Seeking Alpha

The Treasury Drought Goes On: Bonds And Gold Rally Onward

by: Alan Longbon

The treasury drought continues mechanically driving a bond rally.

Gold gets a free ride co incidentally because it is a tier 1 asset alternative to treasuries.

Both rallies end when the treasury drought is over.

At present in the bond (TLT) and gold (UGLD) markets is an artificial rally brought on by a lack of treasuries going on. The lack of treasuries, which are the key tier 1 asset, for banks collateralizing loans and passing Fed stress tests, is causing their value to rise. Gold is getting a free ride because it too is classed as a tier 1 asset and is a reluctant alternative to treasuries that the banks are turning to. This matter is discussed in this article and presents some excellent investment opportunities when the treasury drought is over.

To see what might happen when the treasury drought ends, one can read this excellent blog post from Mr. Robert P Balan of the PAM service and from which the following chart was taken, showing how a similar scenario developed in 2011.

2011 treasury cash balance The X-axis is set out in trading days, and there are roughly 20 trading days in each month, so one must adjust for this to get the right date. The 'crunch' time at about trading day 180 is September/October and coincides with the new Federal government budget period and lifting of the debt ceiling. You cannot authorize a new budget in contravention of the debt ceiling, and so, it too must be adjusted at the same time. There is no getting around this fact.

The latest information on the table that can help us work out when this trade will start is a letter to Congress from the Secretary of the Treasury shown below.

Secretary of the Treasury to Congress The letter says the accounting sleight of hand that has been used to stay under the debt ceiling is continuing. Money is being directed out of the CSRDF and the PSRHBF and onto the treasury operating balance.

The latest estimate for having an operating balance at the treasury is the 25th July 2019. After that date, another such letter and assessment will be made in the absence of action by Congress. And, no response seems apparent unless it is going on very quietly behind the scenes.

Mr. Mnuchin has been sending these letters to Congress regularly as the following screenshot from the Treasury shows.

USA debt limit letters to Congress (Source: US Treasury)

The latest round of letters to Congress started in February 2019, and since then, a new letter has been sent to Congress roughly once a month advising of extraordinary measures and estimates to exhaustion of the treasury operating balance.

When the debt ceiling is lifted, and anyone with a knowledge of reserve banking will tell you it does have to be raised for the Fed and the Federal government to function, bond yields will soar and face values will fall. This is a mechanical fact of accounting and is going to happen and can be traded. The following investment vehicles can be used:


ProShares Short 20+ Year Treasury


ProShares Short High Yield


iPath US Treasury 10-year Bear Exchange Traded Note


ProShares Short 7-10 Year Treasury


Barclays Inverse U.S. Treasury Aggregate ETN


iPath US Treasury Long Bond Bear Exchange Traded Note


iPath US Treasury Flattener Exchange Traded Note


Direxion Daily 20+ Year Treasury Bear 1x Shares


iPath US Treasury 5-year Bear ETN


Direxion Daily Total Bond Market Bear 1x Shares


iPath US Treasury 2-year Bear Exchange Traded Note


Direxion Daily 7-10 Year Treasury Bear 1x Shares


ProShares UltraShort 20+ Year Treasury ETF


Direxion Daily 20+ Year Treasury Bear 3x Shares ETF


Direxion Daily 10-Year Treasury Bear 3x Shares ETF

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.