Oct. 23, 2021

There Is No Joy In “Bond-Ville.”

He's the guy who comes to the company party, sits in the corner sipping his Dubonnet, adding up the bar tab.

In finance, he's the bond market.

There's a reason, after all, that the late Louis Rukeyser called them the bond ghouls.

They're the ones who always have a dour outlook, and measure markets with basis points.

There's one other bad thing I can say about the bond market, most unfortunately they're often right.

So, let's look back at yesterday. It was a day of celebration for Wall Street, New highs for the Dow and S&P. New highs for Bitcoin after the first crypto exchange-traded fund was launched just this week.

But there was one group that wasn't dancing for joy.

And you guessed it: it was those bond people. In fact, far from dancing bonds actually had by one measure one of the worst days they've had in some time.

And that was the Treasury Auction of 20 Year US Treasury Bonds.

Now before I go any further, I'm going to tell you that I'm going to round off all of these yields, so as not to totally confuse anyone listening. For the exact, down to the basis point yield, I refer you to the US Treasury Website.


Now while the Treasury does auction bonds very often, some weeks even every day. They don't auction every maturity every day. In fact, it's a very complex process they use to model out just what maturity bonds they want to offer at any given time. Managing the weighted average maturity of the US Treasuries Bond Portfolio has to be one of the most formidable tasks I can imagine.

So, a long way to say, that these particular bonds, the US Treasury 20 bond were last auctioned, it appears to me, in January. And all the bonds were sold at a yield of 1.6%, rounded. That was considered a very good yield at the time, and both treasury and bond buyers went away happy.

Flash forward to yesterday. Just 9 months later.

Same bonds the 20-year maturity. Only yesterday Treasury had a very difficult time selling all the bonds at a yield slightly higher than 2.1/4%. I say difficult time selling the bonds because the dealers noted that there was a long tail to the offering. Dealer speak for, we had to beat the bushes to get them all sold.

That's a 40% increase in the effective yield for these bonds, remember in just 9 months. Something that is almost unfathomable, in a market where a big move is 5 basis points, 5/10th of a percent.

So what's this all mean?

First of all, it's saying that US Treasury Bond Auction Buyers, the primary dealers and major institutions that actually take part in the auction, now see higher inflation baked into our future. And their actions, just in themselves, are raising the basic cost of capital throughout the financial system. Forget the Fed, this group is even more influential. Especially when it comes to mid, and long-term interest rates.

The other thing it means is that the cost of financing the Federal Government just got 40% more expensive, even if the Fed's total debt remained the same. But of course, it did not remain the same. We had huge increases because of the Pandemic, and the stimulus programs put in place. And remember President Biden's Budget is likely to just pile onto that existing debt.

When you think of all these ramifications. And the amount of money that will need to be spent at those higher interest rates, it's no wonder that those bond traders weren't dancing yesterday...

Pass the Dubonnet..,