Two Reasons Why Primary Dealers Are Hoarding US Debt

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From Alhambra investments comes a report that US Primary dealers are hoarding US debt, such as treasuries other than TIPS (inflation protected treasuries).

Primary Dealers Net UST Positions
Primary Dealers Net UST Positions

The chart above shows the hoarding that began in 2018 starting in the middle of the year. The next chart shows the hoarding that accelerated during the volatile Q4 we saw in 2018. This occurred when stocks were falling and the markets were in question.

Primary Dealer Net UST Positions
Primary Dealer Net UST Positions


The primary dealers are a transmission mechanism between the US Treasury issuing debt and the market buying it. They serve the function of providing an orderly market place for US debt issuance. These dealers make money on the spread between the treasuries and what the market will pay. They handle the millions of complex transactions that must occur in this market so that Uncle Sam doesn’t have to.

So what does this mean? It appears the primary dealers are worried about liquidity, and not only in the US markets. They are hoarding debt so they can ensure an orderly market continues.

However, treasury yield curves are inverting across the world, as I wrote about several times in 2018. When shorter term treasury rates go above longer term ones, it is a signal the market things immediate economic risks are rising. In other words, yield curve rate inversions are a signal the market is worried about a recession.

And it is during the last recession in 2008 that the world learned what happens when liquidity dries up. Companies stop hiring and spending money. Banks stop lending. Consumer stop spending, and the economy drags to a halt. That most prominent words used in the media during that time are represented by the following word cloud.

bad economy wordcloud

To add insult to injury, this week’s Weekly Market Wrap-up will show that corporate earnings are down. Coupled with the revenue misses we all discussed in the last quarter of 2018, and it appears US companies are having a hard time keeping sales up.

In other words, there are signs we are headed for economic deflation. All of that money and debt issued by the world’s central banks in the last decade didn’t lead us to economic nirvana. This is evidenced by the homeless taking up residence in San Francisco streets as well as the devolution of Detroit into a near city-wide slum. Our economy is not as strong as the stock market would indicate, and now there are signs US stocks are sitting on a house of sand.

What’s next? Stay tuned, as we will follow the news into the next recession. Keep your internet browser tuned right here at Gold Silver Pros.

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