I am very much prone to bludgeoning several long-deceased equines, and given what’s really going on with the Fed’s reverse repo (and nearly all commentary unhelpful surrounding it) this gives me yet another chance to really reuse my cudgel on at least two of them. This another opportunity to fixate more upon bank reserves, a forever topic until everyone learns the truth about them, as well as revisiting “too many Treasuries” in light of their auctions and the secondary market following them.



RRP has brought together both “too much money” as well as “too many Treasuries”, convenient for perhaps only me. The data has been consistent (thus beating horses long after their demise) as to how it cannot be either of those. Bank reserves don’t count much even for the reverse repo right now, while both secondary and primary market Treasury prices cannot possibly refute this Treasury glut idea any more than they have for years.

They still do it anyway.

Just today, the government sold 5-year paper which just so happens to be the third note auction at that maturity since the more fateful one conducted back on February 24. It had been this other one three months ago which, taking place during the Fedwire interruption, was perhaps a warning of what would follow the very next day with that uniquely awful 7s auction.

And then everything around the world that has followed.

Ever since then, demand has only gotten stronger and much more so once anti-reflation came to more completely dominate the entire space going back, like reverse repo, to the same exact point in mid-March.


Today’s 5s affair was simply blistering: $152 billion in bids for $61 billion being offered, a bid-to-cover the highest since last September. The median accepted rate of 74.1 bps in yields was nearly 6 bps below where Treasury said the constant-maturity 5-year had closed in the secondary market at the end of today’s session. The auction low of 8 bps, well, you get it.



Yesterday, Treasury sold $60 billion of 2-year notes (the reflation “swing” maturity) which attracted a more than plentiful $164 billion in bids (BTC of 2.735). Pricewise, while the secondary market put the yield around 15 bps, the auction median was just 10.8 with a low of also 8 bps. No wonder the secondary market price for 2s today dropped to 14 bps, among the lowest at this tenor for several months and perhaps best representing the potential expiry of that more and more distant reflationary enthusiasm.



Treasury will sell bills tomorrow, as it does every week, but for the last several weeks the 4-week results have been triple zeroes (high, median, and low yields). Next to them at the 8-week maturity, it has priced out at just about the same (zero median and low, highs of half a bip).

In the secondary market, according to Treasury itself, the 8-week bill equivalent yield priced today at zero for the first time, along with the sixth out of the last ten down at the same for the 4-week. Even the 12-month (52-week) bill yield is slightly less than 4 bps (incidentally two bps below effective federal funds).


Again, too much money and too many Treasuries don’t give you these kinds of results, particularly where the LT yields have priced since mid-March. The anti-reflation increasingly showing up in these suggests that the market(s) isn’t (aren’t) paying much attention to the recent CPI, isn’t (aren’t) looking at the RRP as bank reserves, and is (are) beginning to follow perhaps too closely the shortest of the post-2008 reflationary periods.

Rising yields and reflation had been the dominant direction going back to last August, closing in on ten months. By comparison, Reflation #2 (the wrongly designated “taper tantrum” of 2013) didn’t even make it that far. The same for Reflation #1B, the QE2-inspired transitory optimism late in 2010 lasting only to early February 2011.

This does not, however, rule out a lengthier reflation process even one such as the longest of them (thus far), Reflation #3, which began in July 2016 and didn’t complete its full cycle until early November of 2018. In between, there was a similar lull, early and middle 2017, until reflationary forces reignited by a temporarily raised US and global outlook.

A similar pattern played out in Reflation #1A, too, only that trend’s second leg early in 2010 lasted just five more months before the repo “rat” of dead collateral spelled its untimely horse-like departure.



In other words, we find ourselves right now, judging by global bonds, as somewhere in that uncertain middle. Is reflation already rolling over like it had right from the start of 2014? Reflation #2, unlike either 1A or 3 failed to reach any second leg. Neither did Reflation #1B once Euro$ #2 (based on the unfixed repo rat situation from the year before) plunged what was thought to be the inflationary world of early 2011 back into the disinflationary/deflationary darkness from which it has yet to escape.

Or, is there at least another leg up in yields like 2017 (and briefly early 2010) if after this interim there does appear more positive contributions and reweighting inflation/growth probabilities somewhat more favorably still? What are the chances of something like that?

Reviewing Treasuries and really global bonds, it would seem to be tilting toward the former but still far from conclusive. And it’s not just auction results and bill demand, in a lot of ways it is the time being spent as inconclusive when, right from the beginning of 2021, it sure appeared to be – at the time – everything on the side of reflation and inflation.