The Market’s $40T Question: Can Treasury Keep Yields Under Control?

On Wednesday, August 19th, the United States Treasury announced it will double its buybacks of long-term government bonds to cap the long end of the yield curve. Gold jumped 3% to 4,500 an ounce. Bitcoin rose more than 5% and the 30-year Treasury yield fell back from its highest level in nearly two decades. I'm Matt Milligan, producer, filling in for David Lin today. The buyback relief lasted one day. On Thursday of this week, the bond market took it all back and the Dow fell more than 700 points. And just this morning, the 30-year yield now sits just under 5.3% as if the announcement never happened. Gold is holding near 4,600, a three-month high, and Bitcoin trades at around 77,000, up more than 22% on the week. Consider what is actually happening. The world's largest borrower stepped into the market to support at the price of its own debt. It's second intervention in 3 weeks after the Treasury moved to prop up the Japanese yen on July 31st, the first American intervention in the yen since 1998. The US national debt is now crossing 40 trillion dollars. Interest payments alone on that debt run north of a trillion dollars a year, more than the defense budget by itself. And a week ago, the government sold 25 billion dollars of 30-year bonds at the highest rate in 25 years. Over the past week, we asked our guests, who are economists, fund managers, and traders, the same question. Why does the government keep stepping into its own markets? And what happens if the intervention stop working? They disagree on plenty, but on one point they do agree. The Federal Reserve is no longer setting the price of money in America. The bond market is. We begin with Danielle DiMartino Booth, CEO of QI Research, who predicted this exact move one day before the announcement. >> Well, I I think the closest historical corollary would be Operation Twist. Um of course, the Fed has been involved in the past with Operation Twist um episodes, but in the current in the current case, uh, it it is the Treasury taking the reins. And I mean, this is a very controversial thing to do, uh, to be intervening in our Treasury market. Um, on the other hand, I'd rather have the Treasury taking a direct role as opposed to leaving the onus on the Federal Reserve one day to step in with quantitative easing. I would I would rather have it be in the hands of of the Treasury. This will probably anger a lot of risky, uh, risky asset investors who, you know, day in day out they're they're they're doing the basis trade and hedge funds have record positions in the US Treasury market right now. This is probably a huge surprise to them that Bessen came in to do this, but there's been rumblings about, uh, about taking long maturity, taking duration out of the Treasury market and shifting that into, uh, in into Treasury bills for some time now. We've known that that Bessen has the power and the authority to move forward with this. In fact, it was his predecessor, Janet Yellen, who started out with a smaller program, but that [clears throat] has now been doubled up to 4 billion a month. >> Booth calls it Operation Twist, run out of the Treasury instead of the Fed. Adrian Day, president of Adrian Day Asset Management, says the intervention is aimed at a deeper problem. The investors who are supposed to buy America's long-term debt have stopped showing up. Here's Adrian with the call. >> Yeah, yeah. Well, look, David, first of all, as I've said to you before, I'm not a I don't pretend to be a credit or bond um uh special. But, I mean, clearly, if the bond market is weak, and and evidence of that would be, uh, yields moving up, that just makes it so much more difficult for them to sell those bonds. Even though the interest be a yield is higher, um, we know, just from empirical evidence, that higher yields don't always attract more buyers because higher yields are other things being equal a reflection of weakness in the underlying market, the underlying currency, the underlying economy. Um, you know, that's why Brazilian bonds are not the top performers this past year despite high yields. Um, so I mean I think I think the fundamental concern is selling bonds. And if the yield moves too high, that means the bonds are going down. That is a reflection of weakness in that market. Uh, and we've already seen for the last few years, we've seen increasingly uh, you know, difficulty. Uh, we haven't had any failed auctions, but we've we've had fewer and fewer people willing to buy the 20 and 30 year as an investment. Uh, yeah, people say, oh, you know, the foreign participation has gone up, but yeah, but I mean a lot of that is the Cayman Islands, which are hedge funds buying the trades. It's not the buyers we want in Treasuries long-term people who are going to buy it and hold it for 30 years, which is primarily pension funds and um, insurance companies, primarily in the US and then foreign governments and foreign institutions. Those are the people who are going to buy and hold for 20 30 years, and they're just not interested. >> Two days before the buyback announcement, Professor Steve Hanke of Johns Hopkins University explained why the yen rescue and the Treasury market are the same story. Investors have borrowed cheap yen for years to buy Treasuries, so collapsing yen would force them to dump those Treasuries, which means defending Japan's currency, which is also a defense of America's bond market. Here's where he thinks the long-term yields go next. >> So that's that's that's part of the shall we say the scenario that they put up. >> Okay. So given that you think the US is likely or willing to intervene again, do you see an end to the rise of the long end of the yield curve in the US for now, the 10-year and the 30-year? Do you think that we're this is this is 4.72? >> Yeah, there's so many other factors involved that are probably more important than >> Okay. >> And I I I do think that for example, the 30-year uh I I think that could easily go up you know, with just what's baked in the cake right now. The war in Iran, the Gulf being shut, the Red Sea being shut off by the Houthis, all these disruption caused by the war, number one. Number two, the inflation genie is still out of the bottle in the United States. So, that's the that's the second thing. And and just the general fiscal problem that the US has with its increased deficit that has to be fun- funded by the issuance of more and more Treasury paper. Whether they're Treasury bonds or Treasury bills. So, all those three factors combined >> Mhm. >> point to the fact that I th- I think that the the 30-year could at least go up 50 basis points from where it is now. >> Before we continue with the video, let's talk about a problem that comes with owning gold. Now, gold has long been treated as a store of value, but the catch is that sitting in a vault, it doesn't pay you anything. So, that's where today's sponsor, Monetary Metals, comes in. They offer investors a way to earn a yield on gold paid in physical gold. Through their leasing platform, investors can earn up to around 4% annually with yield paid monthly in ounces rather than dollars. So, your holdings are measured in gold itself, not in fiat currency terms. The gold stays your asset throughout and it can be redeemed at any time. Thousands of investors already earning a monthly yield in gold through Monetary Metals. So, visit the link down below monetary-metals.com/lin or scan the QR code here on screen to learn more and get started today. >> Chris Vermeulen, chief market strategist at the technicaltraders.com, reads the same story in the charts. He has seen this pattern before. The last time the 30-year bond traded like this was 2007 on the eve of the financial crisis. Here's Chris with the call. >> Yeah, so like I mean a couple days ago I was talking about this, you know, we're seeing a breakout. It you know, it's not good. Obviously, now we've got you know, the Treasury stepping in trying to save the day and protect themselves. I mean, the last time we saw the 30-year trade this long, this many times in a year was back in 2007 just before a financial crisis. So, we we definitely got some interesting things going on. They don't like the way this is looking, how it's breaking out. You know, the the monthly chart Oops, let me just go to the monthly chart of this. You and I have talked about this many times and unfortunately, this monthly chart you know, is is pointing to an 8% move. That's what it's showing and it's starting to break out of this huge pattern. Now, obviously, if it goes there, everything blows up. So, that's why we're seeing the Treasury step in. They're going to try to not let this unwind and unfold cuz that is what the chart momentum, the trends, everything are showing. And so, I think that's why the Treasury stepping in cuz this is a huge pattern. It's starting to get some traction and pick up speed and they're literally trying to just hit the brakes and try to slow that down because if this if this pops, we are going to have that big financial crisis that uh you know, is is pending. I think at some point we're going to have it, but yeah, these long-term yields, they're they're scary and they've they're trying to keep them under wraps. >> When the Federal Reserve skipped a rate hike at its July meeting, Chair Kevin Warsh pointed to the bond market. The Fed, he said, hadn't done much in 42 days, but the markets had done quite a bit. Gareth Soloway, president of Verified Investing, says that the admission raises a question nobody at the Fed wants to answer. Here's Gareth. >> Yeah, and and I would say you get above 5% on the 10-year, that is going to get scary. And the issue here is now is that it's it's it's not just, "Wow, my mortgage is going to be a little bit higher." We already know that the the housing market is really struggling. In certain areas of the country, it's okay still. In places like Florida, it is bad. Like, I just talked to a broker in this in this area here, and she said it's as bad as '08. Uh the same as that point. That the crickets out there right now. You're not seeing the obviously the defaults, and that's tough. But in terms of business, it is as bad as '08. But the point here is you're right. Kevin Warsh, basically the market's doing it for him. And what's scary about that is that if the market just does what it wants anyways, then what's the relevancy of the Federal Reserve? Like, is there relevancy, or is the market just going to take control? And that's what I think's going to happen. The market's just going to do what it what it needs to do. Right? Because at some point, when you have 40 trillion in debt, how high can these things go before the amount that we're paying on of interest, which is already north of a trillion, is just going to break the whole economy anyways? And I mean, these are all questions that are just so freaking scary to think about. But as a trader and an investor and an economist, I have to be looking at this. >> Clem Chambers, founder of a NewFangled goes a step further. He says the liquidity has been holding this market up uh is not coming from the Federal Reserve at all. And here's Clem. >> Yeah, it's a liquidity injection. And it's probably coming out of the Treasury, cuz the last one, not this one, but the last one, was done while J. Powell was under threat of criminal prosecution. So, you can imagine that he wasn't going to hand out any favors at that point. So, it has to come from somewhere else. There's only one other place it can come from, and that's the Treasury. And, you know, they've got plenty of levers to pull and press and twist. And, so that's obviously he can rely on them to do so because they're not, inverted commas, independent, are they? >> That brings us back to Danielle DiMartino Booth and the two numbers hanging over all of it, 5% on the 10-year yield and $40 trillion of debt. Here's Danielle. >> I think you hear most commonly the idea of a 5% US 10-year Treasury yield as as being kind of Defcon 1 where things would really start to break across the system. Um, and I think that that obviously that the the the Treasury, that corporate America, that all players in the market would like to see be avoided. Um, but at the end of the day, if you pull up the nation's debt clock, we're about to cross off over the $40 trillion uh Rubicon, [clears throat] but David, you tell me, when was the last time the world really stopped and worried? Uh, I mean, we had uh $20 trillion of some odd US debt prior to COVID hitting. It's darn near doubled um over a very short period of time, and nobody's blinked. No nothing, you know, the world has not come to a screeching halt. >> You know what this reminds me of? It's like a frog in a pot of water and then you turn on the heat and it boils. And, I guess the frog doesn't immediately feel the heat right away at 100 Celsius. Yes, it's boiling, but the frog's still alive. Have you seen that example? That kind of feels like the US economy right now and the debt situation. Yeah, debt's been rising, but it's not like all of a sudden, you know, we turn the boiler on. It's like slowly simmering and at some point we're going to boil and die, but we haven't gotten to that point yet. But, >> We haven't gotten to that point yet. But, we haven't gotten >> Yes. >> But, should the Fed decide to become an even more aggressive um launch more aggressive intervention in the market and we see that much more downside in the US dollar. Um you know, this the frog is in hot water and yet right now it looks like the Treasury's playing a game of chicken. >> Peter Boockvar, Chief Investment Officer at 1. BFG Wealth Partners, joined us Thursday as yields finished that round trip and he read it as the bond market's direct answer to the Treasury. Here's Peter. >> But now he's he he's when you start when you pick a fight with someone that's much bigger than you, um you you better bring enough ammo to that fight and the bond market is much bigger than him. Uh and getting back to my comment about the dollar, if the dollar were to weaken from this, number one, it it it potentially creates inflationary issues and number two, uh it could actually facilitate foreign selling of US assets for those hold for those holders who are not hedged, particularly uh foreign holders of US Treasuries, which that totals still about 30%. So, this is a game of whack-a-mole. Um you have to pick what you want to achieve because there going to be negative offsets to that and and how are you going to weight each one of those outcomes, I think, is the question, but it's clear that the the the bond market with how you started it, how the yield has essentially gotten back what it lost. Um uh the bond market is telling uh Mr. Bessen, um is that all you got? At least right >> What's your take then? Do you think he has enough firepower to uh ultimately change things? And if not, what do you see the tanker headed? >> He he does not. I think it goes higher. >> Mhm. What's clear though is maybe ultimately the Fed has to get involved here with some sort of of QE or or yield curve control. But, you know, these are day dangerous band-aids because at some point they unwind. And to to implement yield curve control um is an extraordinarily expensive thing when inflation is a problem. See, this is what ties the hands of the US government is that inflation is still an issue. >> So, how does a game of chicken with the bond market end? Mark Skousen, economist at the Oxford Club and the editor of the Skousen Report, answers with one of the oldest sayings on Wall Street. >> Well, I'll give you another quote from Wall Street. Stock market is never never commit suicide, but it can be murdered. And the murder can take place by by these crises that you mentioned. It can be a fiscal crisis. We certainly Look, uh we have a 36 What? We're approaching $40 trillion on our national debt in the United States. Um uh Treasury has to refinance $7 trillion every year, and that's going up. The uh interest on the national debt is now exceeding the defense spending in the United States. We're headed for a crisis. So, what could What's the scenario that could cause a monetary crisis due to excessive debt load? And the answer is nobody wants to buy Treasuries anymore. And they have to raise your rates dramatically. I'm reminded of the time in Sweden in 1992 when they had their own crisis. They had to raise rates to 500% on a short-term basis in order to keep people from flooding or leaving the Swedish krona. And that And the United States, of course, is the world's currency. So, there's no place to hide except to go to gold or go to the Bitcoin. But probably gold. Be central banks are buying gold hand over fist. They own more gold now than they do treasuries. Did you know that? So, they're they're planning on trouble that that you know, you couldn't get your $17,000 an ounce for gold if you had a treasury collapse and a no bid on treasuries. And I'm not saying that will happen, but I am saying the Fed may have to raise the Treasury may have to raise rates rather dramatically to get people to buy treasuries. >> Adrian Day sees the same breaking point at the end of the road. He also says the most important thing about it is the timing. >> And then the third and and the most fundamental thing would be governments around the world would have to get their fiscal houses in order. >> Yeah. >> Now, I I I there's no sign of that happening. Uh at some point we will reach a breaking point. At some point, um we'll reach a breaking point where you know, long-term bonds of Britain or Germany or US don't sell. Um we'll reach a point where governments have to postpone repayment of debt. We're not there yet. We're a long way from there. >> Our eight guests came at this from different angles and they all arrived at the same uncomfortable place. The Treasury can shuffle which bonds it buys back and it can double again if it has to. It cannot change, however, the $40 trillion of debt outstanding and it cannot force pension funds and insurance companies to buy 30-year bonds they do not want. Kevin Warsh admitted that the bond market is doing the Fed's job. The real question is what happens when the bond market turns that same power on the Treasury demanding a higher rate at every auction until the government cannot afford to borrow. The number to watch is 5% on the 10-year yield. Below it, the game of chicken continues. Above it, in Gareth Soloway's words, things start to get really scary. Prediction markets put the odds of crossing that line by year end at one in three. Kevin Warsh chairs his first Jackson Hole Symposium next week. We'll be covering what he says there and what he does after with the experts you trust. Tell us in the comments, is the Treasury buying time or is it out of road? And where is your money going while they play chicken? Stocks, bonds, gold, cash, Bitcoin? Don't forget to subscribe to our free newsletter for more analysis. New issues published every Saturday recapping the week. The link is in the description. I'm Matt Milligan. Thank you for watching. Please like and subscribe.