Treasury ETF In Bear Market As US Borrows Portugal’s GDP In 4 Days

If you go by TLT, bonds are in a bear market.

The widely-followed long-end product fell early Friday following “surprise” overnight weakness in bonds, pushing its losses from last year’s highs beyond 20% (figure below).

Earlier this year, the fund wiped away the majority of its pandemic-inspired surge. The next milestone could be a retracing of the rally catalyzed by the August 2019 growth scare.

If you’re looking to explain weakness in bonds, you’re never at a loss for culprits these days. You can comfortably lean out the tried-and-true “confluence of factors” explanation. Everything from the shifting macro regime to concerns over the impact of a possible regulatory fumble are in play.

While this week’s supply went down reasonably well, market participants are inclined to cite the deluge of issuance when predicting an ongoing trek higher for yields. For example, BofA’s Michael Hartnett noted that “Treasury auctioned $255 billion in debt [in] the past four days, an amount larger than the annual GDP of Portugal or New Zealand.”

Regular readers will immediately point out that I’m not generally inclined to this type of analysis. It mischaracterizes what Treasurys actually are. They aren’t properly “debt.” They’re just interest-bearing dollars. You can’t “owe” an amount denominated in a currency you issue. The word “owe” doesn’t make any sense in that context, and when you’re a developed market with sufficient monetary sovereignty, deficits are largely meaningless.

Still, it’s the narrative that matters. Long-held dogma around debt and deficits isn’t going away overnight, so it’s worth noting (as Hartnett did in the same note) that the “US will spend $879 million every hour in 2021.”

That, he said, means that “either bond yields will rise, or the US dollar will fall to fund fiscal excess.”

Again, I readily admit that I’m trafficking in the kind of gratuitous non sequiturs that I so readily malign on a daily basis, but while I’m at it, I may as well deliver the predicable punchline (figure below).

If only Mario Draghi weren’t busy saving Italy, the US could recruit him to serve as President, Treasury Secretary, and Fed Chair, all at once.