There’s a slow-moving storm building in the bond market — and it’s not getting the attention it deserves.
Yields have been climbing. That’s no secret. But the bigger issue is what’s happening behind the scenes at Treasury auctions. The last one saw U.S. banks step in to take down about 25% of the supply. Normally, they’re only good for about 5%. That’s not a bullish sign — that’s a signal something’s breaking.
Foreign demand for U.S. debt is drying up. That’s a problem not just for bond prices, but for the dollar too. When foreign governments stop buying Treasurys, you lose demand for both the debt and the currency it’s denominated in.
And when the dollar weakens, the entire U.S. financial system feels it.
Déjà vu in the making
This is exactly what happened in 2020 when banks had to step in and absorb supply. We saw it again during the 2011 credit crisis. And every time it’s played out, it’s led to stress in the banking system.
The most recent example? Silicon Valley Bank. That blowup in March 2023 wasn’t because of bad loans — it was because of Treasury exposure. SVB was loaded with long-dated U.S. government bonds. When rates climbed and bond prices fell, those holdings cratered, and it triggered a full-blown crisis. It didn’t just stop at SVB — several regionals got caught in the same trap.
That’s why this latest auction is such a red flag. If banks are the ones backstopping Treasury demand again, they’re putting themselves in a position to absorb that same downside risk. We’re looking at the kind of setup that can cascade fast — all it takes is a move lower in the bond market.
What I’m watching now
I’m keeping a close eye on the iShares 20+ Year Treasury Bond ETF (TLT) and the Financials sector (XLF). TLT shows us how long-term bonds are trading — if it breaks lower, that confirms more downside risk. XLF gives a look at the broader financial space. It’s not just banks, but if stress is building, it’ll show up there first.
None of this means we’re guaranteed another 2023-style blowup. But we’ve seen how this movie ends before — and the bond market is hinting at a sequel.
When banks are forced to be the buyer of last resort, it’s not a show of strength. It’s a signal that demand is cracking — and if history is any guide, that’s the kind of crack that can turn into a break.
Kane Shieh
Kane Shieh Trading
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