Thursday, June 11, 2009


Today reminded me of a lot of the Super Bowls that I have watched over the years. Lots of hype followed by little action!

Well, the contrarion in me that I talked about on Tuesday turned out to be right. The Fed found a way to get these sales done.

Here are the 30 year auction results:

"The Treasury Department sold the 30-year bonds to yield 4.72%.The auction is a reopening, meaning the debt sold will mature on the same date and carry the same coupon as the previous sale. Reopenings are always smaller than the initial sale, and this month's offering matches the amount of the last 30-year reopening in March.

Bidders offered 2.68 times the amount of debt being sold, the highest in a year."

My Take:

This was a very impressive auction that saw strong demand. There are many theories as to why we saw so much demand for the 30-year today. There was a lot of talk about Barclay's decision to include Fed mortgage holdings in the old Lehman Indices index. Across the curve does a nice job explaining what may have happened here:

"Barclays inherited the Lehman indices against which many portfolios index or measure performance. Barclays announced today that the mortgages which the Federal Reserve owns will be included in the index. Apparently, many thought those bonds would not be and many investors were instantly underweight the 4 and 4 1/2 coupons and that was the catalyst for a round of buying."

Quick Take:

Hmmm...So could this have created some artificial demand as investor's were forced to re balance their portfolio's? Rick Santelli spoke at length about this same topic today. It certainly makes a lot of sense. The problem moving forward is now that they are rebalanced, what happens when we see the next 30 year auction?

You see that's the problem here folks. We are going to see auction after auction after auction after auction this year. If the market has to sweat out every treasury sale how can the market really make any progress over the long term. Answer? It can't. The supply of treasuries is simply too overwhelming for demand over the long haul in my view. At some point one of these suckers is going to fail.

I think that's why you saw the bounce fade late in the day. Things are looking very toppy in the S&P BTW.

Indirects(FCB's) grabbed 50% of the auction:

Lets take a look at the bond auction results:

My Take:

As you can see, the indirect(commonly known as the FCB's of the world) grabbed half of the bonds in this auction. Many are wondering why. The defaltionist's like Karl Denninger believe that the FCB's are piling in here thinking that in the long run think that we will see a deflationary collapse and a stronger US dollar. As a result, they believe holding longer maturity bonds at a 4.72% yield will be one hell of a return over the long haul if we see a Japanese style deflation cycle.

This will be a good bet by the FCB's IF this is how it all plays out.

Bottom Line:

I think we can't read too much into this one $11 billion auction. The amount of the sale is a drop in the bucket when you compare it to the trillions of dollars that we have pissed away on this collapse. The small size of the auction makes it very vulnerable to manipulation.

As a result, I am not surprised that they were able to kick the can down the road. The Fed has been kicking the can down the road for 25 years so what's one more week!

I think we need to see what type of trends develop in treasuries over the next several weeks as the Fed rolls out auction after auction. This week we saw one poor auction and one strong one. This leaves us with mixed results.

I continue to have a hard time believing that the Fed can continue to sell all of this long term debt without seeing yields soar. I also don't see how you can not worry about inflation when the Fed is growing the M2 money supply by 9% a year.

A nice way to hedge here if you are short bonds and the US dollar is to short the S&P. If bond's rise and the dollar strengthens as deflation takes hold, the stock market will collapse as we see debt destruction and bankrupties on a grand scale. Take a look at Japan in the early '90's if you want to see how this scenario plays out.

As for myself, I still remain stubbornly concerned about inflation. The massive flooding of liquidity by the Fed via QE, bailouts, and other vehicles make it very hard for me to see how we avoid inflation at some point in this cycle. The Fed has historically ALWAYS waited too long to pull back their liquidity. This has always led to problems with inflation. 1970's anyone?

Its hard to believe that it will be any different this time. Especially after watching how accommodating Ben has been when it comes to flooding the system with money.

The 1st inning of the credit market crisis is now complete and the score is tied at 1-1. More evidence is needed before any longer term conclusion's can be drawn.

Stay Tuned!


shrpblnd said...

The velocity of the money supply continues to fall faster than any attempts to increase the money supply. QE and the other programs are failures. Once bad debts are finally forced to be accounted for, the money supply collapses. There's your deflation, not inflation.

Jeff said...


I agree with that and lean this way.

However, if bad debts are never accounted for via printing then the money supply doesn't have to collapse.

I lean towards deflation. However, I own some metals as a protection.

Inflation is a serious risk until helicopter Ben makes good on pulling liquidity.

Personally, the stakes are too high to go "all in" on the deflation or infaltion thesis.

I hate metals but holding them as a hedge is a must IMO and that doesn't mean just gold. I own more silver.

Being diversified is critical at this point. I am prepared for either scenario.