Treasuries Look Ready to Break (and what happens when they do)

Quick Overview

Treasury yields are signaling a potential break to the upside, which implies that if yields rise significantly (e.g., Fed Funds rate hits 10%), the US government will face much higher borrowing costs, potentially leading to severe inflation if the Fed cannot stop buying assets, as banks are currently restricted by the Supplementary Leverage Ratio from absorbing all necessary debt issuance.

Key Points: Gold is on the brink of breaking $5,000 per ounce, acting as a monetary asset against inflation driven by central banks and large funds. The U.S. Dollar Index has been weakening over the last couple of years, contrasting with rising stock indices like the NASDAQ 100 Index hitting all-time highs. If the Fed Funds rate drops to 1% (implying lower government borrowing costs), the cost of living (housing, transport, food) has increased by 5%, meaning lenders demand at least 5% return to compensate for lost purchasing power. The profile of public debt as of December 2025 shows Notes comprise 50.68%, Bills 21.22%, Bonds 16.98%, and Other 11.12%, with 72% of debt maturing in under 10 years. The Fed paused quantitative easing (QE) in 2020 but has recently resumed increasing its balance sheet, which drives up asset prices but also risks severe inflation if they buy too much debt. Banks are currently restricted by the Supplementary Leverage Ratio from buying all necessary US Treasuries, creating a funding gap that the Fed may eventually have to fill, likely through the printing press.

Context: The video analyzes current market conditions, focusing on the divergence between rising asset prices (like Gold and the NASDAQ 100) and the weakening U.S. Dollar, which is historically seen as a safe haven asset. The core argument centers on U.S. Treasury yields, which are threatening to break out higher, and the implications this has for government borrowing costs and the Federal Reserve's ability to manage its balance sheet amid ongoing inflation.

Detailed Analysis

The speaker asserts that the Treasury market is ready to break out, which signals potential trouble, particularly for the U.S. government's borrowing costs. Gold is approaching $5,000/ounce, serving as a monetary asset against inflation fueled by central bank money creation (M2 supply hitting new highs). Simultaneously, traditional equity markets like the NASDAQ 100 are reaching all-time highs while the U.S. Dollar Index weakens. A key issue discussed is the cost of living rising by 5% while borrowing rates might only be around 1% (like a $100 dinner costing $105), meaning lenders require higher returns (at least 5%) to compensate for inflation. The composition of U.S. public debt as of December 2025 shows that Notes dominate at 50.68%, with 72% maturing in under 10 years, creating significant refinancing pressure. The Federal Reserve historically used Quantitative Easing (QE) to buy debt during crises, but recently resumed increasing its balance sheet (Total Assets chart 6:25). If the 10-year yield breaks out higher, the government's borrowing becomes more expensive. Furthermore, banks are currently restricted by the Supplementary Leverage Ratio from absorbing all the new debt issuance, meaning the Fed might be forced to step in and buy again, which could unleash severe inflation if not managed carefully, likely by changing banking regulations.