#88 Treasuries are Tanking. Why?

It’s no secret that treasuries have been tanking.

The conjecture postured here is that with treasuries in a secular downtrend, the equities market traditionally follows. In fact, the previous 40 year secular bull market in treasuries is responsible for the previous 40 year secular bull market in equities.

It’s quite simple, let me explain.

Treasuries are simply loans issued by the government. They are given different names based on the duration of the loans in order to make it more confusing for the lay person.

“T-Bills” or Treasury Bills are short duration loans, typically <1 year.

“T-Notes” or Treasury Notes are medium duration loans, typically 2-10 years.

“T-Bonds” or Treasury Bonds are long duration loans, typically >10 years.

These loans (I will call them treasuries from now on) have a market where they are traded by large financial firms. Treasuries are able to find a price in the market, this price is known as the coupon value. The reason that treasuries are able to find a price is because there is an opportunity cost in holding them.

If interest rates are generally going down over time, more people want to buy older treasuries because the interest rates were higher. This causes existing treasuries to go up in price.

Likewise, if interest rates are generally going up over time, more people want to sell older treasuries and buy the newly issued ones. This causes existing treasuries to go down in price.

The United States has been in a secular bond bull market for the last 40 years that has essentially come to a screeching halt in the face of runaway price inflation.

As rates have generally trended downward over the last 40 years, treasuries have been an extremely profitable market and a rising tide lifts all boats. Now that there is no where for rates to really go, the ripple effects of a crippled bond market will make themselves obvious.

Western financial institutions are forced to hold significant portions of their reserves in US treasuries to capture “risk free yield” or at the very least, make the melting inflation ice cube that is USD melt more slowly.

Price inflation will continue while real economic growth stagnates as the looming potential of large financial firms getting forced to mark their sunken treasury portfolios to market swarms overhead.

A fierce Canadian goose aggressively defending his tower.