Wednesday, May 27, 2009

It's Time To Stuff The Mattress!


What can I say folks. The TNX chart says it all in terms of what happened in the bond market today. Umm there is only one word I can think of: CHAOS!

My Take:

Bonds collapsed once again as the pressures in the credit market continue to mount. Demand at today's 5 year bond auction was strong as investor's continue to clamor for debt at the short end of the yield curve:

"The five-year notes auctioned today were sold at a yield of 2.31 percent, compared with an average forecast of 2.335 percent by eight bond-trading firms surveyed by Bloomberg News before the 1 p.m. bidding deadline.

Indirect bidders, the class of investors that includes foreign central banks, bought 44.2 percent of the five-year notes, compared with an average of 32.4 percent in the last 10 auctions."

The strong indirect bidder(FCB's) demand on these shorter dated bonds is actually creating a panic on the long end as investor's begin to fear that demand for longer dated treasuries will dramtically fall off as a result. Both the 10 and 30 year sold off hard today as the bond market watched the FCB's continue to pile into shorter dated treasuries.

Fixed income investor's are panicked by this strong demand because they see the freight train of unprecented supply of new bond issuances heading right straight for them. As this train approaches, they realize that there is only so much demand/money to finance these sales.

So now they now have to ask themselves: With all of this buying on the short end, will there be any money/demand left to buy the long end thats coming out next week?

The huge treasury auction's next week are all long end 10's and 30's. The bond market is obviously asking themselves: Who in the hell is going to buy all of this worthless crap?

As a result, You saw a virtual panic in the bond market today. What's even more concerning here is the fact that we saw equities sell off at the same time that treasuries did.

Nowhere to Hide?

Kudo's to Karl Denninger for this great chart. If this doesn't say it all I don't know what does:

My Take:

It doesn't get any uglier than this guys and girls. Where in the hell are you supposed to put your money as equities and bonds both sell off at the same time?


Sad but true. I would make sure that you hedge any treasury holding's that you have. You can do this by shorting TLT or by buying ticker TBT. If the long end treasury auctions blow up next week it could be lights out for the bond market. I wish I was kidding folks. Unfortunately, I am as serious as a heart attack.

The fact that the bond market is collapsing this early in the year is STUNNING to me. We still have trillions of $$$ in treasuries to sell throughout the rest of the year. Who in GOD'S NAME is going to buy it? I am starting to have doubts that we make it through the summer with out a bond dislocation/collapse.

What's also frightening was watching the MBS securities also sell off today. The spread between Fannie debt and treasuries has narrowed to razor thin margins. The bond sell off triggered a massive sell off in MBS because the spread got too narrowed.

This was the one area of the bond market that was still performing.

All in all folks, everyone sold everything today: STOCKS AND BONDS. Scary stuff.

Bottom Line:

Buy yourself an extra thick SEALY and tuck some money away. As for for the rest of your wealth thats in "digital dollars" via CD's/treasuries, stocks, and 401k accounts? Just hold onto them and pray that you can liquidate them into cash down the road if TSHTF.

The rise in mortgage/treasury yields are going to absolutely decimate whats left of the housing market because interest rates are going to SOAR.

We could very well see mortgage rates hit 6% by next week and no that's not a misprint. That's how bad treasuries have sold off.

How is anyone holding a $500-$750,000 McMansion going sell now as rates soar? They couldn't sell the damn thing with 4% rates. There is now a 40 month inventory for houses in this price range and this was BEFORE we saw the bond blowup this week!

Higher rates will be the final nail in the coffin for anyone selling in this price range. Housing in general is simply going to be destroyed by higher mortgage rates.

Obama, its time to IMMEDIATELY put the breaks on your spending binge or you risk destroying this nation economically.



Anonymous said...

equities and bonds sell off together? is it safe to put money in commoditites? gold, oil, agriculture?

the dollar index has been dropping too.

Jeff said...

I bought some silver and gold. Holding cash in case we see massive deflation.

There aren't many places to hide. Stay diversified and nimble. I suspect we will see inflation at some point down the road.

Tough market!

Ben said...

Jeff, longtime reader of your site. Great stuff you do here! I saw this on CNN Money and thought of you

"Economists: Recession to end in 2009"

Ben said...

Sorry, it got cut off.

Anonymous said...


snood said...

Hey - for those of us that moved our 401k money into bond funds 2 years ago, where should that money be today?

Please note, there is no "matress" option on my company 401k plans.

Jeff said...


Thanks a lot.

Thats funny. I saw that today.

Our economists are a joke. Could we see slight GDP growth? Perhaps because we have contracted so severely the last few quarters.

Anyone thats calls this GDP growth an economic recovery is a fool.

We will be right back in the red down the road as the economy flatlines.

Jeff said...

CNN should have read the following quotes before reporting such fluff:

January 13, 1930
"Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today." - News item.

January 21, 1930
"Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction." - News dispatch from Washington.

January 24, 1930
"Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast." - New York Herald Tribune.

March 8, 1930
"President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days." - Washington Dispatch.

May 1, 1930
"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity." - President Hoover

June 29, 1930
"The worst is over without a doubt." - James J. Davis, Secretary of Labor.

August 29, 1930
"American labor may now look to the future with confidence." - James J. Davis, Secretary of Labor.

September 12, 1930
"We have hit bottom and are on the upswing." - James J. Davis, Secretary of Labor.

October 16, 1930
"Looking to the future I see in the further acceleration of science continuous jobs for our workers. Science will cure unemployment." - Charles M. Schwab.

October 20, 1930
"President Hoover today designated Robert W. Lamont, Secretary of Commerce, as chairman of the President's special committee on unemployment." - Washington dispatch.

October 21, 1930
"President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter." - Washington Dispatch

November 1930
"I see no reason why 1931 should not be an extremely good year." - Alfred P. Sloan, Jr., General Motors Co.

June 9, 1931
"The depression has ended." - Dr. Julius Klein, Assistant Secretary of Commerce.

Jeff said...


Do you have a money market fund in your 401k?

If you are with a good bond manager like PIMCO you could keep a good chunk of money with them.

A good bond firm is most likely not in treasuries right now.

If a firm like PIMCO is in treasuries they are also most likely short treasuries as a hedge.

If you are in you are in an index like bond fund I would diversify it.

You can always short treasuries with your personal account as a hedge if you are im treasuries.

I wouldn't advise this if its an emergency fund or cash that you may need in the near future.


Jeff said...

Oh God

Bonds are now down again. Auction results on the 7 year hit in an hour.

Housing data was terrible today!

Hold on tight


John Maynes said...

Stocks rise on relief over gov't debt auction

Jeff said...


I expect stocks to trade off of how well treasuries sell in the near term.

Post up around 7

snood said...

There is a money market option. I will research it. Thanks for the advice.