Friday, July 17, 2009

The Bond Market Rumbles

Hello All

I just wanted to briefly talk about the bond market tonight. As I warned a few days ago, Chicago doesn't appear to be very happy at all regarding the spending that's been announced this week by the government. Specifically, I believe they are extremely concerned about the cost of the national health care bill.

We have seen this story before. The bond vigilantes came out of the wood work in the early '90's when Clinton tried to push through national health care. Yields soared when this plan was announced, and Clinton eventually backed off after being bitch slapped by Chicago via soaring lending rates.

It appears the credit market is about to shove this new national health plan right up Obama's you know what.

Take a look at the 10 year today:

Now lets take a look at the 10 year for the week:

My Take:

As you can see, the 10 year has soared almost 400 basis points in just one week. This is a HUGE move folks. I don't care how how much equities soared, you don't see moves like this very often. I consider this to be a very ominous sign.

Goldman and the rest of the hacks in New York may be able to manipulate the stock market, but the credit market beats to its own drum.

Higher yields will destroy whats left of the housing market. this would stop any recovery deaad in its tracks.

Keep a close eye on this next week as this health care bill continues to move through the hill. There seems to be a lot of momentum behind it and I think the bond market now considers it to be a serious threat.

Lets hope the bond vigilantes come back with a vengeance and put an end to this ridiculous spending!


For those of you that follow Karl Denninger: He will be on Larry Kudlow's show tonight at 7PM. That should be interesting to say the least. I plan on sitting back and watching those fireworks with a beer in hand!

Have a great weekend!


getyourselfconnected said...

Uh oh, bond market rumblings are not good. Ray Bradbury says:
"Ill winds mark it's fearsome flight,
And autumn branches creak with fright.
The landscape turns to ashen crumbs,
When something wicked this way comes... "

Great post.

Jeff said...



I know.

The bond market is the dog while the equity market is the tail.

If lending rates soar the economy is in deep doo doo.

Next week should be interesting.

getyourselfconnected said...

Almost done tonights post, plenty of entertainment for friday is my norm. Have a great weekend.

Jeff said...

YOu too.

I am on my way out for a few beers as well.

This week was a long one.

Minton Mckarkquey said...

Wait until the health care plan starts to cost 2, 5, 10, 50x the budget. Then it will hit the fan in a massively unpleasant way. The government has no capability of providing anything on budget, so this a total lock.

Enjoy those beers!

Minton Mckarkquey said...

... and I forgot to mention my dubiousness about many of the "small print" issues thrown around such as:

- Restricting medical lawsuits
- Restricting arguably extraneous tests that are performed.

Apart from being unconstitutional, this is a smokescreen to make people ignore the legal costs involved, which will be multi-bucks. Imagine, "I asked for a CAT scan and my doctor said no and now I have brain cancer from my arthritis and have 18 kids who will be orphans." Ka-ching!

Peter said...

And on the eight day God created health care and accordingly the collectivist/socialist/fascist declared that health care was a God given right and should replace the 2nd Amendment's right to bear arms to protect oneself.

This health care discussing is so off base. The question is not what is the best health care system but rather where in the Constitution is it enumerated that the government has any power to stick its fat, greasy fingers in it.

I agree that the bond market is where reality is but if that were so true where are they???? We already walked off the edge of a cliff six months ago, now the bond market is going to stop health care? So what? This way we can survive another decade before we collapse as opposed to five years if health care is passed?

TARP and Stimulus added $1.5 trillion to our debt (over 10%) in a matter of minutes, this won't add that much because the truth is that costs will be limited, services will be decreased, same price, fewer services. Plus more dead old people that we don't have to support, so that is also a cost savings.

Government should be completely out of health care, losers must pay court costs for both parties, health care prices must be the same for all people, regardless of insurance or not, and providers must be allowed to offer only catastrophic coverage so individuals are responsible for all their basic health care needs.

Have a nice weekend.

Flipdippy said...

Healthcare shmelthcare. Both sides of the aisle, I hate to say it, are wrong.

Fact is, we are on the cusp of transitioning from medicine being reactive to being proactive. Mainstream genetic therapies and nanotech technologies necessary to prevent catastrophic illness like cardiac disease and cancer are less than a decade away. It is widely underreported in the mainstream media but look at any medical or scientific publication and you will be blown away with the pace of progress and innovation.

The most important change which needs to be allowed in any legislation is to alter the nature of phase I, II, and III clinical trials to allow for more focused trials on more aggressive timelines, allowing new therapies to be tested on the populations which should benefit from a drug so they can be brought to market faster.

This debate is nothing but a sideshow distracting the public from some of the economic horror we are going to have to face. Even Obama senses the window for this legislation is closing and closing quick.

For trading purposes I think Jeff is spot on but looking out I feel strongly we have nothing to worry about.

The technology can't be slowed or stopped so don't worry if a crappy bill is passed in the long run it won't matter and we are all going to be healthier at much less expense.

Jeff said...

Great points all

The litigation risk has got to be limited.

Minton nailed it. Billions of dollars worth of needless tests are done only because a doc wants to protect himself.

The system is broken and we have no money to fix it.

Peter said...

Jeff, unfortunately I can't agree with the statement that we don't have the money to fix the system that is broken.

First, we have the best medical care in the world, anyone who says otherwise should be taken off it and sent to Canada. Two years ago I went to the doctor for my knee on a Friday and by the following Friday I had an MRI and surgery. Find me a medical system that can give me that outside of our once great country. The only bad thing about our system is dealing with unionized nurses sometimes.

Second, it is not the medical system that is broken but the financial portion of it. Fixing this requires no money, and actually would reduce costs. There is no competition or price shopping in medicine. Implement that and prices fall.

Take all the government regulations out of insurance coverage and prices fall. Set limits on malpractice, make losers pay court costs and prices fall. Create professional juries for medicine so you don't have some idiot on a jury giving millions of dollars to someone because they feel bad about the results from a procedure. Medicine is not perfect, no 100% success rates, but that is the way our juries see it.

Require that all procedures be price listed and that everyone must pay the same price. Allow people to start paying for their own health care on a procedure by procedure basis. Not having insurance is impossible when a simple surgery ends up costing a private payer $30,000.

Stop all medical provisions for illegals.

The problem here is that government is involved at all. That creates incentives for special interests to get things passed in their favor. This can only raise costs. Look at WalMart now on board with reform because they want their competitors to pay higher medical costs to match what they have been forced to pay.

Require all drug manufacturers to charge the same price across countries. F*ck Canada, France and the UK. Why should we subsidize their drug purchases. If we pay $5 a pill then they have to pay $5 a pill or they don't get it. These countries have created lousy systems that are parasites on the US. The funny thing is that these countries should be spending millions trying to get health care stopped here. Without our system there will be no more medical/drug advancements, we are the last free market left, once we are gone there are no profits in medicine and thus no investment.

Anonymous said...


with all due respect, I think
you're reading the bond market totally wrong. It is selling off due to prospects of higher short rates down the road as a result of econmic recovery and decreased risk adversion...whether a recovery comes to pass is another issue but you can't deny the inverse correlation of bonds and equities right now which suggests I am right.

One day when the solvency of the US becomes a grave concern then you will see bonds react to this but that day is likely well off into the future. Japan has a government debt to GDP ratio about twice that of the US and yet yields have been miniscule for years.

Jeff said...


In a normal economy I would agree with you. I agree that something must be done with health care.

We are biting off more then we can chew by trying to tackle this as we suffer through our worst economic crisis in decades.

Lets at least stablize the system first.

Everyone thinks the banking system has been stabilized. The only reason it stabilized is because we eliminated mark to market.

We are going to need a lot of money to help stabilize society via massive social programs. We will also need money to guarantee everyones deposits in their respective banks.

I guess my point is we can't try and do all of this at once.

You make some great points.

Jeff said...


With all due respect I think the inverse to bonds versus equites is way overdone at this point.

We had a bond trader in the comments section saying the same thing a feww days ago.

IMO, the solvency of the US is already a grave concern.

I respect your thoughts. Thats why there are two sides to every trade.

The JApan scenario was very different IMO because they are two different economies. I can see a scenario where your thesis plays out.

What concerns me is the continuing massive debt issuance by the US.

I think its unsustainable and Japan never attempted to sell so much debt. I don't see where the demand will come from.

I guess we will see what happens.

Jeff said...


Don't have a link, but check this out from Barron's. It looks bonds are worrying about all of the things we just talked about:

"Yields Follow Stocks Higher: A sharp rebound in equities dimmed the safe-haven appeal of government securities, sending their yields sharply higher. But Libor rates fell to new lows.

The minutes were one of several forces that leveled government bonds last week, pushing up the yield on the 10-year Treasury more than 0.3 percentage point, to around 3.65%. In addition to the quantitative-easing discussion, wholesale and consumer inflation topped expectations, while a slew of better-than-expected economic data and corporate earnings reports suggested the economy is getting off the mat, fueling a renewal of risk appetite that sent equities way up.

"The data for a while could be pointing in different directions, but we are forming some sort of bottom and we are only debating what kind of recovery lies ahead," says Anthony Karydakis, adjunct professor at NYU's Stern School of Business.

Perhaps more worrying for the bond market longer term, yields rose despite a rare reprieve from the deluge of new government securities being issued to fund trillions in government deficits. "I think we would have easily hit 4% [on the 10-year Treasury] had we had additional auctions," says Richard Yamarone, head of economic research at Argus Research."

Anonymous said...

Hello, could anyone please provide a link with Denninger s appearance on CNBC that Jeff mentioned? Thank you


Jeff said...


I will add it to today's post.

I will have it up in a minute.