# Decennial decimation

Remember back when 10-year Treasuries reached record low yields, and that was a problem because it meant the bond market was pricing in a deflationary depression? To be honest, that never really scared me. As long as our government can borrow at crazy-low rates of interest, things can only get so bad here.

Well, the yields are moving back up, and with a vengeance.

The Treasury market has cratered. The 10 year note has returned to the 3.30 percent level. Why did we crater? I think I have a solid answer(s) but wish I had thought this through earlier.

In the purest trading sense today is Friday. The treasury just announced $101 billion of new supply which will trade next week. Dealers, as is their custom, establish outright shorts and hedged shorts, to prepare for the bidding process. Certainly much of that process happens in advance of the auctions but the announcement is often a catalyst. Today it is a special catalyst as tomorrow is a short working day before the holiday and Monday is a holiday. If you wish to have a starter kit short in place one had better get working on it as there is only scant time before the bidding begins next week. So I think that the short week / auction supply dynamic is driving much of this. I also think that there is also disappointment about the buybacks. Today the Desk bought$7 odd billion of nearly \$ 45 billion offered. That I am sure leaves many holders of securities unhappy with their plight.

So maybe it is just technical. Or maybe the market is just trying to force the Fed’s hand.

Then again, maybe it is something else… Something potentially very dangerous. U.S. sovereign debt should not trade like a micro-cap stock.

Is “deflationary” the only kind of depression?