come. Now I'm going to give16:10you your truth bomb for today.16:12Washington is not losing the bond market16:14because it is selling too much paper. It16:16is losing the bond market because supply16:18is flat and the Fed has stopped16:20shrinking and the Treasury is doubling16:23the bid for its own long bonds and16:25yields went to a three-year high.16:28Anyway, my friends, join me every day16:30for Wall Street Truth Bombs, where I16:32drop them right here before the market16:34figures them out.
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