Tuesday, May 26, 2009

Bond Panic!!!!

Good Evening Folks

If you only looked at the stock market today you would think that everything was just Hunky Dory out there. Ahh...Not so fast my friends. Bonds collapsed once again today and sold off hard into the close. The 10 year futures are now trading at a 3.55%!

The move in TNX today was PARABOLIC:



My Take:

Basically all hell is breaking loose in the bond market. Here is the problem boys and girls: The bond auctions went well today because they were 2 year auctions meaning that the bonds were on the short end of the curve. This is where everyone wants to be because they mature quickly. This quick ROI makes them one of the safest places to be in the treasury market. As a result, the auctions went well.

Where investors don't want to be is stuck in the long end holding 30 year bonds! The rest of the auctions this week are 5 and 7 year treasuries. There will be not be as much demand for these bonds because they begin to lean closer the longer end of the yield curve in the treasury market. Across the curve is suggesting tonight that a long tail on the 5 or 7 year bond auctions later this week could mark the beginning of the end for treasuries.

The fact that the our bailout obsessed president just dumped another $30 billion into GM wasn't exactly soothing for the bond market. The Fed must be in a panic after seeing what happened in the credit markets today.

Bottom Line

The gates of hell could open wide if the 5 and 7 year auctions don't sell well. The panic sell off in treasuries late today should be considered to be extremely ominous.

This rally today was based on consumer sentiment which came in way above expectations. Hell, even I was impressed. However, remember, sentiment is just sentiment. Sentiment doesn't buy a car or a house. It just means people are feeling more optimistic.

Meanwhile, back here on earth, our economy continues to collapse. The March Case/shiller report was a pefect example of this:

"May 26 (Bloomberg) -- Home prices in 20 major metropolitan areas fell more than forecast in March as foreclosures surged, threatening to extend the housing slump.

The S&P/Case-Shiller home-price index decreased 18.7 percent from March 2008, matching the drop in the year ended in February. The measure declined 19 percent in January, the most since data began in 2001.

Record foreclosures are depressing the value of other properties, contributing to a slump in household wealth that is hurting consumer spending and the economy. Still, falling prices and mortgage rates have made homes more affordable, helping to stem the slide in sales, which will eventually help prices stabilize.

“The housing market still has somewhat of a ways to go before it completely bottoms,” Celia Chen, an economist at Moody’s Economy.com in West Chester, Pennsylvania, said in an interview on Bloomberg Television. “Prices I think still will fall a little bit further.”

Bottom Line Continued

I thought housing was stabilizing? BB told us that the they were seeing signs of stabilization in the economy dammit! Gee, do you think perhaps he lied?

As you can see there are no signs of stabilization. The only sign I see here is one that reads: FREEFALL! Housing prices were down almost 19% down versus March of last year. Yuck.

Remember folks, the economic crisis cannot end until housing stabilizes. Most of the bad assets on the banks books are bloated McMansion mortgages. Dropping housing prices mean only one thing to the banks: MORE LOSSES!

What can I say folks? We are spending too much money that we don't have, and this house of cards is about to come tumbling down. The credit markets are trying to warn you that its coming. We have moved from 2.4% up to over 3.5% on the 10 year in less than 2 months. Whats amazing is this is happening at a time when the Fed buying treasuries via QE! This is a parabolic move that may be signalling that a bond dislocation could be right around the corner.

The equity market told you the wrong story today folks. Moves in equities based on consumer sentiment telling you "happy days are here again" are moves that I ignore.

The real story happened in Chicago. I am amazed at how these pump monkeys can take the market higher in the face of such bad news.

I mean its amazing: GM is bleeding money and going BK, the bond market went berserk going into the close over concerns around our credit rating, and housing once again dropped to all time lows.

So what do stocks do in response to all of this? Move higher because consumer sentiment came in above expectations! These poor saps buying stocks have no clue that they are jumping into a pit filled with rattlesnakes.

Stay Tuned!

13 comments:

John Maynes said...

Consumer confidence reaches highest since September, but don't expect big spending surgePRECISELY!!!Consumer confidence soars, but wallets still shut

John Maynes said...

Testing line breaks.

Testing line breaks.

Testing line breaks.

Sorry, Jeff. Preview looks different from the actual posting.

Anonymous said...

GM bondholders reject the offer.

http://money.cnn.com/2009/05/26/news/companies/gm_bond_offer/index.htm?postversion=2009052618

Thus the 5-yrs and 7-yrs Treasury notes should sell like hot cake.

jeff said...

Nice catches guys

Keep em coming!

Caught this in the FT:

Exploding debt Threatens America:

"Published: May 26 2009 20:48 | Last updated: May 26 2009 20:48

Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up.

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week."

Anonymous said...

These poor saps buying stocks have no clue that they are jumping into a pit filled with rattlesnakes.
-----------------
you have got it wrong. So far it is the plunge protection team takes market higher so it is not "poor saps" buying but the smart money. By the time market is at 10K and poor saps decide it is safe to go in - thats when market reverses. Just my opinion.

Jeff said...

Anon

You sure the saps aren't being bought out here at 900 on the S&P?

The market has had a difficult time moving above the 900-930 range. We have had severals failures once we meet these resistance levels.

I agree though, once it rolls, the suckers will be holding the bag and its gonna be ugly.

BAM said...

Another great post. I think you are absolutely right. Bond market is the place to keep an eye on. I can't believe mess media is completely ignoring this fact. I know they are not that dumb. Are they really clueless or are they being used by higher power... One makes you wonder. Please keep up your work.

Jeff said...

BAM

Thanks

I'll keep at it. The media's response to this crisis has been flat flat out pathetic.

I am seeing record traffic on my site over the last month so perhaps people are looking for other sources for news.

CNBC has gotten worse and worse by the week. When the market is up its unwatchable due to the amount of cheerleading by both the commentators and the joke analysts that they roll out hour after hour.

The only time you see any half decent reporting out of them is when the market is down.

Red markets force them to actually look at the real problems in the economy so they can then explain to the sheeple why the market isn't responding to all of the "green shoots" in the economy.

flipdippy said...

Jeff, looks like you nailed this one today. Good work.

Still unclear what it all means. Other nations must buy our bonds or they'd be shooting themselves in the face, so how bad can they really be this week and next?

Jeff said...

Flip

Thanks

Central banks don't want to buy our long term debt because they are losing confidence that they will be paid back. We must stop spending or this trend will get worse.

jeff said...

post up around 7

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