Not This Again: Too Many Treasuries?

It is a worldview that I share, by the way; I take no joy in reporting these things, how the government can just borrow seemingly any amount without paying, literally, the price for being grossly irresponsible (and opening the door wide open for utter stupidity like MMT; we already have one group of “enlightened” bureaucrats telling the world they can manage the economy who have so utterly failed at doing so they’ve created the most fertile conditions for many to begin seeking an even more “enlightened” set of bureaucrats who will, they claim, fix the first mess). What I would like to happen doesn’t enter the equation.

And while all of that was true, it was only ever half the story. Less than half, really, because those things were, like the petroyuan, indicating something else than this emotionally driven bit of rationalized reverse engineering. The other half, the one with all the evidence, is what I wrote during that most “unexpected” Treasury rally:

The dollar shortage must therefore already be severe if not yet overwhelming. How it gets to this later stage is the self-reinforcing nastiness typical of these money-driven downturns. Eurodollar squeeze takes hold of the global economy, it slows which only confirms the negative impression which brought out the squeeze in the first place. This leads to further monetary tightening (non-policy) and therefore even more of a drag on the global economy. Rinse. Repeat as needed.

Banks always had the option of selling their “unwanted” UST’s to the public in the secondary marketplace. While required by law to buy up paper sold at auction, there has never been any sort of restriction on what to do with the things after the auction gets completed.

The financial system was always free, indeed encouraged, if what the “too many” Treasuries people said was true about how much trouble these were causing, to get rid of them! If being forced to hold these tarnished assets was a major problem in the repo, as many “experts” claimed, then there was every reason to pass them along with to the next sucker in line – the rest of the financial system and the public (more the former).

Which the banking system could’ve easily done if it had ever wanted to. It didn’t once want to. And we know this for a fact.

I guess we aren’t supposed to notice that the rest of the financial world has been buying UST’s at a furious pace. How else did the yield curve invert in the first place? Sure, money market fund and other nonbanks like it may have preferred commercial paper or even unsecured LIBOR to a very low UST yield, but someone is buying to push every UST yield lower to begin with.

Not just someone, but a whole ton of someones. To believe in this convoluted theory, you are asked to believe that primary dealers whose entire job is to find buyers for Treasuries are disrupting repo markets and other funding mechanisms because they can’t find enough buyers for Treasuries during a time when there is otherwise so much demand for Treasuries it has upended the natural order of curves everywhere.

And that’s right where we are now. The current curve is no longer inverted but only because the system experienced another GFC-level global dollar shortage spasm which has left it condensed down flat to an even more grotesque Japan-like state. This is no curve, not really, certainly not a natural one by any honest standard.

It takes a whole lot of badness to distort it in such a way, and, more importantly, more such badness to keep it there.