Thursday, May 7, 2009

Bonds Blow off Ben


Ben Bernanke has a question for everyone: Anyone out there interested in buying a bond?

Ben's got a few trillion to sell this year and he is looking for new buyers after not finding many at today's treasury auction. Take a look at the sell off on the 30 year after today's disastrous auction:

My Take:

Before I start I just wanted to acknowledge that I did read the stress tests results. They are such a joke that I refuse to even discuss them. The results aren't worth the paper their printed on IMO. The fraud rolls on folks.

OK, lets get back to some actual accurate information. Here is the story on the bond auction:

"Investors worried that poor demand for government debt could raise the cost of capital and hamper chances of a U.S. economic recovery.

U.S. debt prices slid, sending the 30-year Treasury bond yield to its highest since November.
"The auction is big news because now it's showing that maybe the Chinese don't want our bonds.

If the cost of capital for the United States becomes more expensive, then the recession is going to take that much longer to get out of," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The $14 billion Treasury bond auction met below-average demand from investors, who bid aggressively to force the government to pay a higher yield as it pushed ahead with plans to help finance its burgeoning budget deficit with more longer-term debt."

Take Continued:

Below average demand is putting it lightly. The Bid to call was 2.14 which was the lowest since last August! Anything underneath a 2 is considered to be a failure! Yields as a result were pushed up dramatically in order to get the bonds all sold.

Folks, I have been warning about this for weeks. Lets see if there is any follow through here in the next few auctions. We have $2 more trillion of this garbage to sell guys. We are doomed if they can't sell all of it. The 10 year yield also moved higher on the news.

Obama: Borrowing comes at a cost!

Our "Messiah" is about to learn a serious lesson on the cost of borrowing money. I find it interesting that this bad auction came as the Federal Budget is being finalized. Perhaps the rest of the world is sending a message?

This all shouldn't be a surprise:

China has been beginning to hoard gold in recent months. They are also making less money on imports off of our increasingly dying consumer. As a result, they don't have the finances that they once did to throw into treasuries.

This ponzi sticksave bailout of the financial system by the government is contingent upon us being able to sell our debt. There will be no bailouts if the government doesn't have the cash to do them.

This new unthinkable reality will come out of nowhere and smack the politicians in DC right upside the head:


Our spoiled brats in Washington will finally have to put the wallet away. Treasury demand is one big thing that Ben can't control. He is absolutely powerless here because he can't force people to buy! Lets just hope he doesn't decide to print. Enjoy that $20 loaf of bread if he does.

My guess is if their spending is cutoff and the game is over, the government would then ring fence itself in order to survive. Everyone outside the fence would be told "sorry" when they come looking for money. This would be a devastating blow to anyone late to the bailout party. Pain will be aplenty in our economy in this scenario.

China and the ROW are not stupid. They realize that we our bankrupting ourselves as we try to bailout a bunch of greedy pigmen. Making matters worse is the fact that the Fed's tax receipts are collapsing. California tax revenue dropped 44% last month versus the previous year.

The rest of the world is beginning to ask themselves: How in the hell is the USA ever going to pay us any of this money back when their revenue base(the taxpayer) is collapsing?

The impact of a massive bond selloff

Lets begin looking at the ramifications of significantly higher yields on bonds:

Higher yields=Higher lending costs. The housing will market explode if we start to see double digit interest rates as a result of higher yields. The home buyer who could qualify for a $500,000 home at 4.75% rates today may only be able to qualify for a $150,000 home with double digit interest rates. Go back to the 1980's and see what houses sold for with borrowers lending at 12%.

The value of those McMansions in the burbs will drop in half or more instantly if the cost of borrowing begins to soar. At this point you need to ask yourself this question:

How many homeowners who bought in at 500k will continue to make their payments when the guy next store pays 150k for the same house? I know I would walk away if I was in this situation.

The resulting collapse in housing prices would then destroy whats left on the banks balance sheet. Trillions of dollars of banking assets would evaporate in a new world of double digit interest rates. The banks are already on their knees as a result of their current losses. Higher lending rates would be the final blow that knocks them down to the canvass.

Imagine how many "performing assets" on the the banks balance sheet would turn into "toxic assets" in an environment of expensive lending. I wonder if they included this scenario when they performed the banking stress tests? HA! We all know that answer!

Bottom Line:

The government will be forced to stop spending if bonds begin to collapse or dislocate. Companies that were able to hide behind government guarantees would then be left naked in public holding a sign reading "HELP!".

Bankrupties would soar as a result. God only knows how bad the market would tank. I can just about guarantee that 666 on the S&P doesn't hold in this new world. The consequenses of all of this are so frightening that I can't think about it for too long because its unimaginable to me in terms of how ugly things could get.

This was only one auction so its early. Let me also note that this situation would take months to play out. However, I personally cannot see how we sell $2 trillion in treasuries without significantly higher rates.

This new world is coming folks. When it does, the reprocussions are going to be breathtaking.


Minton Mckarkquey said...

Wow, it really was a total disaster. I like to think this would reign in the bailouts, but I suspect the printing presses are going to start rolling instead.

Rumor is that Bernanke had a whole truckload of Xeroxes delivered to his office last week - true story. :-)

Anonymous said...


I have a conspiracy theory on the recent financial stocks run up. As announced, Wells Fargo and BOFA have to raise additional capital by selling common stocks. For that transaction to occur favorably to the banks, their stock prices have to be high.

Maybe the Fed delayed the stress result, tweaked the economic data, and delivered a false sense of recovery (Bernanke speech recently to Congress) in order to help the bank stocks?

Jeff said...



Yeah...He might have no choice.

I bet we see a lot more QE next week. The question then becomes how does the bond market react.

Maybe they shove his QE up his behind and takes yields even higher.

Jeff said...


I think you are right on.

A bunch of them sold shares after hours.

It will be interesting to see how the financials trade tomorrow.

Employment number plus the stress test results should make it a wild day.

johndaniels said...

Thanks Jeff; right on target as usual.

Jeff said...



This is interesting. NY Fed prez resigns under fire. Well thats one crook down.

Several thousand to go!

NY Fed Board Chair Friedman Resignation Effective Immediately
Last update: 5/7/2009 5:26:34 PM
(MORE TO FOLLOW) Dow Jones Newswires
May 07, 2009 17:26 ET (21:26 GMT)

Peter said...

I am starting to worry that the end might be a lot closer and quicker than we think. How are they going to cover this up? Once it becomes clear that the treasury buyers are just not there how can you stop that boulder from rolling downhill?

I just can not fathom the ignorance of our public. How can one single person in this country think that a $2 trillion deficit is acceptable? Even when you look at Obama's projected future deficits his lowest numbers are half a trillion. Has he factored in higher interest rate payments? This is like taking a dump in an already clogged toilet.

Anonymous said...

Fantastic Blog. Glad to have discovered it!

Anonymous said...

Jeff, you are a jewel.

There are not many who understand and can connect the dots as well as you. And, you do it succinctly. You are providing a valuable public service.


Iconoclast421 said...

You guys are just mentally masturbating ad infinum. The Fed will just print the money. Duh. They will print $20 trillion if they have to. There is no political will to change that, and they know it, because they own political will. IT simply DOES NOT MATTER how badly people get screwed by the bankers, they WILL NOT change it. Havent you realized that by now? So who cares if they cant sell their bonds. Who cares if inflation really takes off. They will fudge the numbers. Look how badly they fudged the numbers before the bubble popped. A year ago, food and energy hacked off an additional $200 a month out of most people's budgets. But they twisted that into just a few points of inflation. Oh really, what is $200 a month for someone who makes $2000 a month? Ha! But that doesnt matter because the person making $2000 a month doesnt care about this stuff, although he will raise hell if they raise his taxes by $20. Ha ha HA! Can you not see the sick irony in that? But that is reality. It's a complete twilight zone, but it is proof that the Fed can bail out the banks and run their stocks up endlessly and nobody will prosecute them for the damage they are doing to the economy.

Anonymous said...

Great analysis.....scared the pee out of me...but great none the less.

Anonymous said...


"The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it."

You got to love Hollywood.

Jeff said...


Thanks for the kind words.

I will do my best to keep up with everything and report it on here.


Jeff said...


I agree with you. The music is close to stopping in my view as well.

Keep in mind the government will not go down without trying EVERYthing in their power to stop it.

You can't underestimate them. They may be able to string this all out for another 6 months or so. Maybe even longer.

I will be surprised if we make it through the summer without major problems.

Jeff said...


Thanks for the support!

Jeff said...


Points taken.

However, if you think the Fed can print trillions of dollars without the people noticing you are sorely mistaken.

Tax rates after WWII to pay off the war debts were 70% on Americans in certian income brackets.

The Fed has never spent the kind of money they have to battle this crisis.

$200 a month is just the beginning. The cost of doing these bailouts has not yet been realized because they are not paying it off yet.

The torches and pitchforks will be out when its time to pay the bills becuase many will not have the money to survive.

Jeff said...

post up around 6

John Maynes said...

Of course they can print trillions of dollars. But to think this will have no economical and political side effects is adventurous. Same false thinking as the Weimar politicians. :-)