So why are rates falling globally (Switzerland 0.25%) and why are Breaks on TIPS also falling with the 5s and 10s inverted?
But if this does blow up (and I agree the Bond markets are the place to look) this could explode the entire financial system. The Basis trade (the last desperate effort to sell abundant USTs, which foreign Central Banks are no longer buying and instead loading up on Gold, by providing a "risk free" trade to Hedge Funds) and Banks (who are also exposed in the Eurodollar market) are key signals.
I suspect, as much as Powell doesn't want to help Trump out, the Fed will blink first and start reducing rates very quickly, irrespective of "inflation risk". Recessions are, ultimately, deflationary?
I also suspect that at least in the first instance, the "BRICS UNIT" will be purely for trade settlement purposes at the end of a stipulated period, with actual trade conducted in local currencies. Trump has threatened to "Sanction/Tariff and whatever else he wants" any country who starts to use alternative "currencies" to the USD. The above system means that Sovereign States will conduct trade in their own respective currencies - for periodic settlement in escrow in "Units". This will have the same effect but even Trump can't take issue with States conducting trade in their own currencies?
I'm not super knowledgeable on fixed income markets, but heard discussion that
1) the spike in rates is linked to a series of botched basis trades
2) participants include one or more large hedge funds
3) this has happened in recent times (e.g. 2019 repo crisis)
There are no free, functional and fair capital markets, fraud and malfeasance permeate every corner of the financial system, which is why we need a return to trade in tangible goods. Keep up the good work David!
Basis trades are likely part of the fray (Ackman whining) however I suspect there is a tremendous offshore demand for dollars to settle debt that is also fueling Treasury selling by foreign reserve managers in numerous countries.
I also share your views about real assets, even Silver which seems to be "the last frontier" of resistance. Although the Swaps have probably used the opportunity to cover their shorts. With Basel III kicking in fully (Balance Sheet) for US Banks on July 1st, they will never have a better exit opportunity, especially now the Fed has bigger issues to worry about?
Excuse me for saying this but certain other "PM experts" (recently appearing on Sprott Money) seem to have lost the plot? And not only this recent interview. Just my opinion of course.
Yes but Gold is now out of their control, the global physical demand is too large. They appear to be focusing on the (much smaller) Silver "markets" to take a (hopefully!) final stand?
One way or another, this must get resolved before July 1st when Basel III finally kicks in for US Banks - especially given the present stress on their Balance Sheets for other reasons.
I'm thinking that the issue with Silver is that given the industrial demand, it isn't really in their interests to see prices rise. On the "investment" side, retail doesn't really matter and the investment funds/banks are all aligned with the Fed in the suppression game.
I'm speculating but many believe the Fed has the Banks back on PM suppression and beyond July it gets much trickier for the Swaps, so perhaps they wait as long as possible to cover whatever shorts they can and have the Fed pay the Bill for the losses before the new Tier 1rules start?
The Fed sets the overnight rate only (unless it reignites QE).
If the bond market is moving in one direction, the Fed can't move in the other.
The problem is that overseas holders of USD denominated debt face an acute dollar shortage if balanced trade is enacted. So these debt holders are motivated to get out of this USD debt now, in advance. That means securing USD locally to pay debt forcing foreign reserve managers to sell Treasuries.
On the hedge fund side, the Fed's central role has been to blow asset bubbles and provide gambling insurance to banks and hedge funds when the bubbles pop.
There's a lot going on. Rates are climbing because the Hedge Funds are selling USTs in waves after the collapse of the "no risk" basis trade set up for them by the Treasury/Fed to incentivize them to buy the USTs that foreign Central Banks no longer want. Oops. And yes, because the Fed doesn't set long rates, that's why rates are rising.
BUT I still point to the fact that interest spreads (10s and 30s) are COLLAPSING, which as I noted earlier was happening before the negative CPI. I still maintain the direction of rates is down (and the spreads suggest staying down).
Bill Gross once predicted a bond market “supernova” would ignite a global firestorm explosion and collapse.
That may very well happen but we need to be expecting the unexpected here.
The Black Swan financial risks are extremely high.
I LIKE the naked US dollar analogy , the BRICS GOLD BACKING has to eventually destroy the myth of the petro dollar
I absolutely love reading your substacks. I learn so much from each one, thanks as always!
Thank you Nathan - it is my pleasure.
So how does this affect crypto? Is crypto a debt or an asset? A bubble or a refuge?
Crypto is a narrative, a story.
That's it.
Liquidity sponge
Crypto is always a Risk-on asset- take your own guess not enough of a track record to back analysis.
Check the date in paragraph 2.
Sep 2024 is when the Fed started to lower rates. It is correct.
May 2nd tariff announcement?
Typo…April 2nd.
Got it - thank you.
So why are rates falling globally (Switzerland 0.25%) and why are Breaks on TIPS also falling with the 5s and 10s inverted?
But if this does blow up (and I agree the Bond markets are the place to look) this could explode the entire financial system. The Basis trade (the last desperate effort to sell abundant USTs, which foreign Central Banks are no longer buying and instead loading up on Gold, by providing a "risk free" trade to Hedge Funds) and Banks (who are also exposed in the Eurodollar market) are key signals.
I suspect, as much as Powell doesn't want to help Trump out, the Fed will blink first and start reducing rates very quickly, irrespective of "inflation risk". Recessions are, ultimately, deflationary?
I also suspect that at least in the first instance, the "BRICS UNIT" will be purely for trade settlement purposes at the end of a stipulated period, with actual trade conducted in local currencies. Trump has threatened to "Sanction/Tariff and whatever else he wants" any country who starts to use alternative "currencies" to the USD. The above system means that Sovereign States will conduct trade in their own respective currencies - for periodic settlement in escrow in "Units". This will have the same effect but even Trump can't take issue with States conducting trade in their own currencies?
There are a LOT of moving pieces. I think if the FED moves early, it will send real assets to the moon.
Am expecting a market 'lock up' of sorts if rates continue to climb.
I'm not super knowledgeable on fixed income markets, but heard discussion that
1) the spike in rates is linked to a series of botched basis trades
2) participants include one or more large hedge funds
3) this has happened in recent times (e.g. 2019 repo crisis)
There are no free, functional and fair capital markets, fraud and malfeasance permeate every corner of the financial system, which is why we need a return to trade in tangible goods. Keep up the good work David!
Basis trades are likely part of the fray (Ackman whining) however I suspect there is a tremendous offshore demand for dollars to settle debt that is also fueling Treasury selling by foreign reserve managers in numerous countries.
Yes agreed David, it's ugly out there now and the only real "circuit breaker" is for the Fed to make aggressive cuts soon.
I'm sure some of this is planned. But I suspect NOT all of it. More popcorn.....
I also share your views about real assets, even Silver which seems to be "the last frontier" of resistance. Although the Swaps have probably used the opportunity to cover their shorts. With Basel III kicking in fully (Balance Sheet) for US Banks on July 1st, they will never have a better exit opportunity, especially now the Fed has bigger issues to worry about?
Excuse me for saying this but certain other "PM experts" (recently appearing on Sprott Money) seem to have lost the plot? And not only this recent interview. Just my opinion of course.
Indications are that there are hundreds of millions of oz. of gold and billions of oz. of silver sold short in the London physical market.
Too large to cover.
Yes but Gold is now out of their control, the global physical demand is too large. They appear to be focusing on the (much smaller) Silver "markets" to take a (hopefully!) final stand?
One way or another, this must get resolved before July 1st when Basel III finally kicks in for US Banks - especially given the present stress on their Balance Sheets for other reasons.
I'm thinking that the issue with Silver is that given the industrial demand, it isn't really in their interests to see prices rise. On the "investment" side, retail doesn't really matter and the investment funds/banks are all aligned with the Fed in the suppression game.
I'm speculating but many believe the Fed has the Banks back on PM suppression and beyond July it gets much trickier for the Swaps, so perhaps they wait as long as possible to cover whatever shorts they can and have the Fed pay the Bill for the losses before the new Tier 1rules start?
The Fed sets the overnight rate only (unless it reignites QE).
If the bond market is moving in one direction, the Fed can't move in the other.
The problem is that overseas holders of USD denominated debt face an acute dollar shortage if balanced trade is enacted. So these debt holders are motivated to get out of this USD debt now, in advance. That means securing USD locally to pay debt forcing foreign reserve managers to sell Treasuries.
On the hedge fund side, the Fed's central role has been to blow asset bubbles and provide gambling insurance to banks and hedge funds when the bubbles pop.
That is impolitic now.
There's a lot going on. Rates are climbing because the Hedge Funds are selling USTs in waves after the collapse of the "no risk" basis trade set up for them by the Treasury/Fed to incentivize them to buy the USTs that foreign Central Banks no longer want. Oops. And yes, because the Fed doesn't set long rates, that's why rates are rising.
BUT I still point to the fact that interest spreads (10s and 30s) are COLLAPSING, which as I noted earlier was happening before the negative CPI. I still maintain the direction of rates is down (and the spreads suggest staying down).