Treasuries. Very valuable so keep reading if you’re greedy. My precious…

Treasury. It’s not the safe room you have in your house with all your gold, even though I know you totally have a lot of gold. Want to know what it really is? Read on! Also, here’s an actual one worth one million dollars!

September 28, 2022

Notable:

• The 10-year Treasury yield hits 4%.
• The BOE will buy bonds on “whatever scale necessary” to ease the UK’s monetary emergency.

Can we make it fun?

The 10-year Treasury (US10Y for the cool kids) is a bond, also known as a note or T-bill or debt or IOU. The yield on it is one of the benchmarks all around the world for reasons that are so fun you’ll want to keep reading. Wait, isn’t yield what you do so you don’t get into an accident? Actually, no. For bonds, it’s the interest rate. And guess what, it’s related to the Fed Funds Rate! OMG, not this again. Yes, this again, but even funner. The Fed’s Rate is seen as the lowest interest rate around, so when it goes up (drum roll please), the US10Y (I’m so cool) goes up, too.

The US10Y is a benchmark for mortgage rates. So when it goes up to 4%, it’s harder for John and Mary to get that white picket fence so it’s their fault that pending home sales have gone down 9 out of the last 10 months. (Why do they call something a benchmark? What’s the etymology? Heh, look that word up if you want a good SAT score. Hint, it was important to Tolkien. Google it! Learn something that’s totally not nerdy.)

The US10Y is also a debt that the US government says it owes you. 4% means you’re only losing 4.26% to the current inflation rate, which is how you help yourself when you help the government, as all naive people know is true.

Why does anyone buy the US10Y (still so cool) if you lose money on it? Well, remember how we talked about bonds being valued based on how much faith you have in the lender? The US government is the biggest lender in the world because people think it’s the safest one, meaning it WILL pay you back. When you see boring people on CNBC talk about how it’s risk off and people are “going to cash,” what they really mean is that rich people are selling their stocks to buy the US10Y while dummies like you and me sell our stocks and hold onto cash and lose an extra 4.26% while rich people laugh at us.

Education is so uplifting, isn’t it?

The Bank of England (BOE for the cool kids) is buying bonds (UK bonds, that is). Who else do we remember is buying their own money so that it’s worth more than the US dollar? (buying sovereign bonds = buying a currency) Could it be…this guy? Why is he laughing at us? Or maybe he’s not, and I’m insecure.

One reason the BOE is in trouble is the fear of margin calls. What’s a margin call? We once discussed derivatives which I know you absolutely remember because you were reading my article instead of watching orcs and elves. As I’m sure you recall, derivatives are based on leverage which means you can either win or lose way more money than you bet. Hopefully win. Maybe I shouldn’t say it that way since derivatives are definitely investments [gambling]. Anyway, if you’re losing too much, you’re required to put in more money in order to cover your potential losses. That’s because you’re investing with “margin” and your margin is getting “called.” (Like in poker when someone thinks you’re bluffing. What a weird coincidence.) Apparently, the crash of the sterling over the last couple days put some big pension funds at risk with margin calls, which is why the BOE began frantically buying bonds to settle the market down. When retired citizens wake up as paupers, public officials get fired. Oh, and it’s also really bad for the citizens.

Why does it matter when a few big players get margin calls? In order to cover their losses these funds end up selling other assets. Selling a lot of anything makes the price go down. What if those assets are being held on margin by someone else? Then those people need to start selling as well. Pretty soon everyone sees everything going down and then everyone is selling because they don’t want to be the one holding everyone else’s bags. This is contagion, which is sort of a like a fast-moving disease except it’s fast-moving poverty.

I know that’s only two topics for the day, but they were two big ones. Oh, and all the major indexes shot up around 2% today. Maybe we’re coming out of the bear market already. Can you hold my bags while I go to the bathroom?

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