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Short-Term Treasuries: The Place to Be (Szn 5, Episode 28)Podcast episode cover art feat Jared Dillian, Daily Dirt Nap

Short-Term Treasuries: The Place to Be (Szn 5, Episode 28)

Published December 5, 2023

Feat Jared Dillian, Daily Dirt Nap

This podcast episode was recorded Nov. 29, 2023 and made available to premium subscribers the following day. To become a premium subscriber, sign up through our Substack or Supercast.

Jared Dillian of the Daily Dirt Nap joins the podcast to discuss his bullish views on short-term Treasuries and less optimistic outlook for the US economy. He also discusses his work as an author and views on disparate issues facing society. 

Note: The podcast episode contains some mature language.

Content Highlights

  • The ‘soft landing’ scenario appears to have become the base case. Dillian doesn’t quite buy that (1:37);
  • To be bullish on short-term Treasuries one needs to believe the Fed is going to cut rates. That is imminent (4:26);
  • Addressing the inflation bogeyman. The risk has maybe receded over the short term, but what about a return over the medium term? There is historical precedent for this from the last time inflation was a serious force in the US… (9:37);
  • Background on the guest and a broad discussion of his time at Lehman Brothers (including its downfall), working on Wall Street, career paths, education, and more…(15:48)

More About the Guest

Mention this podcast for a generous discount on the Daily Dirt Nap!

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Stocks, Bonds to Rally in Q4: David Hunter (Szn 5, Episode 25)David Hunter Szn 5 Episode 25 cover iamge

Stocks, Bonds to Rally in Q4: David Hunter (Szn 5, Episode 25)

Published October 16, 2023

A short actionable highlights reel from this podcast was released to premium subscribers last Thursday, Oct. 12 — the same day it was recorded. The full episode and transcript were made available to premium subscribers the following day. Become a premium subscriber by signing up on our Substack or Supercast.

David Hunter of Contrarian Macro Advisors rejoins the podcast to discuss his views on the economy, Fed, stocks, and bonds.

Not investment advice.

Content Highlights

  • Views on the bond market (1:31);
  • The Federal Reserve will likely pause again at its next meeting, on Nov. 1 (6:41);
  • Views on stocks (11:30);
  • Once consensus emerges that the Fed is ‘done’ it will remove a major wall of worry and headwind the magnitude of which few are anticipating… (16:14);
  • Targets for S&P 500, Nasdaq, Dow Industrials, 10-year yields… (21:21);
  • How the ‘bust’ scenario will play out (27:02),

To contact David Hunter and find out about subscribing to his newsletter, you need to send him a direct message on Twitter. His handle is @DaveHContrarian. The host will not forward your messages.

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Trouble in the Bond Market

Published October 3, 2023

Bonds are getting beat up again. The 10-year Treasury yield today rose to its highest level since 2007. It is joined by the 30-year, which also crossed the 2007 rubicon. The short end of the curve is hardly looking any better, with the 2-year also selling off — though at the time of this writing still a couple of bps below its level from 16 years ago.

Two things appear to be driving this:

  1. Fears of ‘higher for longer’ interest rates. Inflation remains too big of an issue for the Fed to ignore and Jay Powell & Co. are forced to continue their hawkish path when it comes to monetary policy.
  2. Fiscal concerns, specifically that escalating US budget deficits will create more supply of bonds than can be absorbed by investors.

The first issue is not new at all. It has very much been the driving force in markets for about two years. So much for our assessment that Fed fears had peaked. Maybe it will turn out to be early. Or perhaps just dead wrong. The point is, these concerns have not gone anywhere. If anything, they’ve intensified.

The fiscal concerns are a new wrinkle, clearly not helped by the developments in Washington. There is a lot of very dramatic language over this in the financial media. On some level the question does need to be asked as to who will buy all these bonds.

The Fed

This brings us back to the Fed, as the central bank is the largest single holder of US treasuries. And therein lies the problem because the Fed is reducing its purchases of treasuries through quantitative tightening.

With the largest holder/purchaser of bonds effectively leaving the game (at least for now), it creates a big hole from the demand side of the equation. Mutual funds are the second-largest holder of treasuries. Maybe they will step in and buy, though surely many funds are already sitting on substantial losses in their bond portfolios. Can they keep buying the dip? Maybe?

Other major holders — depository institutions (ie banks), state and local governments, pensions, and sovereign nations like Japan, the UK, and China — are not exactly equipped to pick up the slack when it comes to bond buying. Banks are constrained by new restrictions brought by the bank failures this spring and don’t exactly have the balance sheet prowess to expand their treasury holdings. State and local governments can at best expected to maintain the pace of their treasury purchases. Japan and China have their own fiscal problems to deal with (and bail out, when it comes to China). The UK is facing a recession and can be counted out for its own fiscal issues.

That’s all worrisome and could indeed create more pressure on bond prices in the short term.

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