The Treasury Drought Is Over: Bond And Gold Rally On Borrowed Time

by: Alan Longbon

The bipartisan debt limit and budget deal have ended the treasury drought and herald boom times ahead.

The gold rally will soon end as its use as a tier 1 asset alternative is over.

The bond supply is restored and so yields will now rise to reflect the abundance.

The very generous debt ceiling and budget deal seal in boom times for equities.

At present in the bond (TLT) and gold (UGLD) markets is an artificial rally brought on by a lack of treasuries. 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 now the treasury drought is over.

The President has signed into law a debt ceiling and budget deal that better than expected and will have the following broad market repercussions:

1. The bond rally ends.

2. The gold rally ends.

3. Equities rally starts.

So what now? Knowing that the treasury drought is over and bond creation has begun again, as shown in the table below from the Daily Treasury Statement, one might be tempted to immediately short bonds and gold. But being too early is the same as being wrong.

daily treasury statement The table shows that already this month nearly $300B of new treasuries have been issued.

This has not shown up as spending though. I expect that the proceeds are going towards making good the two Federal employees funds that were used to keep government spending going during the debt ceiling crisis. Part of the extraordinary measures the Treasury uses as such times. Book entries are going on and therefore no external impact.

When the funds are made whole again the Secretary to the Treasury will send the Congress a letter advising of this. At that time we will know that all further bond creation will have an external economic and market impact and no longer only serving to put internal accounting back in order.

Another important change to the Daily Treasury Statement is to Table IIIC shown below.

table IIIC daily treasury statement There is no longer any debt subject to a limit. Instead, there is a note that the debt limit is suspended until July 31, 2021. The take away is no more government shutdowns or strange bond and gold rallies until at least then.

The treasury drought has occurred at a time when there is normally a shortage of treasuries for seasonal reasons. That the treasury drought occurred now only accentuates the depth of the shortage. Yields have gone lower than they otherwise would have. This makes for a greater opportunity to trade.

To see what might happen now, one can read this excellent post from Mr. Robert P Balan of the PAM service and from which the following chart was taken.

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 inflection time is at about trading day 180 in September and coincides with a seasonal reduction in the Treasury Cash Balance. The deepest reduction in the year.

The chart shows how, on average, yields always bottom at this time of year due to the mechanics of Fed and Treasury bond creation mechanics. Yields then increase again as the supply of treasuries is resumed. The rises and falls one sees on the chart are mainly the impacts of quarterly tax payment.

The Treasury Cash balance is the federal governments spending account. The account balance is normally drawn right down until early September as the financial year ends. The account is then recharged with tax and bond income and spending appropriations from the new budget and rises again.

The inflection point shown in the above chart is approximately when one should start thinking about and implementing bond shorting and equity long positions (SPY) (DIA) (QQQ). Until then the gold and bond rally may continue and confound many investors that get in too early on this trade. This is especially so given the current negative news feed about:

1. Iran.

2. Trade war.

3. Currency war.

4. US sanctions on a wide and expanding range of countries.

A list of short bond investment vehicles is shown in the table below. This trade is a mechanical accounting certainty. The long equities trade is an emergent strategy arising from the better than expected resolution of the debt limit and budget crisis.


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.