Could Treasury Bonds be signaling Economic Troubles Ahead?

Hey There Income Hunters,

I’ve long believed that the bond market is the most important indicator of what’s happening in the economy

Well, not to dampen your holiday weekend, it is sending signals of worse economic times ahead.

Of course, that would not be good for the inflation trade, so I took a closer look.

Janet Yellen came up as the culprit — thanks to the secret Treasury Government Account (TGA).

The TGA drawdown has allowed the Treasury to issue fewer bonds than usual, so bond holders redeemed bonds without rolling them into new ones … That means they are most likely buying up bonds in the secondary market.

And I’m not buying this recent downturn in 10-year rate

Check the graph below …

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You can see the spike down to 1.35% on the day the Fed talked tough on inflation …  and since the FOMC meeting on June 15, prices have consolidated above the support at 1.44%.

I think it’s time to look at bearish trades in iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT).

Today, I’ll give you the intel on why I think the second half of the year could be more difficult for bonds.

Someone’s Been Stealing from the TGA Account Again …

With so much liquidity already in the system (judging from the $875 billion-plus balances in the Fed’s reverse repo program), why is Yellen throwing hundreds of billions more into the system? 

As you can see from the chart below, the TGA drawdowns have been substantial in the first half of the year…

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Between new deposits and TGA injections, it certainly doesn’t seem like the Fed is worried about inflation

I just don’t think they have any real game plan other than talking tough — but doing the opposite…

What that tells me is to get ready to sell bonds again soon. 

Let’s take a closer look…

Net Treasury Issuance Has Been Negative

As you can see in the chart below, the surplus TGA funds have been used to pay bills.

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This allows Janet to issue fewer Treasuries while the Fed continues to buy $80 billion-worth a month…

This will not last much longer , and in the second half of the year supply will increase … which could cause a bit of a shock in the bond market.

Foreigners have not been buying US Treasury bonds for a while and, in fact, they have been selling recently.

Let’s look at the iShares 20+ Maturity Treasury Bond ETF (Ticker: TLT) for a bearish trade idea…

The Treasury will auction $160 billion-plus of 3-year, 10-year and 30-year bonds the week of July 12.

I think, if we get a chance to sell a new high in TLT next week, the timing would be right …

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Bring It Home

Yesterday marked a new beginning for the markets as we turned the page on the first half of the year.

I think the second half could bring a shift in psychology, meaning investors may find the reopening trade is not as powerful as anticipated… 

Net supply in bonds will pick back up, which is bearish for interest rates as investors will demand more return.

We could also get confirmation of the infrastructure spending bill, which will add fuel to the supply story.

Well, I hope everyone has an awesome 4th of July.

As always…

Live and Trade With passion My friends,

Griff

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