US Govt Bonds are not legal tender

The 10 year US Treasury yield is back over 1% again.  The TLT (20+ year long term Treasury Bond ETF) has fallen 20% from its peak at $180 to its close today at $144.  

Aren't US bonds a safe haven?  Not always. 

You can't pay your employees, buy groceries and pay your internet bill with US Treasury.  You need cash.  And you need to exchange (sell) them for US Dollars.

As soon as North America began to respond to Covid-19 by shutting down the economy, this immediately put a halt to the movement of cash, and the rush for US dollars began.  On top of the usual causes for a rush to dollars (hedge fund liquidiations, risk parity gone arwy), I believe there are two other important structural issues that are magnifying the demand for cash which are particularly relevant today.

Govt Bonds went parabolic in a rush to safety, and has crashed in a rush to the USD.

First, society (households and businesses) have become 'cashflow' based as opposed to 'balance sheet' based.  Decade ago, it was common to save up a large amount of equity to purchases assets.  These would sit on your balance sheet.  Today, its much more common finance businesses (and even house holds which live paycheque to paycheque!) without the need of much equity (or savings for households).  While this leads to very high return on equity (because there is so little equity), it results vastly more cashflow risk!

The second reason is indexing and low interest rates.  I believe that a lot of small businesses use their business also as their retirement savings.  Low interest rates have forced them to invest in risky assets (stocks, bonds; not cash).  Now, as the economy shuts down and the cashflow they are accustomed to disappears overnight, they are require to sell their stocks and bonds to pay their employees, bills, rent, etc.  This might explain why the selling seems to have been a somewhat steady 4-5% per down day.  As cash needs arise, people are forced to sell to raise cash to save their business.

What does this mean for markets?

I don't think markets (both stock, bonds, and all other asset classes) can gain stable footing until the latest round of proposed stimulus ($1 Trillion in the US) actually puts CASH into bank accounts (or at least close enough combined with raised capital to make it to the next payment cycle).  The expectation certainly helps, but you still can't pay your bills with expectations.

Here's the latest $1T proposal.  The cash won't arrive for another couple weeks so expect periods of forced selling to continue.

• Two $250B cash infusions to individuals (first starting Apr 6, second in mid-May), potentially in the form of $1000 cheques.
• $300B for "small business interruption loans"
• $200B for other loans and bailouts

Risk Manager Jeff