Transcript of THE BOND MARKET REVOLT: Why Yields Hit 52-Week Highs Before the Fed Vote!
Wall Street Truthbombs
0:00Everybody's waiting for the Federal0:01Reserve to vote today at 2 o'clock. The0:04bond market already voted yesterday0:06afternoon at 1:00 and almost nobody0:09watched. By the end of this video,0:12you're going to understand what0:13yesterday's treasury auction actually0:15revealed why one number it is in it. It0:18was designed to look better than it was0:20and the price in the physical oil market0:22that explains the whole thing and has0:25not been on a single financial broadcast0:28either yesterday nor today. My friends,0:31if you've ever driven on the turnpike in0:34New Jersey and you've driven through the0:36refinery stretch, well, you've seen the0:38tank farms. I know you have rows and0:41rows of those big white cylinders. And0:43here is something most people never0:45notice. A lot of those tanks have a0:48floating roof. The lid actually sits0:50directly on top of the liquid and rides0:53up and down with it. Which means you can0:55read how full they are from the highway0:58at 60 m an hour if you're sharp and you1:00know what to look for. You don't need1:02one of these impressive expensive1:04terminals behind me. You just need eyes.1:07That is the difference between the1:08screen and the physical world. And1:11today, that gap is the entire story. So,1:14let's start with what happened yesterday1:16at 1:00. The United States Treasury sold1:2020-year bonds yesterday afternoon, and I1:23want to walk you through the results1:24slowly because this is the kind of thing1:26that moves your mortgage, and nobody1:28ever explains it. The bonds priced at a1:31high yield of 5.42%.1:35The market had been trading them at 5.0%1:384, excuse me, 5.40%1:42right before the deadline. When an1:44auction price is at a higher yield than1:46the market expected, that is called a1:49tail and it means the government had to1:52pay up to get the deal done. Yesterday's1:55tail was two basis points. The bid to1:58cover that is the total demand divided2:00by the amount sold. It came in at five,2:03excuse me, at 2.57 times. The average2:07over the last six of these auctions was2:092.65 times. So, demand was below2:13average, too. Now, here's the number I2:16want you to remember. Direct biders took2:1830.7%.2:20The six auction average for direct is2:23more like 21.4%.2:26Guys, I know this stuff is complicated2:28and we're going to dig into this a2:30little bit further. But before we do,2:32please click like and don't forget to2:33subscribe. It's really important to know2:35how this stuff works. This is exactly2:38how you do it. Okay, let me tell you why2:41that 30.7% actually matters. Because on2:44the surface, it looks like good news. An2:47auction has three buckets of buyers.2:49Indirects which is mostly foreign2:52central banks and overseas money bidding2:54through intermediaries. There are2:56directs those are domestic institutions2:59bidding for their own account. And then3:01last there are the primary dealers.3:03Those are the banks who are required to3:05show up and eat whatever is left. When3:09the direct bucket spikes nine points3:10above its average, that is a cover ratio3:13being held up by one category rather3:16than by broad demand. The headline3:19number looks passable. What's underneath3:21it is thinner than it looks. Okay, I owe3:26you a piece of honesty here that most3:28people would probably skip over, but I3:30am honest with you here. So, while while3:32I'm actually recording this and did the3:34research, the indirect breakdown for3:36yesterday's auction, it wasn't published3:38yet. So, I'm not going to tell you what3:40foreign buyers did yesterday because I3:42don't know the exact number yet. But3:44what I can tell you is the direct3:46number. And the direct number is really3:48the tell. The market agreed with the3:50read actually immediately. Yields went3:53up after the auction, not down. The3:5610-year Treasury traded to 5.047%3:59yesterday afternoon. That is a new 52-4:02week high. The previous day's peak was4:04around 5.014%4:07intraday. So yesterday broke the4:09breakout and that the 30-year was4:12actually around 5.367%4:15and the 2-year was more like around I'd4:18say 4.671%.4:20Um now let me give you the counterweight4:22because the lazy version of this story4:25is that the world had stopped buying4:26American debt and that is actually not4:29true and the data will actually4:30embarrass you as I said yesterday if you4:32say it like that and I reported this to4:34you yesterday. Uh last week's 10-year4:36auction had indirect participation of4:3879.2%. I want to remind you the 30-year4:42the next day 79.5%.4:44Those are pretty strong. That is not a4:46buyer strike. To be clear, it is one4:48maturity. The 20-year, it's the orphan4:52of the yield curve. I also told you that4:54yesterday in a video. Pensions, they4:56want 30 years because it matches their4:58liabilities. Traders want 10 years5:00because it's very liquid. And 20 years5:02sits in the middle with no actual5:04natural home. Back on August 19th, the5:0720-year got indirect participation of5:09only 62.9%.5:1279 versus 63. Same country, same credit,5:17same weekish,5:19different maturity. So why is the long5:22end struggling at all? Well, here is5:24where we get to the part that nobody put5:26on television today or even yesterday.5:28Go look at the physical oil market. the5:31physical oil, not the ones on the future5:33screens that you see behind me, the5:35actual barrels. Brent crude, the number5:38you see on TV all the time, was around5:40108 bucks.725:42uh yesterday after about uh it was up,5:45excuse me, about 2.9%. Fine, dramatic5:48enough. Now, here is Murban. Mban is a5:53crude grade out of Abu Dhabi. In a5:55normal month, it trades within a couple5:57of bucks of Brent. That's its whole5:59personality. Pretty boring. Close to6:02Brent. Murban today is $127.6:06$127.76.6:08That is $19 over Brent. A 17.5% premium.6:12I calculated it so you don't have to. On6:15a grade that normally has no premium at6:17all, if any. In August, Mban averaged6:20about 19, excuse me, $90 and Oman crude6:24is at roughly 121 bucks. 661. So why why6:28why are those two specific grades6:31suddenly worth much more than the6:34benchmark? Well, because of where they6:37load. Mvin loads loads at Fujara. Oman6:42loads at Mina Alahal. Both of those6:45ports sit on the outside of the straight6:47of Hormuz. That's the big deal now,6:50right? The scarce thing in the world6:52right now is not the actual oil. There's6:54plenty of oil. The scarce thing is oil6:57that doesn't have to go through hormuz.7:00And the market has put a $19 price tag7:02on that very distinction. That is your7:06shadow data. You know, I love the shadow7:08data. And you're not going to see that7:09anywhere else. A refinery buying a cargo7:12today is paying $19 charge for7:15geography, not for crude quality, for an7:18address. And before somebody accuses me7:20of hyping this, let me shrink my own7:22number for you for a second here. You7:24probably read that the Saudi pipeline7:26outage takes 4% of global oil supply off7:29the market. I reported that yesterday.7:31That is not what's happening today. That7:34is what is at risk if the line stays7:36shut. The pipe can carry 7 million7:38barrels a day, but ship tracking for K7:41from KPLER shows it was only moving7:43about 2 million in August. That's the7:46lowest monthly level of the year. Why?7:48Because Red Sea pressure had already7:50choked the loadings. So, the live7:53disruption is closer to 2% than four,7:57which makes the price reaction a little7:59bit more interesting, not less. Because8:01a 2% disruption shouldn't produce a $198:04premium on a grade that normally has8:07none. It does this time because there is8:10nothing behind it. Effective OPEC plus8:13spare capacity, the cushion every model8:15assumes is there, that's 220,0008:19barrels. When there's no slack in a8:21system, a small disruption price like a8:23prices like a huge one. That's not8:26panic. It's just arithmetic. And this is8:29why it lands on the bond market. A bond8:32investor buying 20-year paper is making8:34one bet. That inflation over 20 years8:37will be low enough to leave him8:39something at the end of the day. When8:41physical energy were prices like that,8:43well, he demands more yield because he8:45needs it. Not because he's angry at8:47Washington, because his arithmetic8:50changed. And you can already see it8:52arriving. The national average price on8:54highway diesel for this week uh ending8:57for the week, excuse me, ending the 14th8:59was at $6.29 a gallon. The week before9:03it was more like $5.979:05a gallon. 32 difference in one week.9:09Diesel is what moves every box of food9:12in the United States. In case you9:13haven't noticed, my friends, more9:15honesty here, and this one cuts against9:17me as well. Nobody in Saudi Arabia has9:19confirmed a repair timeline for the East9:21West pipeline. The 5 to 6 week figure9:24you keep reading comes from unnamed9:26sources. And you know, over at Wall9:28Street Truth Bombs, we don't like9:30unnamed sources. But well, the9:32Associated Press, uh, a reputable9:35outlet, separately reported 3 to five9:38weeks from different unnamed officials.9:41If it's good enough for them, well, it9:43should be good enough for us, at least9:44for the sake of this video. And US9:47energy secretary said recently that he9:49expects it uh to be running uh real9:52soon. So, anyone giving you a hard date9:55is pretty much guessing or trying to9:57well calm you down a little bit. If that10:00line restarts next week, the $19 premium10:02pretty much collapses right away. And so10:04does a big chunk of this thesis that I'm10:07giving you. But until it does, look at10:09what it is actually costing you. The10:11average 30-year mortgage on lender rate10:13sheets hit 7.17%10:16recently. That's a new long-term high.10:18And the spread between that mortgage and10:19the 10-year Treasury has been actually10:22compressing as I reported to you10:24yesterday down around 1.92 percentage10:26points against the long run average10:28nearer 1.7 or 1.8. I explained that10:32spread recently and I'm going to say it10:34one more time because it is the most10:35underappreciated number in American10:37household finance. a widespread it be10:40acts like a shock absorbers10:42a shock absorber. Lenders can squeeze it10:45and and eat part of the treasury10:47sell-off. A narrow spread passes the10:49next one straight through to you. The10:52shock absorber is nearly flat at this10:53point and the 10ear just made a new10:55high. Let me put that in a kitchen10:58because that's where we hang out most of11:00the time. Well, actually seems like11:02that's where I hang out a little bit too11:03much of the time. But if you're shopping11:05for a house this week, that auction at11:081:00 yesterday afternoon is not11:10abstract. That auction set a price for11:1220-year government money. And your11:14mortgage is priced off the same yield11:17curve. A two basis point tail sounds11:19like nothing, but it's a data point in a11:21sequence. And the sequence has been11:23pointing one direction since February11:25when the 30-year fix bottom near 6%.11:29That's the part I would want a home11:31buyer to understand very, very clearly.11:34Listen guys, nobody voted to raise your11:36mortgage rate. No committee met. A desk11:40in New York decided it wanted to pay two11:42more basis points of yield to take down11:4520-year paper. And that decision travels11:48down the curve and arrives in a rate11:50lock in Ohio by probably Friday. So11:54here's where I land today. The futures11:57market is pricing better than 90% chance12:00of a quarter point rate hike this12:01afternoon. Fine. But understand what12:04you're actually watching. The Federal12:05Reserve controls an overnight rate. It12:08does not control the 20-year auction.12:10And it certainly does not control what a12:13refinery pays for a cargo that doesn't12:15have to sail past Iran. The thing to12:18watch today is not the decision. It's12:20whether the long end keeps rising after12:23the decision. Because if the Fed12:24tightens and the 20 and 30-year go up12:27anyway, that's the market telling you it12:30doesn't think the tool fits the problem.12:33So, your truth bomb for today is this.12:35The auction that tailed at 1:0012:37yesterday told you more than the Fed12:39will tell you at 2:00 today because the12:42world is now paying a $19 premium for a12:45barrel with the right address. And no12:47interest rate on earth, no interest rate12:50on earth can move a port. Join me every12:54day for Wall Street truth bombs where I12:55drop them right here before the market12:57figures.
2,126 words · 314 lines
