Nothing the Treasury is doing right now is new.
We’ve seen this exact playbook before. It was called Operation Twist, and understanding why it worked the first time tells you a lot about why this time is different.
Go back to 2011.
The financial crisis had hit hard, markets bottomed in March of 2009, and things were rebounding right into the summer of 2011.
Then it got serious again, with real systemic issues starting to surface. Scary crap.
The Fed came in with a bazooka of monetary tools, and one of them was Operation Twist.
The idea was to twist the yield curve. Push the long end down while leaving the short end alone. Bernanke specifically wanted the 10-year lower, and he wanted it lower for one reason.
Housing. That’s it. He wanted people buying houses, because cheaper long rates mean cheaper mortgages.
It absolutely worked. Helicopter Ben at the helm, and it did exactly what it was designed to do.
Now fast forward.
The Treasury is running the same play, and this is where I get leery.
Scotty B ain’t doing this so you can go buy a house and live the American dream. He’s doing it because he’s screwed. There’s $40 trillion of debt sitting there and they’re rolling it right now into the worst yield curve anybody has ever seen.
Look at the actual curve and you can see the problem in about four seconds.
The 30-year is sitting up around 5.2% while the short end is down at 3.8%. So the plan is to let the short end drift up a little and shove that long end down.
Because if the 30-year keeps selling off, it’s checkmate and game over.
There’s too much debt to roll in this environment. The US government doesn’t want to pay 5.3%, and it isn’t a question of wanting. They can’t sustain it. And they can’t just keep rolling everything to the short end either, because there isn’t enough of it.
So they’re going to shove that little monkey down, period.
Which puts us on a road somebody else has already driven.
Japan did this, and there were days, actual days, where the Japanese 10-year traded zero volume.
And when I say zero I mean zero, okay? It’s an open market and nobody traded it, because the Bank of Japan was on the other side of every single trade.
And that’s my real concern about the whole thing.
Everybody’s worried this thing fails. I’m worried it works, and one morning you wake up and nobody trades bonds anymore because there’s no point to it.
And look, this isn’t me telling you it’s all over. They’ll keep this bastard going for years. But you should understand what you’re watching, because monetary manipulation on this scale changes what every other asset in your account is worth.
Look, I have no idea how this resolves. Nobody does.
That’s why I build every position knowing my worst case before I click, instead of needing to be right about Scotty B or Warsh or Japan.
I’m showing exactly how I do that on Thursday at noon Eastern.
It’s free, live, and one person walks out with $2,000 for showing up.
To your success,
Don Kaufman
