TrumpTales: Merry Mnuchin’s Call (REVISITED)

Remember when the markets were in meltdown Dec’18, and Treasury Secretary Mnuchin made an unsolicited round of phone calls to CEOs of US banks to “check in” on liquidity – and then publicized the fact that such calls were made, and all is well, causing a further sell-off in bewildered markets?

At the time, while everyone was questioning the judgement of Treasury Sec for causing unnecessary panic (I never understood why talking heads go on TV to say “I don’t have an explanation), I theorized the following:

(Dec 2018): Mnuchin made calls to the bank CEOs asking about liquidity, and then publicized “all is well” – subsequently freaking markets out with consensus saying “why did/would do this?? Doesn’t he realize this causes more concern than calm??”

My theory: OF COURSE he knows that the US Treasury Secretary’s words can move markets- that was the objective: create a safe haven rush ahead of a record sized T-Bill auction during illiquid holiday markets to cap rising short end borrowing costs.

And it worked.

Equity markets were already beaten down, so nothing to lose there. But Treasury was issuing & rolling over short term bills at ever higher rates, with a record sized auction on < 6M debt coming at a time when the gov was shut down, trading week was shortened from Pres GHW Bush’s funeral, & primary dealers on the ski slopes rather than at their desks to bid. UST yields had been dropping for weeks prior at the long end, but front end yields were on a relentless surge higher as Powell seemed to be on unconditional rate hike mode, inverting the curve. So Mnuchin scares the market, flight for safety into US debt, and demand for yield caps yields on short dated paper just in time for the auction. Short end yield surge stopped, turned south, and hasn’t looked back since Mnuchin’s call.

Dec 2019 Update: 1 Year Later

On the anniversary of this “baffling” call/announcement, we now find ourselves actually in the midst of a liquidity crisis in the repo markets over the last quarter- so where’s Mnuchin been? It’s been 3 months, and not a word from the previously “concerned” Treasury Sec. Yes, I‘m quite aware that this repo mess is a Fed issue (though not exclusively Fed’s oversight jurisdiction, and definitely not unrelated the Treasury Dept’s actions on issuance, cash and collateral supply)- but at the very least, one would think that we’d have another round of “called the bank CEOs” announcements, no?

Well, then perhaps last Christmas, Mnuchin didn’t actually give a single F about “bank liquidity,” and short dated yields capping just in time for primary auctions was NOT just some nice coincidence?

1 year later, STILL sounds like insane conspiracy theory, I know. Market manipulation by THIS administration? And for non-nefarious causes (in this case, just trying to save the taxpayer money on interest expenses) – never. Let’s just stick to “I don’t know, but its definitely not that, that I know” – the good ol’ sell-side bank Chief Global Market Strategist value-add way.

Another Previous TrumpTales from July ‘19: “Mysterious Mike Pence and the T-Bill Auction”

Remember week of July 4th 2019 when VP Mike Pence was on his way to New Hampshire, but last minute cancelled the event as Pence was suddenly called back to the White House in yet another personal aid making a widely publicized “nothing to see here” comment – sending markets risk-off?
(FROM JULY 2019):

Just to sum things up: nothing is done for “no reason.” I may very well be completely off on both theories. But I do find it to be curious that these sort of strangely publicized non-event events that turn markets risk off happen when yields start to move higher just as Treasury auctions for those very durations are scheduled, and issued over illiquid holiday weeks. I’m far from a conspiracy theorist, nor do I think what I’m saying is unreasonable to the extent that it could be labeled as tin-foil hat wearing nonsense. Either way, one thing I won’t accept is simply shoulder shrugging when the “inexplicable” occurs- the existence of an explanation is not contingent on consensus’ cognitive limitations.