Bonds are sending a major warning
U.S. Treasury Bonds are sending a DANGEROUS signal for the state of our whole financial system.
Our research here at Golden Portfolio is of course geared towards gold securities, which means we pay close attention to gold.
But it also means we have to pay attention to the US dollar (because gold is priced in dollars) – and that means we have to pay attention to Treasury bonds.
Treasuries are the debt instruments sold by the US Government to fund the difference between tax receipts and federal spending.
Today, Treasuries are signaling something very dangerous for the dollar and the whole financial system. In the face of market uncertainty, we typically see investors of all kinds rush into the safety of US government debt. But that’s not happening. The opposite is happening. Investors are fleeing US debt, and not showing up to bond auctions. Major banks are now sitting on unprecedented losses!
What’s going on?
Until last week, Treasuries were AAA rated – meaning they were the safest bonds you could own and in basically zero danger of default. On Friday of last week, the credit rating agency Moody’s downgraded Treasurys from AAA to AA1, saying, “This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”
Part of the risk for bondholders is always default, but when it comes to sovereigns (aka, countries) that print their own currency, another risk is inflation, which can very quickly undermine the value of bonds on the secondary market.
Consider that on March 12, 2020, the US Treasury sold $16 billion worth of 30 year bonds yielding a record low 1.32%…
The lucky folks (mostly banks) who bought those bonds were maybe hoping that the long trend of lower rates would continue, which would mean they’d have an easy gain if the next auction’s yields dropped to 1.25%.
That didn’t happen. Those bonds have been losers ever since, and of course it wasn’t just that auction in particular. The Treasury sold another $17 billion worth of sub 1.5% bonds in April, and $22 billion in May, and so on.
All told, between March 2020 and April 2021, the US sold over $300 billion worth of 30 year bonds, all yielding under 2%.
And that number of course does not include US debt of other durations, from 20 year bonds all the way down to 1 month bills.
Who were the financial geniuses who bought these super-low yielding Treasuries?
According to Risk.net:
“Holdings of Treasury securities by the eight US global systemically important banks (G-Sibs) increased a whopping 42% over 2020 to $1.19 trillion. JP Morgan disclosed the largest increase in Treasury holdings dollar-wise, of $142.4 billion (62%) to $370.4 billion. This amounted to almost 11% of its total assets as of December 31. Citi’s holdings increased the most percentage-wise, by 73% to $232.2 billion, making up about 10% of its end-year assets.”
That’s right: faced with the worst yields EVER for US Treasuries, the world’s largest and most “important” banks bought massive amounts.
Today, with 30 year yields at 5% (and rising) these bonds have absolutely crashed in price. The March 2020 bond (CUSIP: 912810SL3) currently sells for 56 cents on the dollar. That’s a 44% loss on the books.
That means if JP Morgan still owns $142 billion worth of US debt they bought in 2020, they’re sitting on losses in the neighborhood of $62 billion.
The 8 G-Sibs collectively could be looking at total write downs of $520 billion.
The irony is that banks buy bonds not for their large yields, but for safety. That’s the whole point of buying what is supposedly the world’s safest asset: it’s safe, right?
Apparently not.
Now you might be wondering who owns the most Treasuries? It’s not China or Japan. It’s actually the US Federal Reserve. The Fed currently owns over $4 trillion, making it the largest individual holder of US government debt.
And after a few years of trying to “unwind the balance sheet” (a fancy way of saying they weren’t buying Treasuries) the Fed is back at it.
They recently added a net of $1 billion worth of Treasuries, for the first time since 2022.
The Fed isn’t buying Treasuries for the yield either.
They’re buying because no one else seems to be interested.
To recap: 5 years ago, the world’s most important banks bought huge amounts of Treasuries at rock bottom rates, for safety.
Today, those “safe” Treasuries are down 40+% and yields are screaming higher, while the Fed is forced to step in to buy Treasuries just to fulfill the auction.
Banks are sitting on hundreds of billions of losses from 2020 alone.
So right now, the Fed has a choice.
It can step-up its bond purchasing program to keep yields low. Doing so will likely spike inflation.
OR it can let bonds continue to rise, which pinches all of those “important” banks, risking a total financial collapse.
Which do you think they’ll choose?
As a gold investor, I believe it’s likely the Fed will choose inflation over collapse. That’s what they always do.
Be ready.
Garrett Goggin, CFA, CMT
P.S.Is the World’s Greatest Investor About to Shock Wall Street?
In just a few weeks, a move decades in the making could be revealed — and when it is, it could ignite the next great gold rush. Savvy insiders are quietly positioning now… before Buffett makes it official. I've already pinpointed four tiny-gold-miners that could 100X once the announcement hits. It’s the perfect moment to be greedy — before the herd wakes up.