(1/10) The continued steepening of the yield curve caused by the simultaneous rise in long-term US Treasury yields and decline in short-term US Treasury yields is telling an important story that investors should pay close attention to.
https://twitter.com/Schuldensuehner/status/1357815765974605837
(2/10) Long term yields are rising on the back of increasing inflation expectations and a broad industrial & commodity led "reflation". The sharp and unexpected consumer shift towards durable goods away from services last year caught many manufacturers and suppliers off-guard.
(3/10) A sustained consumer demand for durable goods and a sharp draw down in inventories combined with disrupted supply chains was a recipe for a spike in goods & commodity prices and increased production orders to meet the demand and replenish inventory. US30Y up, $USD down.
(4/10) However, the short-term UST yields continue to make new lows. This is indicative of a shortage of TBills that will only grow worse and have potentially broader impacts out the curve and across risk assets.
https://twitter.com/coloradotravis/status/1357750731801915393
(5/10) The drawdown of the TGA from ~$1.6T now to under $0.5T by June will flood the banking system with reserves. Banks may have trouble absorbing all of these reserves and it will increase demand for TBills further. This will put pressure on short-term rates to go negative.
(6/10) The Fed has been explicit that it does not want negative US rates, which could likely cause many unintended consequences across risk assets. To prevent rates going negative they can either raise IOER (not likely) or ramp up reverse repo, which has a similar effects as QT.
(7/10) High demand for TBills with not enough supply will push buyers to longer durations, causing a flattening of the Yield Curve. However, this impact will weaken the further our the duration.
(8/10) Forcing short-term rates positive when they would naturally go negative and with long yields continuing to rise, it could result in flows into $USD and strengthen the dollar. This is currently being overcome by the industrial upcycle and $USD remains in a downward trend.
(9/10) The rubber band is being stretched. The transient industrial & commodity led recovery are showing signs of slowing in China, which lead the US in timing of the virus and the subsequent recovery.
https://twitter.com/Trinhnomics/status/1356053773852889090
(10/10) Once the US industrial recovery slows, the rubber band will snap back. Treasuries up. Dollar up. Everything else down.
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