There are a number of variables that are working against the US Treasury market right now. We've discussed them in this letter throughout the past years, but it seems like there is a culmination of events coming together right now that make the outlook for treasury markets a bit bleaker. I sent the tweet above out last night after doing a brief check of markets before putting my phone away for the night and I had a hunch that these markets were going to be the focus of the day.

After a good night's rest and some validation upon market open I came to the conclusion that the yen blowing out and 10-Year treasury yields following suit to start the week shouldn't be that big of a surprise. Last Thursday it was made abundantly clear to the world that President Joe Biden is mentally unfit to be the president of the United States, or an HOA board for that matter. Friday brought with it a ton of speculation from the media, pundits, and Americans from all walks of life about whether or not Joe will be pulled from the election in favor of someone who can form even somewhat coherent sentences. By Saturday morning the consensus was that he will be replaced by someone before the Democratic convention. That was until yesterday rolled around and everyone was made aware of the fact that the Bidens had convened as a family and all agreed that Joe should stay in the race. As of right now, this seems to be the plan.

Whether or not this is because of grit and determination by Joe Biden, his family and his handlers as they attempt to brute force their way to another term or the fact that the Democrats came to the realization that federal election laws would make it very hard to swap out Joe with another candidate this close to the Democratic convention is up for debate, but the particulars don't matter as it relates to the treasury markets. The treasury markets are a proxy for confidence in the US government and its ability to pay back its debts.

When rates are low and demand is high, individuals, companies, funds and nation states buying treasuries are confident in the US's ability to pay back its debts. When rates are high, the opposite is true. Having a president who cannot articulate coherent thoughts is not confidence inducing and coming to the realization that despite the obvious fact that Joe Biden is mentally impaired, it seems like nothing is going to be done about it is even scarier. This is what the 10-Year treasury did over the last five trading days.

As you can see there was a slight retrace on Friday when the markets thought it was a foregone conclusion that Joe would bail. By late last night yields started screaming higher as it became clear that this does not seem to be the case. This yield blowout is probably being helped by the poor economic data that has rolled in over the last couple of weeks. Things are rather ugly out there at the moment.

Things get interesting here when you consider the precarious nature that Japan finds itself in as it continues to lose control of the USD/JPY pair. The yen broke above 161 once again just after midnight on the East coast and kept climbing throughout the day today. Hitting 161.708 at one point before ending the US trading day around 161.5. The double whammy of the Biden bond yield blowout and a yen breakout creates a particularly interesting scenario. To defend the yen the Bank of Japan is likely going to have to sell off a portion of their US treasuries. As yields keep climbing higher due to falling confidence in the leadership of the US government the dollar value of the bonds Japan needs to sell is falling. If treasury yields keep rising as the yen keeps blowing out the Bank of Japan is put in a tough spot; they need to defend the yen by selling treasuries, treasuries are losing value quickly, and once they do begin selling to defend the yen they'll begin to lose value even quicker. Things could cascade out of control rather quickly.

Interestingly enough, bitcoin - the globally distributed peer-to-peer cash system with a hard capped supply and an inability to be corrupted by central planners - rallied by more than 2% throughout the day.

Maybe markets are waking up to the fact that it doesn't make much sense to store your wealth in assets that are tied to the market's confidence in a decrepit president and the government's overall ability to manage their debt. It's almost as if it makes a lot more sense to take human error out of the equation and store your wealth in an asset that operates on a transparent ledger that cannot be corrupted by central planners.

Final thought...

Ready for oysters.