We’ve heard a multitude of explanations for yesterday’s activity so here’s our twisted view. There is no actual functioning market for Gov securities. The “too much debt” myth has morphed into a paucity of collateral myth in a matter of months. We pose a simple question: Who is the alleged Treasury participant supporting market function? “The Banks”? Sorry folks, no longer in that business. Besides, they can get 25bps at the Fed.The truth is, there isn’t one (any).
Our sources tell us 1 (ONE-UNO) seller of mortgages appeared around the testimony and the bids disappeared. We documented a massive upsurge in speculative positioning last month. That positioning is also concentrating in a limited amount of ideas. Short the Yen, long the SP, long the 10 yr was a nearly universal speculative House of Worship. What happened yesterday? Someone had seen enough and the herd followed.
So don’t waste brain cells rationalizing market chaos. Ask yourself this question: In a casino capital market world, around what “table” will the crowd now congregate? The front running candidate is the Aussie Dollar but we are doubtful it can handle the capacity the Spec- Juggernaut demands. We’ve got more thinking to do here. One thing we know for sure, Macro Tourists travel in packs.