Stock Market Strength And The GDP-Bond Yield Gap

Foreign central banks currently own about $4 trillion, or about 25 percent of all marketable Treasury notes and bonds outstanding, which is signifcanly lower than prior to the GFC.  The Fed holds $4.8 trillion or about 30 percent of all outstanding Treaury coupon notes and bonds.

Greenspan Lost Control Of The Yield Curve

Greenspan ultimately blamed the Fed’s loss of control of the yield curve, much of it due to foreign central bank inflows as the primary monetary factor inflating the housing and credit bubble,

Despite the fact that we lowered rates, we did not have long-term rates moving down. We did not have money supply accelerating. There were no fingerprints of an easy money policy in the marketplace. – Alan Greenspan, April 2014

Whatever, dude.  

Repression

Why is the 10-year Treasury yield so low with inflation running so hot?  We maintain for same reason there are no mass student demonstrations in Tinanmnen Square:  Repression. 

Though we hear the Fed has accounted for aound 50 percent of the COVID Treasury new issuance, their indirect purchases of the $3.6 trillion of net new issuance of notes and bonds are over 75 percent.   That is,  Fed has bought up three quarters of the entire new issuance of COVID notes and bonds.     

We wonder out loud where yields would be without the Fed?   We can speculate using the Fed’s 2012 model cited above.  We conclude much higher and discount whatever long bond yields are signalling.     

The Dearth Of Long Cash Coupon Treasury Securities

Moreover, on a relative basis, there are just not many long-dated Treaury securities outstanding available to the non-central bank public, who are market sensitive and actually care about prices and entry points.  

We have calculated, based on data from the Monthly Statement Of  The Public Debt, and illustrated in the following chart and table, the outstanding stock of marketable Treasury securities with maturities longer than nine years is only $3.7 trillion.  Absolutely large, relatively small.  

The chart highlights how relatively small the stock of Treasury coupon notes and bonds with maturies longer than nine years is when compared to, say,  Apple’s market capitalization.  Excluding central holdings, the float available to market & price sensitive investors is about the same size as Apple’s market cap.   

Rebalancing Effect

We have also estimated the demand for longer dated Treasury securities based on the rebalancing effect from this year’s gains (December 7th close).   Assuming 10 percent of all of this year’s stock market gains are reallocated to longer Treasury securties — a stretch, but hypoble does help make a point – it would take out about one third of stock of notes and bonds with maturities longer than nine available to the price sensitive public.  

The upshot is there is a structural short of risk-free duration and  just not many, on a relative basis, long maturity Treasury coupon securities floating around as the Fed and foreign banks hold about 20 percent of the outstanding stock. 

Where To? 

We will take Issac Newton’s lead as to where we think the markets are headed.   We can calculate various stock of debt outstanding but not the madness of people.  As Carol K. has taught me,

Let it ride until it slides.   

Go CK!