If you see a cockroach in your kitchen or bathroom, you can be sure there are more hiding. There is never just one. People may try to convince themselves there is only one, but there never is.

We can say the same thing about demand for US treasury bonds at last week’s ten-year auction. The result of the ten-year bond was ok, 4.225%, a little above what was expected. A slightly weaker result than expected shows only slightly weaker demand than expected. But this was not the cockroach. The cockroach was what happened 90 minutes before the auction; the yield surged and then faded quickly. A surging yield probably highlighted a very large short position going into the auction. In effect, someone with big money anticipated demand, either now or in the future, will decline, sending yields up and prices down. Short interest is selling, the opposite of demand.

The aggressive selling was brief, fleeting, just like a cockroach in a kitchen or bathroom.

Given the fundamentals of the US treasury market at present, a case can be made for declining demand. Metaphorically, more cockroaches.

First, no matter what one says confidence in US data is at risk given the firing of the head of the NLS. Skepticism regarding data quality can lower demand.

Second, the US dollar is not the only reserve currency in town. Other currencies, like the Euro, are taking up a larger share of global reserves. Any time a reserve currency is substituted for the dollar, demand for treasuries will be less.

Third, if a new Fed Chairman lowers interest rates without inflation being under control, inflation could eat into interest returns, leading to lower demand.

Fourth, the US is nearing its debt limit. Few people lend money to people who are over extended, and treasuries are the key source of US borrowing. If investors are skeptical about lending, treasury demand will decline.

Finally, treasuries are getting a boost from US dollar stable coins, crypto currencies backed by US treasuries. But US dollar stable coins are not the only game in town. Other countries are issuing stablecoins. If investors shift allocations to non-US dollar stablecoins, demand for treasuries that back US stablecoins will go down.

So, there may be a colony of cockroaches living behind the walls of US Treasuries.

What to do? Start diversifying away from US bonds. Don’t dump them completely but lower exposure. Lowering exposure can be done by buying funds that have foreign bonds, but if you are comfortable with crypto, there is a better way. The better way is to buy tokenized bonds from issuers like Etherfuse. Etherfuse bonds are bought in crypto accounts on multiple platforms. They provide direct exposure to several non-US sovereign bonds, all backed by underlying government paper.

If demand for US treasuries declines, medium to long term yields will go up. The US Fed may lower short-term interest rates, but that will not effect medium to long-term rates which are determined by supply and demand at auction. The whole point of pushing the US Fed to lower interest rates is to make the cost of money across the whole yield curve, from short-term to 30 years, go down. If this doesn’t happen , the US dollar may weaken, and a weak US dollar is good for non-US bonds.

So, a good trade might be two sell USTRY (or any other treasury) and buy Mexican CETES or Brazilian short-term bonds. On either one you will get more yield than on US, and there may be a chance of currency appreciation when the dollar is under pressure.

This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.

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