Demand for Treasuries at the weekly Treasury auctions has risen by slightly more than the increase in new issuance lately.

With more buying, which should boost price and push the yield down, why have Treasury yields been rising? Because selling in the secondary market has outstripped demand!

Securities prices, just like the prices of the everyday goods that we purchase in daily life, are driven by supply and demand. Money is the fuel of demand. Treasury debt is supply. In today’s markets, there’s more supply than there is demand.

In the big picture that I have been painting for you over the past year, the growth of money (what professional investors call “liquidity”) is waning and soon to turn negative, thanks to the Fed and its foreign central bank cohorts.

This is bad news not just for the Treasury market and bond market in general, but for stocks too. The bad news that we have been expecting is starting to happen.

But this bad news wouldn’t be apparent if it were not for the involvement of the Primary Dealers, the legion of big banks that the Fed works with.

That’s why today, I want to take a deep dive into how the involvement of the Primary Dealers is influencing this market downturn.

The Primary Dealers Are Required to Participate in Treasury Auctions. But There’s a Problem…

The Fed and Treasury require the Primary Dealers to participate in Treasury auctions, in return for the privilege of being the Fed’s exclusive counterparties in open market operations.

The problem for the dealers today is that weaker demand from other investor classes has forced them to take down more note and bond inventory than they otherwise would. Strangely and ominously, last month they took down more note and bond inventory, but they bought fewer T-bills. This could be a sign that they are running out of cash.

The market has persistently gone against the dealers over the past couple of years as they have increased their buying. An accident has been waiting to happen because of this. It looks like it started to happen in October, with stocks getting nailed.