Someone pointed out the day’s massive rally in the TBT which is the ProShares UltraShort 20+ Year Treasury ETF. The ETF moves up 2:1 when the daily percent change of the 20-year Treasury moves down, and vice versa.
My immediate reaction was admittedly muted, as ETF’s are riddled with technical anomalies, and I’ve learned to ignore most of the noise that one-day moves create. But I thought I would just double check what actually occurred today in the treasury market, which is when I noticed that the 5-year treasury auction effectively failed.
Today the government sold another $35 billion in 5-year t-notes, the second auction of such size. Effectively, the cost for the US Treasury to borrow 5-year paper jumped from 1.94 in April to 2.31 in May. This is no small move, and is strongly indicative of waning support for the greenback. This auction could very well now become the tipping point for more long-dated treasury auction stress. The 1, 3 and 6 month auctions as well as the 2-year on Tuesday seemed to clear without any significant changes. This would indicate that inflation is becoming a concern, or at least that fear of US credit risk is rising for maturities of five years or more. Tomorrow’s 7-year note auction that closes at 1pm will offer confirmation of today’s effective “failure” in the 5-year. If the 7-year prices significantly wider, and this trend continues, this will have a ripple of consequences that will bleed into all credit and spread product markets.
The inability of the US to cheaply and effectively finance the largest taxpayer bailout in modern history would stop the green-shoots dead in their tracks. As the US’s cost of financing increases, so will the costs for all other borrowers. Imagine the consequences as this trickles back into housing, municipal and corporate credit markets as all rates begin to rise, constricting the delicate “growth” we’ve been hearing about.
One thing is for sure, today’s auction was a sign that demand for the US dollar may not be endless, and that furthermore, the Obama Administration may have underestimated the speed and efficacy of the detriment an all-you-can-eat fiscal policy can cause. Buyers of this debt were 44% sovereign, according to Marketwatch, up from a recent average of 36%. Furthermore, this price drop is including any net purchases by the Federal Reserve in its attempt to keep rates low, which is essentially an artificial price inflator. If nothing else changes, future auctions will have to be smaller, which will stifle the speed with which the administration can inject added liquidity and shore up price stability through this deflationary period. It would be predicament for policy makers to potentially have rising interest rates and further price deflation at this point in time. If that happens, all those folks who bought guns may see appreciation on their investments.
The 5-year treasury auction ended at 1pm today. The chart below is the intra-day chart for the TBT. Notice the price action on this ultrashort treasury ETF from 1pm on. Speaks for itself.
Not all gloom and doom though. The equity markets have found ways to continue to accentuate the positive as Dr. John would say. While I view this anecdotal tidbit as wholly negative, maybe the green-shooter-uppers will find a way to a new high in equities anyway.
Bloomberg, Google, Marketwatch