The Tale Behind The Tail….

erohedge grabbed my attention, “Terrible 2Y Auction: Biggest Tail in 3 years, Dealers Highest Since 2022”:

“We were wondering how long before the lack of disposable cash hits US debt. We got the answer today…when we got the results of today’s $69 billion 2Year bond auction. In a nutshell, it was terrible.

The auction priced at a high yield of 3.936%, up from 3.455% last month and the highest since May 2025. It also tailed the When Issued by a whopping 1.8bps, the highest tail since March 2023.”

Their conclusion – always direct:

“The bid to cover was a piss poor 2.440, down sharply from 2.630 and the lowest since May 2024.”

Chuck Butler followed, quoting MarketWatch in the Daily Pfennig:

“Typically, 2-year auctions go largely unnoticed, beyond the dealers and buyers involved in the roughly $30 trillion Treasury market. …. The auction starts; buyers line up.

But Tuesday’s auction went ‘miserably,’ making it hard not to notice, with yields on the policy-sensitive 2-year rate advancing…during the session to 3.926%, its highest yield in nearly eight months…. The rate now is 45 basis points higher in 2026.”

That sounded bad. I contacted Chuck (friend and expert) for clarification; what is the “tail?” He explained:

“The price tail is the difference between the average price paid in an auction and the cut-off price (the lowest bond price in the auction). A big price tail is seen as a negative. Why? Because the marginal buyer of the bond was only willing to pay a much lower price than the average. Remember as a bond price goes down, the yield goes up!”

The Treasury auctions bonds, accepting bids at a certain interest rate. If they can’t sell them all, they drop the price (raising interest rates) until all the debt is sold.

It is a big deal! Government debt is nearly $40 trillion. A 1% interest increase adds $400 billion to our debt – which taxpayers must account for.

Today it’s time for Chuck to help explain, “What’s the tale behind the tail?”

DENNIS: Chuck, thanks for taking your time to help our readers. Let’s start with the big picture. It took 240 years to accumulate $18 trillion in debt. In the last decade it has more than doubled!

 We predicted it will be harder for the government to find qualified lenders without paying higher interest (risk premium). Is the “tail” giving us a message?

CHUCK: If we use just this auction, it is indeed giving us a message that no longer can the U.S. just announce a bond auction and buyers line up to buy… The key will be the next bond auction… If we see more of this rot, then the message is in… And that’s a bad thing for the U.S. economy.

DENNIS: If I were a bond buyer, I wouldn’t be an early bidder when I might get a higher rate by waiting a few minutes.

CHUCK: That certainly could happen, which would add billions to the US cost of servicing our debt.

DENNIS: ZeroHedge said the “bid to cover ratio” was terrible, dropping from 2.630 to 2.440. I’m confused. If there are more bidders than debt, why is there a tail? Shouldn’t it all have been auctioned off at the opening price?

CHUCK:Theoretically, you are correct. While they say the “bid to cover” ratio is currently bad, they did eventually sell all the debt after they dropped the bond price, effectively raising the interest rates. It’s a caution flag, just like the tail.

DENNIS: We’ve discussed “primary dealers” who buy bonds at an auction. Can you explain their role and obligation?

CHUCK: Yes, the “primary dealers” are pre-authorized Financial Institutions that are allowed to conduct business with the Fed/Cabal/Cartel. Their main function is to be the buyer of last resort… For example, if the U.S. needs to auction off $50 Billion in bonds, and only get $45 Billion of bids, the “primary dealers” have to step up and buy the Tail…

DENNIS: In 2008, before the bank bailouts, the Fed held around $1 trillion in assets. Over the next 12 years, they monetized government debt, topping out at almost $9 trillion. In addition to current debt, the Fed still has over $6 trillion of previous debt they need to unload.

If dealers are supposed to pick up the slack, why did the Fed monetize the debt instead of selling to primary dealers? Who makes that decision, the Fed or the Treasury Department?

CHUCK: Well, actually the Fed and the Treasury are supposed to make the decision, but in most cases, the Fed/Cabal/Cartel makes this decision as part of their Monetary Policy…

They monetized the debt because they could… No, seriously, they monetized the debt to keep from having free market interest rates they did not want to pay … And to get the bad bonds off the books of the banks so they could start anew…

At the time Wall Street casino banks didn’t want rates to rise.

We all know that for the Fed/ Cabal/Cartel to buy anything they have to print the money (create it) they use for the purchase… And this printing of all this money leads to the high inflation we had a couple of year ago.

DENNIS: You recently criticized outgoing Fed Chairman Powell (for good reason):

“It’s plain as day. Powell is using the Iran war as cover to slough off responsibility for every boneheaded decision on his watch for the last eight years — decisions you’re living with right now.”

The last several Fed heads played CYA, lamenting “Deficit spending and borrowing is unsustainable, and congress needs to do something.” They never say it loud enough to ruffle any congressional feathers.

Wolf Street tells us about Trump’s nominee, Kevin Warsh:

“Warsh has long hammered on the Fed for its still huge balance sheet even after $2.4 trillion in QT. …. He says the large balance sheet got the Fed involved in fiscal matters, in funding the deficits, and that the Fed should not be involved in that.

…. He says inflation isn’t caused by rising wages and a rapidly growing economy, but by government spending and ‘money printing’ – Inflation is caused when the government spends too much and prints too much.”

Chuck, if this continues, in ten years our debt will be $80+ trillion. While Warsh supposedly resigned when Bernanke went beyond QE, do you have any confidence that, when faced with similar situations, that he will protect taxpayers as opposed to the banks?

CHUCK: None, zero, zilch, nada, a big fat Goose Egg of confidence that he will choose to protect taxpayers over the Big Banks… Kevin Warsh is a good friend of the POTUS, and he’s being nominated for Fed/Cabal/Cartel chairman to do the bidding for the POTUS… In other words, he will cut rates and invite higher inflation back into our economy…

Sadly, that could be the end of the middle class… I say that because another round of high inflation will bring about higher prices… And we’ve never recovered from the last round of higher prices… The process will continue.

The culprit is Money Supply… and with money printing we get excess Money Supply – the root cause of inflation and the higher prices of items…

DENNIS: While the Fed can adjust rates, is the free market taking control with the tail? Could the new Fed chair keep rates down, trying to satisfy Trump, but allow the free market to prevail, with higher rates slowing down inflation?

CHUCK: The Fed/ Cabal /Cartel is in a pickle… They are in the corner of the room and have painted themselves in and they can’t escape…

So, they’ll have to deal with it… and going from their previous history in tough times, the Fed/Cabal/ Cartel will again flub and disappoint.

This is sort of burning the candle on both ends… They’ll need to keep rates high to offset inflation, but they’ll keep buying bonds on the side to help keep the rates the public sees at levels that the Fed Heads can point to and say, ‘We’re keeping rates where they are” So, don’t blame us for the inflation!”

DENNIS: One final question. And thanks again for your time.

The tail and bid to cover ratio are warnings. Unless congress reinstates Glass-Steagall, and honestly cuts waste and spending, the process will continue – until it doesn’t!

You urge readers to diversify and hold precious metals to offset the potential collapse of the US dollar. Have current events modified your recommendations?

CHUCK: No Way! I’ve always contended that investors maintain a diversified portfolio… Markowitz had the idea of a diversified portfolio long before I ever came around. He spells out the idea as going out on the diversification curve… To own Stocks, bonds, Currencies and Metals, and by doing so, you decrease the risk to your investment portfolio… There will be times when one asset class that you own isn’t doing so well, but the other ones in your portfolio are, so you remain steady Eddie… I’m holding on to our metals for sure….

Thank you for inviting me.

Dennis here. Well, that’s the tale behind the tail! A caution flag of the high inflation that is coming unless the government radically changes course. We are powerless to stop it, so the best we can do is prepare for what’s coming….

On The Lighter Side…

Jo and I are making a quick trip back to Indiana for routine medical issues.

We have several boxes that needed to be moved north, so we rented a big vehicle and drove one way, and will fly back to FL. It’s a two-hour, direct flight; much easier than when we had to fly to Phoenix.

We are having some major landscaping done, working around much needed rain. Things are coming together nicely in our new home. We are not at the bottom of the list yet, but we are getting there. I have several projects planned between the time we return and leave for Indiana for the summer.

In the meantime, we are looking forward to the hockey playoffs and following our Chicago Cubs faithfully. The Villages has a Cubs fan club and we enjoy going to a local pub for “watch parties.” It can ger pretty loud.

Quote of the Week…

Yesterday was Tax Day….

“Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying your taxes. That’s a red flag.” — Jay Leno

And Finally…

Jo sent along some funny quotes about taxes for our enjoyment:

• “The hardest thing in the world is to understand the income tax.” — Albert Einstein

• “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” — Benjamin Franklin

• “I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.” — Arthur Godfrey

• “The income tax has created more criminals than any other single act of government.” — Sen. Barry Goldwater

• “Income tax returns are the most imaginative fiction being written today.” —Herman Wouk

• “The avoidance of taxes is the only intellectual pursuit that carries any reward.” — John Maynard Keynes

• “Unquestionably, there is progress. The average American now pays out twice as much in taxes as he formerly got in wages.” — H.L. Mencken

• “What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.” — Mark Twain

• “Congress can raise taxes because it can persuade a sizable fraction of the populace that somebody else will pay.” — Milton Friedman

• “You must pay taxes. But there’s no law that says you gotta leave a tip.” — financial services firm Morgan Stanley

• “Dear IRS, I am writing to you to cancel my subscription. Please remove my name from your mailing list.” — Snoopy

• “The best things in life are free, but sooner or later the government will find a way to tax them.” — Anonymous

• “The income tax has made more liars out of the American people than golf.” — Will Rogers

And my favorite…

• “Why does a slight tax increase cost you two hundred dollars and a substantial tax cut save you thirty cents?” — Peg Bracken

Until next time…