The Treasury fired its biggest bullet this morning.
At 5:30 in the morning they announced a dramatic expansion of buybacks at the long end of the curve. A huge amount of liquidity aimed straight at the 30-year.
Call it what you want, quantitative easing or easing light or modern monetary theory. I’m calling it yield curve control, and I expected it early next year, not in the middle of August.
The bond market did an entire session’s volume in about an hour, with notes trading 1.1 million contracts. The dollar tanked and gold went bid.
Here’s my problem with it.
They shot the mother bullet way too early. Fire that one off and you don’t have another one sitting there.
The Fed has tools. All the Treasury has left is rhetoric.
So if the bond market starts to slip again next week, what exactly do they do about it? The vigilantes will have a hold of it and there’s nothing left in the drawer.
The Treasury just moved to loosen conditions at the long end. Meanwhile the Fed under Warsh wants to shrink the balance sheet and tighten conditions.
One hand loosening, the other hand tightening.
Some screwed-up crap.
The character of the move bothers me too. Why in freaking August, between Fed meetings, with nothing publicly forcing their hand?
The 10-year hit 4.75 last night. They cannot let it touch 5% or credit default swaps start moving. This looks less like policy and a lot more like somebody trying to save the world before it breaks.
My honest read is that this has something to do with semiconductors.
I don’t think the CapEx spending in that sector is sustainable anymore, and that’s the first time I’ve said that out loud. These tech companies are in so deep there’s no coming back.
Everybody is doing a mad dash for cash right now, and Nvidia lined up $500 billion in credit for a reason.
So here’s what to watch, and you can do this tomorrow morning without any special tools.
Watch whether bonds hold this move. If they give it back, the Treasury just burned its ammunition for nothing and everybody finds out at once.
Which is exactly why I don’t build trades around predicting any of this.
Tomorrow at 2 Eastern I’m showing you how I decide which way to lean without predicting a single thing. All 80 of my trades from the last 16 months go up on the screen, the red ones included, and somebody in the room walks out with $1,000.
To your success,
Don Kaufman
