The Most Important Canary in the Coal Mine

treasuriesSomething big is going on now in the U.S. Treasury markets. Brokers and dealers are dumping U.S. Treasuries, as evidenced by the chart on your left. Note how these insiders continued to increase their holdings all the way from the massive double-digit yield of the late 1970s until it peaked at about 18% at the start of the 2008-09 financial crisis. Now the percentage of Treasuries held by these insiders has plunged to a mere 4%.

Something tells me this is significant. I have been noticing how frequently, when stocks decline, so too do Treasuries, sending yields higher. It used to be that when stocks came out of Treasuries (yields rose), it indicated “risk on.” But now that seems not to be the case. And if anyone would understand why they should get out of Dodge, it would be the bond market insiders who left Treasuries en masse when the Fed started printing money like drunken sailors.

T-noteThis past week on Thursday as well as on Friday, U.S. Treasury bond yields rose following the lead by the German Bunds. The Bund rose to nearly 1%, up from just 0.05% just a few weeks ago, while the U.S. Treasury yield touched 2.42T, the highest since October 2014.

The U.S. Treasury dealers serve a function of providing liquidity in the markets. But they are apparently not interested in doing so, now that the dollar is being debased massively by printing press money. And so there are reportedly growing concerns about growing illiquidity, and rates are rising, perhaps out of concern about a lack of liquidity arguably started by a lack of appetite to hold Treasuries by the consummate insiders—namely, the major banks that buy and hold Treasuries.

The charts on your left are from J. Michael Oliver of I expect to talk to Michael about the Treasury markets on my radio show next Tuesday. Note how the 10-Year T Note has not only broken down below trend dating back to July 2013, but is also on the cusp of a structural breakdown as well. Michael is suggesting that a critical point for the 10-Yr. U.S. T Note is 127 for the June contract and 126 8/32 for the September contract. In fact the June contract today closed at 125 3/32. Quoting Michael in his June 2 missive, “MSA argues that if the front month contract ever closes below 126, then the yield watchers/price watchers will begin to sense what momentum already argues: the beginning of trend failure.”

T-bondThis is an extremely important development in my view because it portends a breakdown in confidence in the largest reserve currency market of all—the U.S. dollar. If confidence is broken down in the U.S. Treasury market it could send all markets into a cataclysmic tectonic shift.

I refer also to Michael’s excellent June 3 article titled, “Judas Goat – Remembering 1987.” Michael is implying the strong possibility that we are starting to see a repeat of that horrifying stock market decline that was led by the T-Bond futures markets. As you can see as the T-Bond declined from June of 1987, it wasn’t until late August of that year that the stock market even began to show some weakness. The real avalanche in stocks took place only in October, which was a horrifying, death-defying plunge that actually led to the President’s Working Group on Financial Markets (aka the Plunge Protection Team) that stepped up manipulation of all manner of markets under President Reagan and Alan Greenspan at the Fed.

As Michael pointed out, rates were much higher back in 1987, but what is most important is a rapid change in rates. And it seems to me we may well be on the cusp of another such event.

The bottom two charts on your left show similar support lines for the U.S. 10-Yr. Treasury and the 10-Yr. German Bund at the bottom. It looks as if the German Fund has in fact pierced the support level at just under 152 at 0.714% while the U.S. 10-year instrument is resting on support at 3.09%.

It was Michael’s work this past week along with comments from other trusted analysts that convinced me to buy TBF, which is a straight 1 x short against 20- to 30-year U.S. Treasuries. And I am going to do the same with my Model Portfolio.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.