I got to play in a memorial golf tournament for a friend of mine yesterday. It was terrific to see a number of people I have not seen enough of over the last 20 or so years. The format was a

scramble which means one can feel confident to take risks. However, there were still a number of shots that got away from me.

I wonder if the Fed is feeling the same thing in regards to QT and balance sheet reduction. It probably felt confident to take the risks of unwinding a large amount of assets. Those risks might be getting away from them now.

You see, the Fed is not the only one looking to sell. Emerging market central banks are in a position where each needs to sell holdings of Treasuries to raise dollar liquidity and help domestic companies that have dollar debt. The Fed could extend swap lines to help these countries out. The Fed has existing dollar swap lines with Canada, UK, Europe, Japan and Switzerland. It has had temporary lines with others in the past. Given the dollar wrecking ball ripping thru the mkts, this could help relieve pressure. Until we see that, this source will not buy bonds.

Other central banks are not stepping into the void because of their own problems (Europe) or a new desire to diversify away from the US for geopolitical reasons (Russia, China, maybe others too).

Individuals are not quite there yet in buying but may soon. Pension plans are starting to see

corporate bonds around 6%. With a benchmark return need of 7 to 7.5%, corporate bonds get attractive soon. The spreading by dealers will bring some demand for Treasuries but not yet.

The reality is the bond yield is starting to dislocate from fundamentals. We can see back in

2021, bond yields were held artificially low when growth in white was spiking and inflation expectations recovering. That is the lower circle. Now we are in the opposite, where QT might be forcing yields higher than they should be as growth is slowing and inflation expectations out to 5 or 10yrs are also falling.

This is where the NY Fed needs to take note. It will survey dealers each day. It will determine that the liquidity in bonds is very poor. It will see the dislocation from fundamentals. Back in June when I first started discussing the idea of a Fed pivot or pause, I said the pivot would not come in rates but would come in stopping QT because the Fed would soon realize the mkt could not handle it. Even while the Fed hikes further, and I think it will in Nov and Dec, there is scope to use the liqudity and market stability argument, as well as stresses abroad, to slow QT. Perhaps we see that in the coming weeks. That would be a positive.

For now, the price action in bonds has me worried. This will cause pain in leveraged

accounts. We will hear of this soon enough.

Stay Vigilant