The cracks are forming

The bond market is telling us exactly how bad things are.

We all know that the US banking sector is essentially insolvent. Over $500b of unrealised losses on the balance sheets after the fed hiked rates in 2023, killing their treasury holdings.

As we know, that caused SVB to collapse and they had to initiate the BTFP (stealth QE) to prop up the system, allowing banks to park their distressed bonds at the fed in return for the held-to-maturity value in (freshly printed) cash.

The BTFP was allowed to expired in march 2024, and the loans were of 12 month terms. That means that by march 2025, all the loans will have come due, with interest, and the bonds are back on the bank’s balance sheets. Only the bond market has fallen further since, meaning the losses on those bonds are even greater.

And just like clockwork, 12 months from that date, in march 2025, the fed tapered their QT aggressively. They reduced the monthly balance sheet roll off from $25b (originally $60b) to just $5b. That means they became net buyers of treasuries again, QE in full effect, but with the label of QT still, desperately trying to prop the market up.

The timing was telling, not only with the BTFP loans expiring, but with yields regularly threatening to go above 5%, which would be disastrous for the treasury who have to refinance $9.2 trillion of low interest debt this year. Fiscal dominance anyone?

Whilst all of this is going on, interest payments have quietly creeped up to 14% of federal budget in 2025, second only to social security. It was 11% last year. It’s overtaken healthcare.

The final nail in the coffin was last week’s treasury auction. Clearly demand was low, and the primary dealer banks had to soak up a load of excess demand, because the fed just stepped up and bought $43b of treasuries in a single week. The only reason for that, is to relieve the banks and avoid a liquidity crisis. The private market wasn’t buying and the primary dealers had to burden their balance sheets with all those treasuries. There is now no doubt remaining, QE is back (for treasuries at least), they just aren’t saying it.

How long now before they have to officially announce they’re easing again? And how much will they have to print to overcome the worst bond bear market in modern history?

I honestly didn’t think this was going to happen so quickly, I thought we may have to wait a while longer. If they didn’t seize all of Russia’s assets, maybe they could’ve kept the can rolling for longer too.