If Investors Are Not Buying Treasuries, Then What Are They Buying?
Bonds (or treasuries, which is another name they are called) are investment vehicles investors like to jump on during times of uncertainty. Historically, during wars and events that distort economic activity, investments in bonds are on the rise. But there are 2 major wars in the world right now and there appears to be a net selling happening.
What is happening? If investors aren't buying treasuries, what are they buying?
Markets VS Real Economy
First, you have to understand that there is a difference between the financial markets and the real "on-the-ground" economy. The market seems to catch up with what is happening in the real economy in hindsight.
And this is mainly because the markets are data-driven. They have to see a broad base data and decide how to react. For example, people started complaining of inflation in 2021 long before the data started showing signs of it. We call it the 2008 financial crisis, but it wasn't until 2010 before the official narrative was that there was a financial crisis.
People explain things away. They will come up with fancy terms to speak against the obvious. This is why you must pay attention to who you listen to and where their allegiance is. Everybody has a bias.
And aside from the hindsight of the markets, sometimes the markets don't correlate with what is happening on the ground. A good example is the year 2020 during the lockdowns. We all know business activity was shut down, but the markets were surging to all-time highs. It became a casino.
So, don't think that what is happening in the real economy will translate to the markets, at least in the short term. It won't happen in the short term, I am very sure of that. Over the long term (and by long term, I mean 9-18 months), it may. But even the long-term trend is subject to the policies of the central bank.
Therefore, anyone trying to explain anything happening in the markets right now with the current economic activity in the real world is not doing it right.
If you want to know what is going on in the financial markets, look to the financial markets and the data the financial markets currently have.
Net Sales in Treasuries
There are many reasons for the lower price of bonds (and higher yields). I have written about that here. Is this a good time to buy bonds? It depends. Are you a bond investor? If you are not a bond investor, you'll probably hurt yourself somehow.
But what you see is what you get. First, with the supply of new bonds and the current yield, you would see more massive inflation numbers. It is the way the average person will pay.
And I think this net sales in treasuries will keep happening. Don't try to put too much real-world reasoning into it. What you see in the financial data is what you get.
What Investors Are Buying
Cash is king. Many people are taking their cash to the private credit market. There they can charge north of 8% interest. I recently got an offer for cash at 17% interest. Mortgage is now at 8%.
Why keep buying treasuries at 5% when you can some insane percentages on the private market? And people are buying into it. People are still taking money at these high rates because they have to keep economic activity going.
It's mostly the small business owners who don't have high enough credit scores to get the official bank lending rates that will suffer these. And as times get harder, there will be more pressure on small businesses to use the private credit pathway.
It's the big eats small. So, this is where money is going. The rules haven't changed. Everybody is looking for a place where they can get the maximum profit for their capital.
There is net selling of bonds and treasuries. Investors appear not to be buying. My hypothesis is that all the money that traditionally flows into bonds is flowing into private credit vehicles.
Bloomberg revealed last week that the credit score of the average customer of Goldman Sachs is 797. Other banks such as Bank of America, JP Morgan, etc., maintain the same dynamic. In other words, they are not the bank of the average American. They are the bank of the rich.
None of the top 5 largest mortgage-lending US institutions are banks. The big banks have largely dumped that business. This is further driving the divide between the rich and the poor.
In my opinion, the worst-case scenario is extreme wealth inequality leading to civil unrest. But if you play smart, there are lots of rewards.
P.S. I learned a phrase last week that stunned me. Maybe I will write a full article on that. It is something I heard from a billionaire hedge fund manager mid-conversation. He said, "Nobody pays their debts, everybody just refinances until they can't refinance anymore". When they can't refinance anymore, they have to file Chapter 11 bankruptcy. Think about that.