Saturday, June 6, 2009

The End is Near!!

For the the treasury market that is.

Perhaps its time to change the name of my blog to "The Treasury Time Bomb" since the housing time bomb already went off?

Folks, what happened in the short end of the treasury market on Friday was flat out frightening. Lets take a look at how treasuries moved yesterday:

3 Month 0.16% +0.03 (23.08%)
6 Month 0.32% +0.05 (18.52%)
2 Year 1.31% +0.19 (16.96%)
5 Year 2.84% +0.10 (3.65%)
10 Year 3.83% +0.02 (0.52%)
30 Year 4.62% 0.00 (0.00)

Here is Bloomberg's take on the bond action on Friday. I respectfully disagree with most of this article. The "yields are rising as the economy recovers" argument is a bunch of hogwash IMO but feel free to take a look. Its always nice to hear the other side of the argument.

My Take:


As you can see, we saw about a 20% jump in yields in the short end of the treasury market on Friday. This is NOT good folks. The FCB's are already running away from the long end. If they begin to run away from the short end does it mean they have lost total confidence in US Treasuries altogether?

The one area of the bond market that was still showing strength was the short end because the risk is much lower for the FCB's since the bonds mature much faster.

We have already seen huge moves in the 10 and 30 year bonds as a result of our spend happy Fed. The FCB's are running away from the long end of the curve because the increased spending by our government has created a huge inflation risk which would be devastating to anyone holding the long end of the yield curve(10's and 30's)

As a result, China and others have recently been piling into the shorter end of the bond curve despite the fact that they are getting 1/3 of 1% return which is basically nothing! The bid to cover's in the short end have been around 3.5-1 which can be interpreted as healthy demand. A 2-1 bid to cover or higher is considered to be a successful bond auction.

Is the World "Walking Away" From Our Bonds?

After reading the article below from the well respected Financial Times, you gotta wonder:

"China is “actively considering” buying up to $50bn of International Monetary Fund bonds, the country’s State Administration of Foreign Exchange has said.

John Lipsky, IMF first deputy managing director, confirmed the Chinese proposal, which follows one by Russia to buy $10bn (€7.1bn, £6.2bn) in IMF bonds

Friday’s statement by China said any investment would be made according to its usual criteria of “safety and reasonable returns”, but made no mention of Beijing’s wish for more power in IMF decision-making, in return for financial support.

Safe, which controls almost $2,000bn of China’s foreign exchange reserves, added it was ready to help the IMF explore more ways to raise finance.

Mr Lipsky said the Chinese and Russian proposals were part of a commitment made during the London G20 summit in April to augment IMF resources by $500bn, and that the IMF “absolutely welcomes” the commitments.

The IMF expects to submit a proposal in the next few weeks that would allow it to raise money through issuing notes or bonds."

My Take:


Scary stuff folks. I think the Times did a great job breaking this all down. Both China and Russia are obviously extremely nervous about their treasury holdings as a result of the Fed's reckless spending behaviour.

The world wants a viable alternative to our bonds. It looks like the IMF is the perfect alternative. This is also a "power play" by Russia and China in terms of having a bigger say in the IMF. "Money talks", and these two have a bunch of reserves to invest.

The USA currently has zero reserves to spend as we continue to drown in debt. As a result, if I was the IMF, I would keep the door wide open for both the Russian's and the Chinese. What's interesting here is the USA has the most power and influence on the IMF because we are the world's largest economy.

Let's see how this all plays out. My guess is the ROW's concern around our solvency combined with with the huge reserves of Russia and China could render the USA powerless when it comes to us preventing the creation of IMF bonds.

If the IMF plays ball with China and Russia and successfully creates this bond alternative we are...ummmm....I really know how else to say this: Fucked!

Bottom Line:

We could have a "come to Jesus" moment in the bond market this week when the long term treasury auctions are held.

Did Timmy perhaps make a deal last week with the Chinese in terms of getting them to agree to continue to buy long bonds in the near term? Perhaps, but if he did, it means the Fed is going to either start raising rates or stop spending. I can't see the Chinese agreeing to buy more of this treasury garbage unless the Fed agreed to play ball by stopping all of the spending nonsense.

Either way, both of these options will be devastating for equities because it means that the bailout "tap" will have to be shut off.

The Fed can't win in this predicament. We either stop spending or the bond market blows up as the world runs away from our debt. The IMF story is a huge one folks. The HEAT IS ON the Fed and their spending.

It's possible that we could see a failed auction this week in the long end which would possibly result in a bond dislocation. If this happens, 10% interest rates will be right around the corner. This would then implode our economy and the financial system as we know it.

Its Judgement Week!

Time has run out on the Fed. Could they keep the game going for a little while longer with some successful long bond auctions? Yes, but it will come with consequences. You will have your answer if equities collapse next week which then forces investor's to come over and "save" the bond market.

They can play this liquidity game back and forth between stocks and bonds or awhile.

However, it can't last long because each time they pull this trick, investor's on the wrong side of the trade will take huge losses. This results in massive losses of liquidity in the stock market. Folks, when there is no liquidity, there is nothing to support stock or bond prices!

You can thank the Fed and their trillions for this recent 40% rise on the S&P. This huge bounce is basically the result of the Fed using its liquidity to pump up the stock market via the banks. The problem with this game is the Fed and its liquidity is about to be cutoff by the bond market.

Lets see how this all plays out next week. I expect a lot of fireworks.

Stay Tuned!


CT-Hilltopper said...

You must have been reading y mind, Jeff!

I just this minute finished taking a quiz about whether I could survive another Great Depression. I'm not usually a quiz taking person, but this one interested me.

The results:

I am 59% likely to survive another Great Depression.
"Even though you may not be expecting the worst, you're the type of person who prepares for the worst.
You live a relatively modest life. You don't overspend, and you aren't very materialistic.

You are also quite self sufficient and independent. You have many useful skills.
You can take care of yourself and those you love... which is crucial to surviving another Great Depression."

You can play too at the following link:

Seriously, this country has a lot riding on this week. If we manage to pull a rabbit out of the hat this time, then what about next time?

Interest rates are going to have to go up. We can't afford to ease anymore. We just can't.

ryan said...

So how do I short treasuries?

Might as well benefit from the mess...these things are going to get worse.

Jeff said...


I will have to check that site out tomorrow and see what I score!

I will let you know what I score.

Yeah, unfortunately there are only so many rabbits and I think we are down to our last couple.

This week is going to be fascinating to watch.

Jeff said...


You can go long with ticker TBT. Or you can buy some PUTS on Ticker TLT.

Just a warning. This trade is going to get volatile as the Fed continues to keep this debt bubble inflated.

Treasuries will move higher if the market crashes or the Fed does a huge QE.

I own TBT as opposed to options because I think this short could take awhile to play out.

If you buy PUTS on TLT I would look at the Jan. 10's. You can even buy Jan '11's.

This way you don't have to worry about expiration.


Anonymous said...

Isn´t there any other alternative? Won´t China collapse if the Us economy does?

Jeff said...


I wish there was.

The problem is we all dug ourselves a hole that's impossible to climb out of.

China lived off of our consumption by manufacturing everything.

They bought billions of our treasuries in order to allow us to run deficits and consume like there was no tomorrow.

The USA got addicted to debt and China became the drug dealer that allowed us to continue and bury ourselves in it by spending more than we could afford.

Tomorrow is here and its time to pay the bills. There is no way out I'm afraid.

Hopefully the IMF comes out with some altrernative. I am ready to invest outside the USA if its safe.

I think investments in this country will be "dead money" for decades.

AS soon as I see viable investment alternatives I will post it here. So far I see possibilities but nothing concrete.


Jeff said...



I scored a 39% on the depression test. Perhaps I need to get a gun and stockpile some food!

That's a great quiz.

Thanks for sharing.


CT-Hilltopper said...

Ironically, Jeff, if you have a gun, according to the people who run the test, it lowers your score.

I tried it once with gun, and once without, just for the hell of it, and it did lower the score.

Getting back to your article though, Jeff, I think the Russians and the Chinese are getting ready to bury us with our own shovel. If they don't do it now, it's because they are playing some kind of macabre game of cat and mouse with us. Oh...gotcha...anytime we want, but we won't pull the plug just now...that kind of thing.

How can you conduct any kind of foreign policy or command any kind of respect from the Chinese if you are allowing them to play these kind of games with you? You can't. No wonder those kids openly laughed at Geithner when he went to China last week. Most Americans have a thinly veiled contempt for Geithner: You expect anything different from the Chinese?

So, once again this all leaves us sitting here wondering how much time this all leaves us until the sand runs out of the hourglass. significant other (I'm almost 50, too old for a boyfriend, too young to call him someone I'm shacked up with LOL), who had been giving me LOTS of crap for being so negative...we were having a discussion about credit lines last Monday, and he was telling me that I was talking crap, he had three credit cards, one that he barely used, and everything was fine. He wouldn't believe things weren't fine until it affected him personally.

Wouldn't you know it, on Thursday, he was reading a letter, and he pushed it across the table to me. It was from the credit card company for the card that he barely used telling him that they were cancelling his card for lack of usage. I pushed it back at him with a smile and said, "Of course you know that this will effect your FICO score."

The look he gave me was priceless.

Jeff said...


Interesting story around your significant other. I have heard that a lot of credit cards are yanking lines.

There will come a day where he comes up to you and says "you were right". I just hope all hell doesn't break loose when this house of cards comes tumbling.

I am seriously considering getting a gun. Don't like them but I am hearing more and more stories about people getting robbed. even a few friends.

I think the whole world is laughing at our policies. Geithner is a joke. He looks like a frail little weakling.

He commands zero repect with his presence. The guy is a joke.