Notes From Underground: Though I Walk Through the Valley of Debt, I Fear No Evil

On Friday, U.S. 30-YEAR BONDS were the best performer as the 5/30 yield curve flattened in the face of several divergent asset movements. The GOLD rallied even as the stock markets rose around the world, so no need for haven status. The DOLLAR had actually been strong in the morning but as global stock markets rallied the DOLLAR was actually lower by late afternoon. So why was the 30-YEAR BOND the premier asset? I have no idea. Over the weekend there was a Yahoo Finance story in which Jeffrey Gundlach is quoted as speculating that long-end U.S. Treasuries will see 4 percent yields later this year.

The media is full of warnings about rising government and corporate debt levels at a time when we are in the “late innings” of the current economic expansion. I’m returning to Gillian Tett’s Financial Times piece on Feb. 8 (“America Faces Battle to Find Buyers For Its Bonds”), where Tett wrote about the recent letter Beth Hammack and the Treasury Borrowing Advisory Committee (TBAC) sent to Treasury Secretary Steve Mnuchin.

“According to TBAC calculations, America will need to sell an eye-popping $12 TRILLION of bonds in the coming decade, sharply more than it did in the past 10 years,” Tett wrote. “This will ‘pose a unique challenge for the Treasury,’ Ms. Hammack warned, even ‘without factoring the possibility of a recession.’ In plain English, the Wall Street luminaries on the committee were asking who on earth — or in global finance — will buy this looming mountain of Treasuries?”

The suggestion by TBAC is that lack of foreign buying is presently being filled by American households as the holdings of domestic savers has grown to $2.3 trillion from $1.9 trillion over the last year, replacing the drop held by non-American entities from 45% a decade ago to 36% last year, Tett said.

This raises a question in my mind: What constitutes American households? Is this just another move by the Wall Street fiduciaries of pension funds to set the pension holders up for another lackluster performance, if not worse? It is no secret that U.S. pension funds are severely underfunded even as we have experienced one of the longest BULL MARKETS in financial history. I understand duration matches for pensions and insurance plans. But what I fail to comprehend is how the BOGEY is 7 percent and the plan administrators are purchasing massive amount of long-term debt yielding less than 3 percent. So if Gundlach and others are correct in their analysis about the current danger of rising government debt during the times of ROBUST growth, plus increased discussion about modern monetary theory, then THOSE PURCHASING LONG-TERM U.S. DEBT CERTAINLY FEAR NO EVIL.

On Friday, the FT published a story titled, “Taiwan Insurers Skirt Restrictions to Load Up On Dollar Bonds.” The article, by Edward White and Robin Wigglesworth, noted that in a desperate need for higher returns, “the trade is buying locally listed exchange traded funds that purchase overseas, dollar-denominated corporate and sovereign bonds. The funds are denominated in the Taiwan dollar, providing a way around recently imposed regulatory restrictions on foreign assets.” But as Wigglesworth and White said, “the boom raises questions about the currency risks that insurers are taking on, and the outsized role Taiwan’s insurance companies play in the global market.”

The bottom line is that the search for yield, the global insurance industry is creating systemic risks of enormous proportions, especially as the U.S. embarks on a political discussion of the insignificance of DEBT because it has cheap rates and a printing press. To Larry Summers, Jason Furman, Bernie Sanders,and a group of new legislators proclaiming that DEBT doesn’t matter, the Taiwanese have lost their fiduciary compass. Yet I fear no evil.

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9 Responses to “Notes From Underground: Though I Walk Through the Valley of Debt, I Fear No Evil”

  1. Mike Temple Says:

    Yra
    In such a world that is forming, I think that gold will soon see its golden decade.

    You did not even mention the coming Socialism if the AOC wing of the Dems win the WH in 2020. Just as Amazon/Bezos simply decided to EXIT NY, how much wealth/capital will head for friendlier tax jurisdictions overseas. Pretty easy to move to Bahamas and spend 6 months and one day to escape the clutches of the IRS.
    Heck, even Canada may look like a good place to “hide”.

    USD future definitely not good.

  2. Richard H Papp Says:

    In the Fall of 2018 I mentioned that there was an important downtrend line in the long bond from the top of July 2016. Since the bottom of the 2 year bear in bonds(10/18), there was a 9/10 point rally that has penetrated that downtrend line ( on the upside). In addition, the 50 day of the CBOT long bond and TLT is presently above the 200 day. So, we now have a cyclic rally in a secular bear or……??????
    Jeff G. has a crystal ball which is much clearer than mine and until this 3 point range is broken, I do not have a clue. Yes, fundamental point to higher yields but……
    We all thank Yra again for his great blog!

  3. Richard Papp Says:

    Oh, a 3 point trading range has formed over the last 4 to 6 weeks and as of Friday’s close we are right in the middle of it

  4. The bigman Says:

    I’ve seen this movie before(apologies to Stanley Kubrick): Dr Ocasio-Cortez or How I learned to stop worrying and love the Debt stariring Bernie Sanders as Gen Jack D Ripper and Liz Warren as Major “Queen Kong” Today is the 10th anniversary of the infamous Santelli rant IMO should be a national holiday

  5. ShockedToFindGambling Says:

    IMO, the danger to Treasuries is a weak USA economy……if we hit a significant soft spot, there is no way that Treasuries will be paid back with dollars that are worth much.

    Look at how the FED is easing back already, and the economy is still OK……imagine the QE,NIRP, ZIRP when we get a recession.

    Hoping for a reboot of Cash for Clunkers……would love to trade my Chevy for a Lambo.

  6. yraharris Says:

    Richard Papp—a very good post as the content is great and certainly right on target.Only morons fight the obvious trends and save their capital to fight another day.The thirty year bond has acted as you lay out while the 5/30 curve itself has actually steepened even as the 2/10 has languished near its flattening lows.The fundamentals do point to higher yields even as the economy slows,maybe even more so.Patience be my guide but when bonds rally along with GOLD it is certainly something to pay attention to

  7. Debt Does Matter | Points and Figures Says:

    […] of debt changes a lot of decisions that could be made.  My friend Yra Harris illustrated some in this blog post.  One very interesting thing to watch is going to be the insurance industry.  They were forced to […]

  8. Chicken Says:

    In the case the FED resumes QE, what’d be the anticipated impact on gold?

    • yraharris Says:

      Chicken—I believe that will get all time nominal new highs as it would be a signal of panic on the part of central bankers

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