Wednesday, March 25, 2009

The Bond Market Rumbles!


Mr. Bernanke must not be too happy after seeing what happened in the credit markets today:

"March 25 (Bloomberg) -- Treasury 10-year note yields rose the most in more than two weeks after an auction of $34 billion in five-year notes drew a higher-than-forecast yield, spurring concern record sales of U.S. debt are overwhelming demand.

U.S. securities dropped even after the Federal Reserve today bought $7.5 billion of Treasury notes, its first targeted purchases of U.S. securities since the early 1960s. The five- year auction drew a yield of 1.849 percent, higher than the 1.801 percent forecast in a Bloomberg News survey of eight trading firms. The Treasury will sell $24 billion of seven-year notes tomorrow.

The 30-year bond yield gained 10 basis points today to 3.73 percent, while the current five-year note yield appreciated eight basis points to 1.81 percent

The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 2.02 from an average 2.18 at the previous 10 sales.

The Treasury Department is selling a record $98 billion in notes this week, eclipsing the record $94 billion auctioned the week ended Feb. 27. The U.K. failed to attract enough bidders today at an auction of 1.75 billion pounds ($2.55 billion) of gilts for the first time in almost seven years.

President Barack Obama’s government is selling record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc."

My Take:


I bet Ben is about to have a heart attack! This isn't good folks. The fact that demand for treasuries has softened after the Fed just announced it plans on buying them does not bode well. Consider this to be a shot across the bow from the rest of the world.

Making things worse in the credit markets today was the failed bond auction over in the UK. This is not a good sign for our future treasury auctions considering the Brits have already started quantitatively easing!

The FCB's of the world are obviously getting increasingly irritated and concerned over the Ponzi style spending approach that Geithner and the US has adopted in an attempt to pull the US out of a deepening recession.

Czech Prime Minister Mirek Topolanek didn't hold back any punches when asked about this topic:

"March 25 (Bloomberg) -- Czech Prime Minister Mirek Topolanek said the U.S. is on the “road to hell” with protectionist steps that threaten to deepen the global economic crisis.

Topolanek, demoted to a caretaker role after losing a confidence vote yesterday, said European Union governments were wise to resist U.S. appeals for more pump-priming measures at a summit last week.

“The U.S. is repeating mistakes from the 1930s such as wide-ranging stimuli, protectionist tendencies and calls, the ‘Buy American’ campaign, and so on,” Topolanek told the European Parliament in Strasbourg, France today. “All these steps, their combination, and even worse, initiatives to make them permanent are a road to hell.”

Gee Mirek: Tell us how you really feel! I think that a lot of countries are thinking the same thing but are afraid to voice their opinions out of fear of angering the US.

China really started to ramp up the rhetoric this week as they voiced their concerns around its treasury holdings. They also continued to push the idea of a world currency. This idea appears to be gaining some traction.

In fact, the worldwide buzz around a new global currency actually forced Geithner to respond on the topic today:

"NEW YORK (Dow Jones)--The dollar declined to session lows against the euro and yen after U.S. Treasury Secretary Timothy Geithner said he was open to considering a new global reserve currency.

The issue of a new global reserve currency to replace the dollar has caught steam lately, after both China and Russia proposed expanding a Special Drawing Rights, or a currency issued by the International Monetary Fund.

An independent expert panel convened by the United Nations is also expected to recommend an expanded SDR this week.

Geithner said he hasn't yet read China's proposal, but that he was open to considering expanding an SDR. He added that the dollar's future role will be determined by good U.S. policy."

Quick Take:

The heat on the US is coming from all directions. The world is beginning to realize that they are sitting on a pretty strong poker hand as they watch us drown in our own debt. Expect them to use it to their advantage.

I gotta be honest folks: I frankly just don't see us selling $2.5 trillion of this crap to the world without us cutting back on spending and showing some responsability. Yields will scream higher if this crap continues because the countries of the world will "walk away" from our debt just like a homeowner walks away from their bloated mortgage.

Also, keep in mind that the world now needs to spend more money at home as a result of this global economic meltdown. This will only further dampen demand.

The huge risk here if we continue down this path is simple: Higher yields push lending rates higher which then blows up whats left of the housing market.

Bottom Line:

I think what you saw in treasuries today was a rejection of the Fed's recovery plan by the world. The reason they are rejecting it is because they know it won't work! We seem to be the only country other than the UK that doesn't realize this!

Everyone knows that our new policies are nothing but a new game of "smoke and mirrors" that fails to deliver what the market needs: TRANSPARENCY. I hate to keep saying folks but that's the problem is. Transparency will force us to default on all of the bad debt that we have been accumulating over the past 25 years. Putting more lipstick on this pig simply doesn't cut it.

The Fed's quantitative easing policy is off to a rocky start. Yields are going in the opposite direction that Ben wants as the demand for treasuries collapses. Even if yields stay low there is no guarantee its going to spur demand for borrowing.

QE certainly didn't work in Japan. Lets take a look at the facts:

Japan started its quantitative easing policy in 2001.....

Housing prices continued to drop during the QE period despite lower lending rates:

Final Take:

As you can see above, quantitative easing doesn't work even when the government is successful in keeping rates low! Housing prices continued to collapse in Japan even though the government was able to keep rates artificially low using QE.

People lose their desire to lend after suffering through a major financial collapse. You can call it: "Post Bubble PTSD". Everyone is going to suffer from PBPTSD because they are scared and there isn't a darn thing the government can do to stop it. FEAR is a powerful emotion.

What's frightens me most here is our QE may end up being very different from Japan's. Rates may actually RISE over the course of our QE. This will likely force the government to buy even more and more treasuries in order to try and keep rates low.

You can pretty much guarantee that this scenario doesn't end well.


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teddy bear said...

Japan vs US

In Dec 2008 Shiller Index for 10 cities was ~162 (for 20 ~150) ;)

Jeff said...


Great chart..Love it.

I am sure our housing prices will follow the same path.

Futures are up.

Financials were bid up about 5 minutes before the close.

You can bet that we will see some bank intervention tomorrow.

The pigmen must have pulled off another majic trick.

The fraud rolls on!

Jammer said...

I do not necessarily disagree with your conclusions, but the statement that Transparency means we default on all our debt has me confused. If we default on all the derivatives debt, which is what I assume you mean, not default on Government debt, will that make the world any more enamored with us and willing to buy treasuries and all the other things that make a global financial system work? I have no answers myself, but I worry that those who would simply let AIG and others collapse, after the world credit markets came to a halt when smallish Lehman went under, are not thinking through the consequences. Would we not have another world credit lock? Would calls for a world currency go away? I dont know that they would and that is worrisome when talking about defaulting on trillions in debt. By the way, only recently found this site and love it. Very good information and provocative conclusions.

Jeff said...



When I say debt I mean mainly consumer debt. Let's hope treasuries survive. The consumer makes up 70% of the economy and they are up to their eyeballs in debt due to bloated mortgage payments.

Our economy can't recover without them spending. We need consumer debt to be cleared via default and bk. This includes any company who overspent and leveraged up to much. Basically we need an economic reset so that things are affordable once again.

The banks need to let housing drop so the consumer has the ability to spend

Anonymous said...

@ Jammer
"Would calls for a world currency go away?"

I don't think so! The dollar was the only feasable solution after WW2, when Europe and Asia lay in ruins, the British Empire was about to fall apart, China, the Soviet Union and Eastern Europe were excluded from world economy.

By establishing the „dollar regime“ The US were able to detach their national currency / economy from a lot of risk. With commodities like oil, gold and a lot of other goods being traded only in dollars, the impact of a dollar devaluation on the US economy is much less severe.

A lot of countries embraced and tolorated this in exchange for stability and a reasonable monetary policy by the US.

This is the real underlying problem. The dollar regime is based on trust and mutual understanding.

Expect the dollar supremecy to disapear, it will not last forever because since WW2 times and markets have changed dramatically.
Almost half a billion residents in the EU, 1 Billion in India, 1,3 billion in China and 280 million in the CIS, not even considering the OPEC countries. That's a lot of people that need to trust Helicopter Ben and Tim...


jeff said...

post up around 8