Waves

Yields are rising: *TREASURY 10-YEAR YIELD RISES TO 4.365%, HIGHEST SINCE 2007* so ran the Bloomberg headline. And it’s not just the 10-year. There’s heat in the pipes. As the gaze falls on the colour of Powell’s tie, his gait and general demeanour in the face of a no-pat move on rates today, some analysts are getting a little itchy over where yields might be heading in the face of the waves and waves of supply. Said analysts speak of the US Treasury needing $3.1 trillion over the next two years. It will also need to replace a further $ 3 trillion of maturing Treasuries. And this at a time when the Fed, China, and possibly even Japan, are out selling in size. There’s a risk of labouring the point, but the numbers are spell binding. The same analysts also point out a slightly numbing development with what’s been happening in the murky depths of the financial system known as the reverse repo account, essentially an account where institutions can park money with the Fed and get paid some interest. This amounted to, at it’s peak, about $2.6 trillion. So quite a lot. This $2.6 trillion was effectively just sitting there, out of the system. All good, until that is, up to the point when the interest paid on such reserves slipped below that what institutions could get elsewhere. And so it’s leaving. Up and off, most likely ending up meeting the supply of Treasuries, the latter still regarded as something of a risk free asset: ‘Over the past month the incremental issuance of Treasuries has matched the withdrawals from the reverse repo‘. Hmm. The Treasuries are being issued to fund all the deficit spending and so that cash once sitting idle gathering dust, now ends up sloshing into the economy. This is clearly inflationary. But it’s also a one off, just like the open spigots on the SPR. The reverse repo account will soon be depleted. What happens to yields then? Where are the buyers? ‘The system is surreally bad’ the analysts conclude. As ever, the bond market is the one to watch.