- The Broken US Treasury Market

Let’s try a little thought experiment. If NASA announced that an asteroid big enough to utterly destroy every land creature on the planet was going to hit us in 2 weeks and there was absolutely nothing they (or anyone else) could do, how would you spend your remaining time? We all think about how we would spend our last 15 minutes… but what would you do with 2 full weeks to fill?

That’s too long to stay awake… too long to go without food or water. So some of the time you will spend sleeping, eating, and doing the normal things that make up a life. In some respects, things would be ‘normal’, because … what else would you do? I would imagine that many people will still show up at work every day – why not? Maybe you’re one of those people who are closest to their coworkers. There are plenty of people out there like that.

What about when you pulled up to the gas pump? Would you pay for the gas you took? I know I would, so long as someone was there to charge me and wanted me to pay. The money would mean nothing to me at that point, and if he still wants it for some reason, why not give it to him? What exactly are you going to do with the money otherwise…buy a vacation home? There are no more vacations coming.

Would you go on a rampage of mayhem throwing bricks through the window of Tiffany’s or raping your way through the high school senior class? I suppose it’s possible, but I doubt it. Maybe I’m just naïve, but I don’t think there are that many people who want to do things like that who aren’t already trying to. Most people I think will probably be more or less the same people they are right now.

In other words, life would be very close to normal. In many respects, you’d hardly know the difference. And the reason is that in the face of imminent destruction, most people will simply blot the whole thing out. It’s a difficult thing to imagine yourself beyond an unknowable abyss like that, so very few people would have a plan for living among the ruins afterward.

Anyway, there are three main reasons that the US 10 year bond is yielding as little as it is. The first is that old axiom that it’s always better to bet against the huge asteroid hitting the earth, because if it doesn’t hit you get paid, and if it does, there is no one left for you to pay.

The second is the assumption that if there a ‘credit event’ then the Fed will step in and buy up US treasury debt forcing rates to stay low, so there is no profit to be made on the short side, even if the outlook justifies it.

The third reason for the persistently low yield on US Treasury debt is that people are buying Treasuries for the same reason that many people will go to work after they know the world is going to end. What else are they going to do?

But markets are flexible, and reality will not be denied. The risks are there so the money is going somewhere. And if you can’t expect a profit shorting Treasuries, and you can’t short the dollar because the euro is collapsing even faster than it is, then what’s left?

In a word, it's the Swiss Franc and precious metals, which are the only way left to profit from the collapse of the US sovereign balance sheet.

The market for US Treasuries is broken. It has been since QE1. So it’s not giving anyone the feedback that it ordinarily would. But have a look at the yield that you get from US treasuries if they were priced in Gold instead of dollars, and you’ll get at least a window into the reality of what the market thinks for the outlook on US government debt.