GM. Welcome to Milk Road Macro, your new favorite macro cheat code.
After months of saying “we should start a macro newsletter”, we finally did it. You’re holding history in your hands. Well, your inbox. Same vibe.
Here’s what we got for you today:
- ✍️ 3 ways the US can fix the unruly Treasury market
- 🎙️ The Milk Road Show: Macro Mayhem, Hidden Liquidity and Bitcoin ATH w/ Arthur Hayes
- 🍪 Trump delays 50 percent tariff on EU goods to July 9
Prices as of 9:00 AM ET.
3 WAYS THE US CAN FIX THE UNRULY TREASURY MARKET
There’s a problem in the gigantic $28 trillion US Treasury market.
You may not be too interested in the Treasury market.
But its movements could have big implications for risk asset prices and the US economy.
And it might just be the most important thing to watch right now.
So what’s going on?
One of the Trump administration’s clearly stated policies is to “lower 10-year yields”.
But yields just keep on rising.
The Treasury market has already forced Trump into one U-turn.
Long-term yields surged upwards in early April amid the tariff turmoil following “Liberation Day”.
The rapid upswing in 10-year yields up to 4.5% forced Trump into a sudden walkback of his aggressive tariff policy.
The President called out markets as “yippy”.
But yields are edging upwards to that “yippy level” again…
This is absolutely not what the Trump administration wants.
However, there are a number of sneaky liquidity levers that policymakers can pull in an attempt to tame the Treasury market, if yields keep on rising.
Let’s take a look at what’s going on, what it might mean for risk assets, and what to look out for next…
Why are Treasury yields rising?
This is not a US-specific problem - it’s part of a worldwide trend.
Long-term Government bond yields are edging up across the globe.
Yields in countries like Japan, Germany and the UK are all rising.
But why are US yields rising specifically?
It’s tough to pin narratives on Treasury market moves - but here are a few potential reasons:
1/ Just simply too much debt
Trump’s new “Big, Beautiful Bill” looks set to add between $3.3 trillion and $5.2 trillion to the national debt - and $600bn to the US Government budget deficit in just the first year (according to independent analysis).
2/ Worries about inflation
There is a perception among some investors that inflation is, at best, “sticky” at its current level above the Fed’s 2% target.
3/ Anticipation of stronger growth
Previously planned austerity is out the window, and now the Trump administration says they plan to spend, spend, spend, and “outgrow the debt”.
Higher anticipated growth often = higher Treasury yields.
Why might rising Treasury yields be “bad”?
1/ Higher mortgage rates
If long-term Treasury yields are rising, this likely means higher mortgage rates and higher private borrowing rates ahead - a headwind for the US economy.
2/ Higher Government interest payments
The US Government is already paying out roughly $1 trillion annually in interest on its debt, and as Treasury yields rise, this number increases.
3/ Often bad for risk asset prices
We’ve seen over the past few years that above roughly 4.5% on US 10-year Treasury yields (US10Y) could be a “tipping point” - a potential “danger zone” for risk assets like US stocks and Bitcoin.
Below, I’ve marked when the US10Y is rising above 4.5% (yellow line), and the corresponding S&P 500 price action.
The danger zone
However, it’s important to understand there’s a “protection team” ready to be deployed.
Over recent years, we have seen a Federal Reserve/US Government tag team has “defended” the 4.5% to 5% area on US10Y on a number of occasions.
Every time US10Y creeps into “the danger zone”, it’s been smacked back down with some kind of response.
But every time, US10Y creeps back up with a vengeance.
It just can’t be kept down.
So, what if US10Y continues to rise above 4.5% and towards 5%?
And policymakers feel the need to step in again?
What’s the next tool in the toolbox?
Outside of drastic measures like outright Yield Curve Control (Fed buying an unlimited amount of bonds at a particular yield) or outright Quantitative Easing (Fed buying a set amount of bonds at any yield), there are a number of other sneaky levers that can be pulled in an attempt to cram more liquidity into markets:
1/ SLR adjustment?
One big tool is an adjustment to the SLR (supplementary leverage ratio).
So what does this mean?
In very simple terms: shoving more Treasuries onto the balance sheets of commercial banks.
The SLR is a regulatory constraint on how banks put together their balance sheets.
Adjusting the SLR allows banks the ability to hold a lot more Treasuries.
With one simple change - Hey Presto! - you’ve artificially created more potential demand for Treasuries from banks.
“Bank-led QE” might be a bit of a stretch - but it certainly could be a big liquidity boost.
Recently, there’s been a lot of talk among policymakers about this change, with numerous Federal Reserve members suggesting it could be a good idea.
The latest signpost was last week, when Treasury Secretary Scott Bessent revealed “we are very close to moving” ahead with an SLR adjustment.
He’s argued yields could fall by as much as 70 basis points if an SLR change is made.
2/ More Treasury buybacks?
The US Treasury has been conducting small-scale “Treasury buyback operations” for roughly a year.
This means it issues new “on-the-run” Treasuries, and uses the proceeds to buy back old and less liquid “off-the-run” Treasuries.
This can be thought of as “lubricating” Treasury market liquidity and allows for more leverage in the financial system - more liquidity.
The pace is relatively small at the moment - projected to be roughly $40bn between now and early August.
However, Treasury buybacks could be expanded, potentially aggressively.
And Treasury Secretary Scott Bessent has already alluded to an expansion of the program recently.
This is another one to keep a close eye on.
3/ More debt issuance shenanigans?
Previous Treasury Secretary Janet Yellen leaned heavily on a special trick to funnel liquidity into markets.
She dramatically shifted the Government’s “debt issuance mix” away from longer-term debt and towards short-term Treasuries (T-bills).
This type of “bill financing” is generally stimulative to the economy and asset markets.
It is thought of as a textbook “debasement” tactic.
Heavy T-bill issuance can at times resemble a form of light “debt monetization” or “money printing”, because bills are often financed through private sector balance sheet expansion.
This tactic also means issuing less long-term debt, which crimps the supply, suppressing long-term yields.
Current Treasury Secretary Scott Bessent previously hammered Yellen for her controversial debt issuance switch, directly accusing her of “stimulating markets” in the run-up to the 2024 election.
But since taking office earlier this year, he has continued with her tactic of leaning on short-term debt.
It’s possible Bessent could shift the debt issuance mix even further towards T-bills.
But this might be a big blow for Bessent’s reputation.
In a scenario where yields continue to rise - maybe he won’t have a choice?
Wrapping up
All of these potential actions are attempting to do one thing:
Shove more liquidity into the system.
And maybe, paradoxically, Treasury yields rising could actually be a good thing for some risk assets?
Are we now approaching the point where investors understand that rising yields mean some kind of policy response will very likely come?
Maybe.
“Store-of-value” type assets like gold and Bitcoin, in particular, may now understand that rising Treasury yields = more liquidity is likely coming.
It’s certainly worth watching US10Y closely (watch that yippy level).
And keep an ear to the ground for any sneaky liquidity tools being used.
That’s it for this edition - catch you for the next one.
PS: Make sure to read through to the bottom, rate this edition, and leave us your thoughts on our first article (only if you want to of course 😉 ).
These ratings and comments help guide the content we create in the future to make it as helpful as possible!
THREE BIG ‘OH SH*T!’ MOMENTS FROM OUR CHAT W/ ARTHUR HAYES 🤯
Every week, The Milk Road Show sets aside one episode to talk macro! The most recent one was with Arthur Hayes (my spirit animal).
Here are three big ‘Oh sh*t!’ moments from our conversation:
1/ Follow the Treasury (not just Jerome Powell)
Everyone is focused on J-Powell and the Fed, waiting to see if/when they’ll cut rates – but as mentioned above, Scott Bessent, the Treasury Secretary, has been quietly enacting Treasury buybacks to keep debt markets functioning.
Translation: everyone is waiting for the Fed to come to the rescue, but the Treasury has already started to do so (just without telling anyone).
2/ Tariffs aren’t the protectionist policy Arthur is worried about
What could REALLY scare investor dollars out of the US market are capital controls – like a ‘foreign investors tax’.
Silver lining (to a very dark cloud): if that were to happen, the US would likely need to print money to prop up the economy – and money printing tends to pump Bitcoin’s price.
3/ Bitcoin price targets
Everyone is saying there’s potential for us to see a $150k–$200k $BTC by the end of the year…
Arthur thinks it could happen by the end of JULY!
The crazy part? All of this is just scratching the surface!
Click below to watch the full episode. 👇
YouTube | Spotify | Apple Podcasts
BITE-SIZED COOKIES FOR THE ROAD 🍪
Trump delays 50 percent tariff on EU goods to July 9. It delays duties on billions in steel aluminum and other imports while US and EU negotiate.
Kashkari says Fed should keep interest rates steady. He warns holding rates is prudent amid tariff uncertainty that could sustain inflationary pressures and slow growth.
Tesla sales in Europe fell 49 percent in April. Backlash against views of Musk and stronger competition for the updated Model Y keep sales weak.
MILKY MEME 🤣
