the right tool

August 14…)

in the news

Baker Hughes rig count at 1 PM. Rigs have been flat since mid-July.

An interesting heads up from Secretary Bessent on Iran. “As things disappear from the dining table, fruit goes first, then dairy products, then anything considered non-essential,” a woman in the Iranian capital, Tehran, said in an audio message sent to RFE/RL’s Radio Farda.

Iran’s economy is in tatters (via oilprice),

Via Z-hedge chart below: Monthly nuclear update: China 37 nuclear reactors under construction; US 0…

in the markets this morning

The long bond is hanging from a thread. No amount of dovish data has aided the erstwhile AAA rated fixed income. A reader reposted this X-post in market vibes comments yesterday (Ht Where is Billy D).

“From the Financial Times: “A $25bn Treasury auction of 30-year bonds on Thursday drew yields as high as 5.22 per cent, according to the US Treasury department. It marked the highest yield since the 5.52 per cent paid in August 2001, after which 30-year auctions were suspended for almost five years”

interesting history

In late October 2001, the U.S. Treasury (under Secretary Paul O’Neill, with the decision executed and announced by Under Secretary Peter Fisher) suspended new issuance of 30-year bonds. The last auction before the pause, in August 2001, had cleared at a high yield of 5.52%. Auctions remained suspended for nearly five years until reintroduction in February 2006.

The stated rationale centered on debt-management principles rather than short-term market timing: projected federal budget surpluses made long-term borrowing unnecessary; shorter-maturity issuance was cheaper amid aggressive Fed rate cuts; and concentrating supply on other tenors would better preserve market liquidity and minimize long-run borrowing costs. Long-bond yields plunged 35/40 basis points on the announcement (from 5.22% to 4.85%), in the largest one-day decline since the 1987 crash. Prices rallied higher on abrupt scarcity and the yield curve flattened.

no new legislation was required

The Treasury Secretary holds broad statutory discretion over the maturity structure and auction calendar of marketable securities within the overall debt limit. The episode established a precedent that Treasury can unilaterally adjust (or suspend) long-end supply as a legitimate debt-management lever to influence the term structure when it judges that reduced long-duration issuance aligns with lowest-cost financing over time and market functioning. It demonstrated a supply-side mechanism capable of relieving upward pressure on long-dated yields without relying solely on monetary policy (sources: Congressional Research Service & New York Fed historical study of Treasury debt management (page 5 and 9-12).

Treasury Under Secretary Peter Fisher’s remarks at the November 2001 quarterly refunding explicitly framed the suspension as a debt-management judgment: the 30-year was not needed for financing needs, and concentrating issuance would better serve lowest long-run costs and market liquidity. The precedent established the unilateral discretion of the Treasury Secretary over the maturity structure and auction schedule, and the 2001 episode as a concrete exercise of that discretion that successfully influenced the long end of the yield curve.

The action was executed solely by Treasury. Therefore, according to what I have read, the same authority remains available today.

Data has been disinflationary. May NFP job growth fell from +172k to negative 23k in 90 days. Productivity was up 1.4% in July. Wage growth is lower than CPI and PPI and long yields are spiking. The auctions are functioning, liquidity is stable but the cost of funding is more than double MOM core CPI. It would seem reasonable to sell fewer long dated bonds and more 2 year and 5 year notes. At any rate many thanks to paid up subscriber “Where is Billy D” for pointing this out. And… for those of us watching the dollar, interest rates and trading bonds… forewarned is forearmed.

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