Saturday, March 20, 2021

Margin Call On Bullshit

The Fed is driving the bond market to a Minsky Moment, in order to "help" the economy...

"When the tide goes out, you discover who's been swimming naked"
- Warren Buffett

"A battered Treasuries market faces another trying week as it will have to absorb a massive slate of auctions focused in maturities that have gotten pummeled amid a brightening outlook for growth and inflation"

It’s been a month since a disastrous seven-year auction sent the bond market into a tailspin that reverberated across financial markets and helped put benchmark yields on the path to prepandemic heights. Now that maturity is on the calendar again"

One month ago this week is when the Tech rout accelerated due to the spike in bond yields - that was BEFORE the stimulus passed...

Zooming out to the decade view: 

The one year rate of return in long-term Treasury bonds is the worst since 2010. But cyclical stocks are cycle highs

Someone is swimming naked:

One month on from the failed seven year bond auction, the $1.9 trillion stimulus is in effect, the Fed is still on full afterburner, AND as feared last month the SLR is expiring:

"Bond traders were already on edge as they waited for Fed guidance ahead of next month’s expiry of a regulation that has encouraged banks to buy Treasuries"

The main protagonist in the bond market was the five-year Treasury note, a maturity often associated with long-term Fed rate expectations"

Friday the SLR was rescinded because it had been encouraging excessive risk taking over the past year:

"It is surprising. You can see it to some degree from the markets reaction. I think some people figured if the Fed was going to kill it, they would give it more than 12 days.”

Schumacher noted that banks are bigger holders of 5-year Treasury notes, whose yield edged higher after the announcement"

The supplementary leverage ratio is a product of post-Great Recession banking reforms...Fed officials worry that relaxing the ratio might encourage banks to load up on risky assets like junk bonds, which carry the same weight against reserve requirements as safer holdings."

Unlike every other cycle, there has been no deleveraging in this cycle - quite the contrary there has been a massive increase in risky junk debt. Which is why the Mr. Creosote bond market is hyper-sensitive to reflation expectations. Policy-makers assumed they could build a new bubble on top of the last decade's super bubble: 

Over the past year, massively leveraged risk has been accumulating in corporate debt markets, sovereign debt markets, and of course stock market margin accounts (lower pane). The Fed has lost control of the Treasury market - they can't step on the brakes or the gas, without imploding markets. They are now bystanders to their own Minsky Moment.

Since last month's failed bond auction, the overnight lending ("repo") crisis flared up again, the stimulus was passed, the FOMC reiterated their policy to "run hot", and the SLR just ended. All factors that will put even more pressure on the bond market. 

Failed bond auctions, record junk debt, pump and dump ETFs, FOMO ETFs, brokerages offline every other day, record SPACs, record speculation - just remember:

"No one ever sees it coming"