America’s economy is faltering not from too little infrastructure spending, but from too much debt—-$67 trillion of total public and private debt, to be exact. So it appears that the bond vigilantes are returning from 24 years of hibernation just in the nick of time to put the kibosh on the Trumpite/GOP’s latest hare-brained scheme to balloon the public debt.

As if the impending FY 2019 collision between $1.2 trillion of new Treasury borrowing and the Fed’s $600 billion bond-dumping campaign (QT) incepting this coming October were not enough, word now comes that Tuesday’s night’s State of the Union (SOTU) adress will feature a $1.7 trillion infrastructure plan.

We’d say rechristen the Donald as “Boondoggle Don” and be done with it. On top of the $1 trillion + deficits already rumbling down the pike, the very idea of a massive debt-financed, pork-barrel driven borrow-and spend spree 104 months into a business cycle expansion is sheer lunacy.

And don’t take our word for it—even if we have been smoked by the bond vigilantes up close and personal, and more than once. With this morning’s breakout to a 2.72% yield on the 10-year treasury note, it is more likely than not that the bond-selling stampede has commenced.

To wit, the greatest no-brainer trade ever invented has been front-running on repo (i.e. 95% borrowed money) the massive bond-buying campaigns of the central banks: The carry was free, the bond price was guaranteed to rise, the spread was fulsome, the central banks’ policy signals were well-telegraphed and transparent, and through it all bond traders slept like babies without risk of Ambien addiction.

That is to say, on top of the $20 trillion of bond supply that the central banks have taken out of the market with credits conjured from thin air since 1995, trillions more was absorbed by leveraged speculators who were buying today exactly what the central banks had pledged to be buying tomorrow—-right down to the Cusip number.

Needless to say, that double whammy of bond price levitation is over and done. With central banks rapidly winding down their QE bond purchases, the smart money is about to make its own pivot. That is, toward selling what the Keynesian central banks will be selling as the latter desperately scramble to shrink their elephantine balance sheets, and reload the dry powder they believe will be needed to combat the next recession.

To that end, it is worth noting that the 10-year yield has now doubled from its all-time closing low of 1.36% recorded on July 5, 2016. Having gone eyeball-to-eyeball with a yield of 15.86% back in September 1981, we can say this: A 92% yield drop over 37 years defined an aberrational era that virtually destroyed all intellectual muscle memory in the bond pits.

Neither the trading algorithms nor the remaining carbon-based bond jockeys have ever known a sustained period of rising yields.

Likewise, they have operated for a lifetime in hot-house markets where massive, sustained central bank bond buying over-rode and deformed any ordinary dynamic of supply and demand fundamentals. Accordingly, the denizens of today’s electronic bond pits don’t know from “price discovery” and can’t imagine a scenario in which the central banks don’t have their backs.

But that’s precisely why a “yield shock” is imminent. In fact, now comes the black swan with an orange-colored hue; Trump’s SOTU boondoggle may well be the risk-on pin that the current manic financial bubble has been searching for since November 8, 2016.

Stated differently, Boondoggle Don may be commencing god’s work after all. In the current fraught environment, it will not take much to trigger a self-fueling bond market sell-off that will finally bring down the entire debt-enabled house of cards.

In this context, we’d also bet heavily on the proposition that the chart below has never been seen inside the White House. Unlike the warmed over supply-side fantasies being ponied-up by geriatric supply-siders like Steve Forbes and Stephen Moore, this chart is about the real economics of our time; it dwarfs into insignificance Art Laffer’s four-decades ago napkin scriblings.

To wit, as recently as January 2017, the major central banks were draining securities from the bond pits at a $2.1 trillion annual rate, thereby injecting a tsunami of newly minted cash into the casino where it found its way into corporates, junk bonds, ETFs, short vol trades and even more exotic “risk-on” speculations.

Print Friendly, PDF & Email