Something Really Weird Just Happened at a Treasury Auction

Something weird just happened in a key U.S. Treasury auction and it is not at all what everyone was expecting. But it did help set up trading today, which saw the 10-year yield dip below 4% intraday anyway, for the first time in almost a year. The entire curve is being reshaped and it is confusing the hell out of everyone, especially since the Treasury market is not alone in this. There is a huge move in the long end of the Canadian market too. In fact, the most aggressive action by far in all bonds is taking place up there with the maples. And that's another critical signal for U.S. interest rates given the close ties between the U.S. and Canada that remain regardless of everything else. All of this explains what's happening at the long end of the yield curve too. Now there's been a ton of focus on the 30-year maturities and the 30-year is indeed making a big push, but one that's aligned with yesterday's auction and what was uncovered by it. So these moves are also defying the September effect, which makes them even more remarkable. Whether that will continue the rest of the month remains to be seen, but so far it has been completely turned around, which is another critical signal relating to strength. With the release of today's August CPI, which we won't get into here, the Federal Reserve is right back into the Pringles can. Whether that means a 50 basis point rate cut next week or 25 doesn't much matter given what we're seeing all across auctions as well as the yield curve. What it points to, yet again, is that fundamentals matter. We see them in all of these different places, including our friends up north. The curve is being reshaped in a way that is confusing the hell out of everyone when it really shouldn't. So we've got the curve, we've got the 10-year auction, we've got the long bond 30s and the huge push up there in Canada. Plus we'll finish up with what is going on with the September effect. Whether anyone realizes it or not, these are all basically the same things. All you've probably heard, at least outside of this channel, is that the world is busy rejecting treasuries. Whether it's foreigners selling their bonds, their dollars, or their anything America related, or whether it's bond vigilantes that are finally stirring from a multi-decade slumber, the idea that borrowing costs are rising has been thrown around by basically everyone and so persistently that the myth has just become accepted as true by the entire mainstream, even though not a single part of it is. Naturally then, as the entire marketplace is supposedly rejecting treasuries, they must be doing it right from the auction process. That's probably what you've heard too. Mainstream sources like Bloomberg and Reuters and all the rest of them, they keep pumping out headlines and articles that decry the poor and even horrible auctions that they say pretends the start of some big push, the final reckoning after decades of abuse by governments. And the real reason why this view has caught on the way it has and why they keep doing it is that there is a kernel of truth embedded deep down inside. Governments have gone insane. Spending is out of control. No one is arguing that. However, it is a total mistake to believe that all of that is a problem for the bond market. It is not. This is very difficult for people to accept in one part because you hear the opposite everywhere. The treasuries have to blow up because of Uncle Sam's spending insanity. But the truth is Uncle Sam's insanity is a massive problem, just not for the treasury market. And the reason is very simple. Depression economics. Nobody wants to admit depression economics. The world is in bad shape and government spending is actually a symptom of it. This leads to the perverse dynamic where because of depression economics, the world's marketplace wants safe and more liquid instruments. And sadly, treasuries and government bonds in general, whether we like it or agree with it or not, they have the most liquid marketplace. So the worst conditions that appear, including the U.S. labor market, which may already be in recession as I talked about yesterday, the more demand will be there for U.S. treasuries completely independent of the supply situation and the federal government's deficits. And that demand will be supplied by everyone, including foreigners. As I said, the media has been hyping up treasury rejection and bond vigilantism all year. And part of this we have to keep in mind, it's just pure partisan politics. Like I keep saying, you've got to leave your partisan politics at the door. It has no place in rational analysis. Whether we like it or not, both sides of the aisle are terrible when it comes to fiscal recklessness. Doesn't matter if you're an R or a D. Both parties have shown repeatedly they don't care about the fiscal situation. They don't care about cleaning anything up. I almost never do ads and I say no to the vast majority of those that are brought to my attention, but I was thrilled to be able to work with today's video sponsor, Monetary Metals. And the reason is because they're solving a big problem, one that I've been highlighting for a very long period of time. Gold is a safe haven, but other than sitting in a vault, it doesn't do anything. Monetary Metals fixes that. They let you earn real yield paid in physical gold without giving up ownership. It's not a fund. It's not a paper claim. It's your gold working for you. Every month, more gold gets deposited into your account. It's simple, it's transparent, and it is fully insured. If you believe in gold as a long-term store of value as I do, this changes everything. Go to monetary-metals.com slash Snyder. That's monetary-metals.com slash Snyder for all the details. We absolutely thank them for being the sponsor of today's video. And now let's get back to it. So anyway, if you've seen nothing more than the mainstream media reports, you'd be left with the impression the Treasury is having enormous difficulty selling almost anything. Poor auction after poor auction, especially foreigners fleeing and allegedly leaving primary dealers stuck holding the bag during these auctions. Just so you were clear, primary dealers are obligated to buy any leftover bonds if there ever was a time when no one else showed up at these auctions. But that's never happened, and it's not going to happen. Even during auctions where dealers are taking more of the bonds and notes being sold, they're doing it voluntarily because they know they'll easily be able to sell what they buy directly from the government into the secondary market at a profitable price. It's all the same thing. There is no one getting stuck. Dealers are smelling a profit from higher bond prices, which by the way, is exactly what the market has been producing for months on end now. So all the while the media has gone nuts over supposedly poor auctions, the reality is market yields have been moving lower and lower and lower. So at the very least, even giving this mainstream myth and everyone on social media hyping up treasury auctions to benefit of the doubt, even if the government has seen multiple poor auctions, one after another after another, so what? It made zero difference to yields or the direction of yields. The treasure rejection thing is a myth. It is an easily disproved myth. Just look at the charts, look at the behavior, look at the context. That's what people don't really like and what they don't really agree with. So yes, it's true the government is out of control, but it's also true that depression economics comes first. That's what the market is pricing and that's what the market is focused on, even if everyone else would like to focus in another direction. So that brings us to yesterday's critical 10-year note auction, again, hyped up beforehand as a quote critical week for treasury supply. Instead, there were so many bidders at the auction, primary dealers ended up getting almost completely shut out of it. Dealers ended up taking only 4.2% of the $39 billion that were reopened for 10-year notes. Talk about stomping all over the narrative. With long-term yields having caught a clear bid, even the mainstream media can't miss the past month or so, of course there was massive strength at auction. The secondary market determines what happens in the primary market, not the other way around. So what mostly does happen is that all the quote experts wildly overhyped bid-to-cover ratios that don't affect pricing in the slightest. There was a relative low bid-to-cover at last month's 10-year auction, sure, but so what? It wasn't all that low, still well within historical range, and again, the low ratio had zero impact on prices or the direction of rates from there. The auctions do not matter. The secondary market and the fundamentals in the secondary market are what drive auction mechanics. You can call it poor because the bid-to-cover is relatively low, but that doesn't mean anything. It certainly doesn't mean anything for the treasury market or direction of interest rates. You can tell how ridiculous this bias is by what Bloomberg printed yesterday in the wake of having their crap called out by the market action itself. After being forced to print the truth about the 10-year, they then turned it around and tried to claim that somehow dealers not having bonds is suddenly a huge problem that will lead to the end of the treasury market as we know it. Seriously, after saying in story after story all summer that dealers were being stuck with bonds and that was somehow proof interest rates were about to soar, now when there's so much demand at the auction that dealers nearly get shut out, this is somehow proof that interest rates are about to soar. If you haven't noticed, everything from the mainstream perspective seems to end in that direction. Interest rates, we're told, have nowhere to go but up. The dollar is always crashing. The Fed is a powerful institution wielding powerful stimulus that just so happens to never stimulate. Are you tired of being lied to yet? That's ultimately what this is all about. Why they keep lying about interest rates going up or the dollar crashing. No one wants to have to admit what the fundamentals really are. The depression economics that continue to crawl all over the marketplace and set the real course for the world. That's what the overwhelming demand at yesterday's auction was really about, reinforcing yet again those fundamentals. The auction itself didn't matter, just that the results were consistent with everything that we're seeing pointing to the depression economics fundamentals. Even those auctions that are classified as poor by the mainstream are actually in reality consistent with all the same. It is altogether one big comprehensive picture. Okay, but what about the long bond? 30-year rates do appear to be rising. Just look at the UK and Japan, which everyone can't stop talking about. Well, to begin with, those two are very special cases, not representative of the global bond market and certainly not treasuries or Canadians. I've talked about Japan before, how the Bank of Japan is the only reason behind the volatility there, which isn't nearly as volatile as it's being claimed either. Just look at the key 10-year JGB, which has been sideways and mostly steady for about 6 months, meaning even in JGBs, most of the entire curve is not doing what everybody's saying it's doing. But even that shows what we're dealing with. Back on the treasury curve, the entire curve has been bull steepening with more emphasis on the bull part lately. As a direct consequence, those who continue shouting about the world rejecting treasuries have been pushed further and further down the curve to the point all they have left is the 30. But the truth is they don't even have that. What's going on with the long bond is the same thing what's been going on with the curve overall, steepening. Not only is the curve steepening, it is doing it in the way we see every single time it does this. There is absolutely nothing unusual about the steepening at the long end of the curve. No matter how many times you're going to hear how this is the canary in the coal mine and this time is different, as you'll see, it is not different. This is bull steepening and the last part of the bull steepening process, which again points to the same depression economics. In fact, if you look at the spread between the 10-year and the 30-year, it does seem to start out to validate the treasury rejection narrative. Maybe the rest of the curve isn't seeing that, but maybe the long bond is the canary in the coal mine for bond vigilantism and the market rejection of that idiot Trump. Nope, not even close. The 10-year, 30-year spread has jumped to roughly 65, 70 basis points. It's closer to 65 basis points currently. And while that sounds enormous, especially since you go back to last year when it was around 30 basis points and even in December, it was down to around 15 basis points. So that additional yield for the 30-year over the 10-year sounds like it must be something, like it must be treasure rejection, but it isn't. It really is nothing other than curve steepening. We see this every single time. In fact, when you go back through the past cycles, this 65 basis points long bond spread is actually below average. It's not even all that steep. The difference in yield between those maturities should actually be far greater than what we got right now. So go back to other steepening periods, 2008 for a perfect example. The spread had been inverted when the 30-year long bond made its reappearance in 2006, consistent with the warnings we got in the yield curve. And then it turned modestly positive in 2007 as the curve overall was inverted in warning about trouble. Does this sound familiar? In fact, the inversion at the time in 2007 was roughly thin around 20 basis points, just the same way it was last year. But once the trouble arrived, and I mean the real trouble, what happened? The curve steepened out with the 10-year, 30-year spread surging to almost 100 basis points by March of 2008. That wasn't treasury rejection or bond vigilantism. It was nothing other than bull steepening. And mechanically, that steepening meant shorter maturity bonds saw their yields drop far more than those at the longer end. The two-year no yield dropped sharply. The 10-year no yield dropped significantly, but not as much as the two-year. Well, the 30-year bond, that rate only dipped a little, bull steepening. And that steepening, by the way, continued right on through the 2008 crisis and its aftermath, with the spread between the 10-year and the 30-year reaching 135 basis points, more than double of what we have right now. Of course, back then, in the wake of what was the initial explosion in government borrowing, a lot of people said the same thing that you hear today, that the steepening in the 30-year was the canary in the coal mine telling you that governments had gone too far and that treasury yields and the treasury market was about to explode. But none of that happened, even as the 30-year got to 135 basis points spread over the 10-year. That was just the curve being steep. But if you really want to go back to an example where none of this treasury borrowing business was even an issue, look no further than the 2001 steepening cycle. Same story as before, the 10-year, 30-year spread inverted in the summer of 2000, as the dot-com bust looked more and more like it was going to impact the economy and turn it into a recession, which it did. But the curve really began steepening at the end of that year and to start 2001, when Alan Greenspan's Fed aggressively cut rates by multiple 50s. And like before, in 2008, like now here in 2024, 2025, rates went down far more sharply at the front. The two-year rate crashed, the 10-year rate dropped, and the 30-year only dipped. Bull steepening. And since the government at the time was running very nearly a surplus and actually paying down debt, I mean, they got rid of the 30-year bond, you can't say that any of that steepening was because of bond vigilantism. It was simply the bull steepening process because the fundamentals at the time heading into a recession in an uncertain economy after it, that's what demanded the curve to steepen. That's what directed everything. It's always about fundamentals, not treasury supply. Maybe the best demonstration of changes in perceptions of those fundamentals and how it's largely uncertainty surrounding central banks that cloud the issue more than anything, look no farther than Canada. The Bank of Canada, as we all know, aggressively lowered its policy rates last year, really starting last September, right with the Fed and right when all this bull steepening really took off. And that's not an accident either. And I've talked about this in prior videos. Central bank rate cutting is the trigger for the bull steepening, which only confuses people further because they're taught all interest rates follow central banker policies and lockstep. Alan Greenspan called it a conundrum when they didn't do that because he was just wrong and nobody in the mainstream is bothered to notice. After the Bank of Canada's steep rate cutting, like a lot of them, Tiff Macklem thought he'd done enough because rate cuts, they all say, are powerful stimulus. It was, Macklem said, more than enough to steady Canada's failing economy with its soaring unemployment. Then the tariffs hit, the BOC shifted to tariff inflation like the Fed, which meant that they stayed on hold for the same reasons as the Fed. They all said it was a solid economy that was supported by lower policy rates with far more risk of inflation. At least that was the official story that was parroted uncritically by the stenographers and the media. But that uncertainty from policy makers, getting it all backward, did hang up Canadian bond rates all the way until mid-July. What happened in July was that it became clear to the markets none of what the Bank of Canada was saying had been true. The economy was not stabilizing and it sure as hell was not at risk of inflation. While there are price changes and there have been price changes feeding somewhat to consumers, it's not inflation and the bigger problem is what happened to employers. In short, jobs in Canada collapsed July and August and therefore rates plunged right along with them. So whatever the Bank of Canada might have thought it thought before then has been thrown right out the window. Bull steepening all across the maple bonds has been restarted with TIFF's poor interpretations no longer hanging everything up. Fundamentals win every time though at times it does take time in order for that to take place. I mean you have to overcome irrational bureaucrats practicing bad economics based on garbage theories. It's a lot to overcome until you see something like Canada's job market collapse and then the market says TIFF isn't going to be able to get away with his crap any longer. And while everything we talked about in this video is powerful stuff on its own, it's even more remarkable how this is happening in September of all months. If you're new to URU, you may not know the September effect. Well, there are actually two September effects. The other one we won't get into here is a calendar liquidity bottleneck. This other September effect affects government bonds, especially longer term. Starting around August, yields rise at the long end for whatever reason, they appear to be completely non-economic reasons and it isn't just treasuries. The phenomenon sweeps the entire global marketplace from German bonds to JGBs. It's been happening very clearly going back to 2008 with a few fingerprints and telltale signs that I've observed as early as 2012, maybe even to an extent in 2011. But whatever the reason for it, yields rise starting in August and head through September right on into October without fail every year, especially back to 2018. Some years it starts a little earlier, some years it starts a little later. The timing is variable, but long-term rates will rise during September. But here we are on the 11th and the opposite is taking shape. That makes the current bull steepening even more remarkable, demonstrating just how powerful the tide has been and how powerfully wrong the notion of treasury ejection at any part of the curve really is. It also means we shouldn't be surprised if rates do manage to back up just a little bit over the rest of this month, which won't be too many treasuries or treasury rejection either, though if it does happen, you better believe the media will be all over it saying otherwise. Fundamentals are the entire key and they are all over this marketplace, whether it is in the curve reshaping or at the treasury auction, shocking the hell out of basically every mainstream opinion. Bull steepening does describe everything that we're seeing because the US and global economy is not in a good place. Moreover, it's heading to a worse place, one which would quite naturally drive demand for safety and liquidity. Jay Powell and Tiff Macklem have been wrong on the economy and the risk to it the entire way. We are very much reminded of this with the data that's been posted the past week, especially where it comes to jobs, meaning the loss of them. That's another huge factor in what triggered the bull steepening last year. Think about it. The QCW today strongly implies the US began shedding payroll sometime late last year, which means job losses showed up the same time the Fed was cutting rates or exactly the same setup that we see in bull steepening periods throughout history. Poor economics, not poor auctions. That's why the most important takeaway from the QCW wasn't the record revisions to payrolls. It was instead how the QCW suggests that job losses began last year around the time the bull steepening did. All those details, video link below. As always, thank you very much for joining me. Huge thank you, URU members and subscribers, and until next time, take care.