MAY 7, 2018
The Fed is often referred to as “The buyer of last resort,” the entity that will purchase US treasuries when nobody else will.
With foreign buyers stepping away from the treasury market, we will get to see just how committed the Fed is to “normalizing” its balance sheet after a decade of QE. If they continue to remain sellers, Napier’s expectation of a buyer vacuum must necessarily result in a sizable spike in yields to attract private-sector buyers.
Fresh off his successful call earlier this year that the US dollar would strengthen in the coming months, macroeconomic strategist and market historian Russell Napier joined MacroVoices host Erik Townsend to discuss why he favors deflation and why he has such a bullish view on the US dollar.
Echoing David Tepper's concerns that the equity highs for the year might already be in, and that a 10-year yield above 3.25% could lead to market chaos, Napier said he sees interest rates rising sharply in the coming months as the dollar strengthens - a phenomenon that will push the US back into deflation.
Napier's thesis relies on one simple fact: With the Fed and foreign buyers pulling back, who will step into the breach and buy Treasurys?
The answer is - unfortunately for anybody who borrows in dollars - nobody. In fact, the Fed is expected to allow $228 billion in Treasury debt to roll off its balance sheet this year.
This "net sell" will inevitably lead to higher interest rates in the US, as well as a stronger dollar. And once the 10-year yield reaches the 4% area, signs of stress that could be a lead up to a global "credit crisis" could start to appear.
ORIGINAL SOURCE: Russell Napier: The Rising Dollar Will Trigger The Next "Systemic Banking Crisis" by Tyler Durden at Zero Hedge on 5/5/18