Treasuries ~ market folly

Wednesday, November 5, 2008


Gregor Macdonald has a great post up detailing an issue I've been mulling over myself: the flooding of the market with supply of treasuries. He writes,

"My view is that because current events in equity and credit markets are so dramatic, the market has not yet paid attention to the coming boundary, of debt-ology. However, I expect participants to direct their thinking this way quickly, once the intensity of the crisis lessens. I see two areas, where markets will inevitably focus.

First, The FED could be getting close to more unconventional measures, like direct buying of long-dated Treasuries to bring long-rates down. Second, the quantity of new Treasury issuance, both in train and intended, is so gargantuan that it’s not clear how the world would be able to actually take up the supply. There may be structural limitations. Simply put, it’s not clear there’s enough available capital in the world to increase the US debt position further. After all, we have already been sucking up the world’s savings for most of this decade. It strikes me the only method to ensure this new supply is taken up would be that other central banks would eventually have to monetize the USA, in the same way the USA is monetizing its own banking system. So future Treasury issuance may depend either on our own central bank to monetize it, or for foreign central banks to do the same. When either happens, I’m of the opinion it’s Game Over."

You can check out the rest of his post on the subject here. I mainy posted this up as food for thought and for a way to possibly play this impending situation. Over on Twitter, many of us finance/market junkies have been discussing tickers PST and TBT. PST is the etf for Ultra Short the 7-10 year treasury, and TBT is the etf for Ultra Short the 20+ year treasury. A few months ago, these vehicles didn't even exist. And, as of 2 weeks ago, I am long TBT. The consensus was that longer term maturity paper was a better short. Monitoring technical analysis on this name doesn't necessarily make a whole lot of sense given what it is, but I have noticed that the etf itself has seen support around $56/57 and resistance around $65, as noted in the chart below. Either way, I think this is a great longer-term play based on what we've seen lately in the supply of treasuries.

(click to enlarge)

I've posted regarding Gregor's writings before and would definitely suggest everyone check his blog out for some great insight into energy and other topics.

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