Stanley Druckenmiller thinks we should listen when the bond market speaks. His recent opinion column in the Wall Street Journal, however, demonstrates that listening is not enough. You also have to understand the language of the market.
The event that prompted Druckenmiller to deliver his translation of the market’s message was the announcement by the Treasury Department that it would increase the upper-limit of its repurchases of 10-, 20-, and 30-year Treasury bonds from $2 billion per reverse auction to $4 billion. According to Druckenmiller, this is an attempt to silence the bond market.
The trouble is that the evidence he present to support this idea shows nothing of the sort. He points out that long-term yields initially fell after the announcement and then quickly rebounded. “The market’s verdict was swift and correct: This wasn’t liquidity management, it was price management—and a mistake far larger than $4 billion suggests,” Druckenmiller writes.
In reality, this proves almost the opposite of what he claims. If Treasury were managing the price of the long bond, there would have to be a price it was prepared to defend. Yet the 30-year yield returned to where it had been, and Treasury allowed it to remain there. There was no yield target, no additional response, and no promise to buy however many bonds were necessary to hold rates down. It’s an odd sort of price management that does neither management nor price targeting.
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