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The Exact Situation I Had Forecast Is Here, and It's Grave 2/26/21


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Primary Dealers were holding record levels of inventory with record levels of leverage since late Q3 2019. It was all hunky dory as long as bond prices were rising, or at least stable. The mirror of that is yields falling, or stable. 

Ever since then I regularly warned about this in my Liquidity Trader reports. I said that it's a two way street, and that when the inevitable decline in Treasury prices started, it would devolve into big margin calls to the dealers.

I have tracked these trends of dealer inventories and repo financing for years. The dealers had purchased the Treasuries almost entirely using repurchase agreements (repo) where the lenders would put up almost all the cash in return for the dealers pledging the bills, notes and bonds they bought with it as collateral for the loans.

I predicted, and this is not rocket science, obviously, that as prices fell, the lenders would demand more collateral. Duh. Those collateral calls would lead to forced liquidation in all asset classes, particularly stocks.

While these are patently obvious facts to any idiot paying attention to them, and this is where I come in, it seems that virtually no one was paying any attention to it whatsoever, outside of this one idiot.  

I posited first that a breakout in the 10 year above 0.80 would signal trouble ahead. When that didn't happen immediately, I doubled down and said, ok, well maybe the Maginot Line is 1%, but certainly the problem was there. I said that it's just a matter of time, and not too much more time. 

I've studied Primary Dealer bond inventory data and hedging data for many years. I knew they were exposed, but could not pinpoint an exact price level where the shit would hit the fan.

But I knew it was inevitable, and told subscribers that month after month. I tend to be compulsive when I get an idea that flows out of my research. Very annoying, I know. But I have to tell it like I see it.  

We are now there. Contagion has begun.

tvc_a3fd5a2d410a670518989251d673d148.png

 

I would not be lulled into a sense of false hope by this double bottom in the S&P fucutures. Resistance is currently (5 AM NY Time) at 3845 and 3855-60. That comes down to 3850 when New York opens at 9:30. If they don't clear that, the lows will break sooner rather than later. If they do manage to clear it, then a quick run back to 3890-3900 would be in order, with a pitched battle likely at that level. 

tvc_430112c48a096c222635810916fa8377.png

Yesterday, the 10 year hit a price projection for this move of 1.60. Odds are that the selling should have maxed out yesterday, FOR THE TIME BEING. Those are based on the historical probabilities that go with this type of projection.

It's not a guarantee that it won't get worse. Over the long run, it probably will. In the short run, as I've chronicled over the last week, the US Treasury has intervened in the market. If they continue with this level of intervention it should ameliorate the situation within the next few weeks.

But there are more problems coming over the next several months. I'll flesh out that scenario in a Liquidity Trader update which I should get posted later today or tomorrow. Take a risk free trial now and don't miss a beat. You can also access all past reports.   

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Meanwhile, here's some free stuff I've written about this unfolding catastrophe. 

US Treasury Injects Another $30 Billion Into Market

Treasury Announces It Will Inject ANOTHER $25 Billion For $125 Billion Weekly Total

 
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The Treasury poured $96 billion into the market over the last 2 days and has another $55 billion coming next week. This is all on top of what the Fed settles in QE each week.  But Treasury also is issuing $174 billion in new coupon paper. So I'd imagine there  will be a lot of bouncing around. 

https://liquiditytrader.com/index.php/2021/02/18/treasury-joins-fed-in-spewing-money-into-a-black-hole/

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