Of $20T in marketable Treasuries outstanding, $4.7T is from T-bills due in 6 months or less. Treasury is almost completely reliant on short-term debt to fund current deficits.
The Treasury hasn’t been able to raise any net cash from T-bills since June, since $7.3T in this debt has already come due since March.
More long-term debt is out of the question. Demand is waning and foreigners are pulling out. Substantially more long-term debt would push long-term interest rates too high.
Yet another $2 trillion bailout bill is in the works, but there are only $2.82 trillion in total reserves in the entire US banking system. If it passes, the Fed will have to expand its balance sheet by trillions more to avoid another “Repocalypse”.
Besides another $2 trillion bailout bill, a no deal Brexit could trigger a banking crisis, or a contested US presidential election could destabilize the already shaky Treasury market.
The debt treadmill that is the United States Treasury market is overheating. If you look closely, you can see the engine smoking now. Of course, the streets are littered with the bodies of traders that called the bond market top and lost. Nevertheless, here I’ll try to make the case from a mathematical standpoint that the US Treasury market could implode at any time now, and that only one final trigger is needed.
The way I see it, there are three near-term catalysts that could trigger it:
- One more multi trillion dollar consumer bailout bill that would overwhelm currently available reserves in the US banking system of $2.82 trillion, triggering another repo market crisis as happened last September when short-term rates shot up to 10% overnight.
- A confirmed no deal Brexit that now looks to have a deadline of October 15, which could easily topple a sickly European banking system and cause a global domino effect.
- A contested US election that draws out.
If and when the Treasury market finally cracks, the chief beneficiaries in my view will be gold and silver which will skyrocket, while most other mainstream financial asset prices will implode. All risk is benchmarked to bond yields, so it all starts there. My raw numbers approach begins with Treasury Direct, together with a little help from the Securities Industry and Financial Markets Association (SIFMA), which helps organize and crunch the Treasury Direct numbers. All data in this article comes from those two sources, plus the Federal Reserve website.