Looking back into last week treasury bond sell-off I decided that the puzzle of the reason for that to happen is not resolved yet and I need to throw my three cents (inflation-adjusted two cents).

Most media sources posted that rebounding economy revived inflation and rate increase scare. I’m sorry, it’s hard to believe for me. First, the trailing 12-month inflation is decreasing and is already not above the Feds comfort zone. Second, as reported here, “this does not seem to be about inflation”, as inflation-protected TIPS are not in panic move.

Maybe China is dumping treasuries? Maybe, I don’t know. But why would they?

Then I came to this article, which claims that the source of large sell-off of treasuries are, probably, the mortgage servicers. They need to sell treasuries to offset the decline in mortgage pool values. But why so fast? You know what is the process that usually triggers the sharp sell-off of treasury bonds?

It is called “Involuntary inventory accumulation”. This process is sort of “margin call” for corporations, when they experience a sharp decline in sales and dramatic increase of inventories. To cover the short-term obligations they need to urgently borrow money at any price. They don’t have time to issue bonds or raise capital. They need money so fast that they just borrow at prime rate, pushing interest rates up and making bonds to collapse. You can read about this here or here.

Usually the involuntary inventory accumulation happens right before the recession starts. I’m not claiming that this is what we just experienced, but if it is, then we will enter the next recession before the summer ends.

We shall see very soon

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