Tuesday, October 6, 2009

The Bond Market says it all

By now all of you know that I have ten times the respect for the bond market traders than I do for the bull obsessed equity traders on Wall St.

The bond market sent a strong statement today about their confidence in both the stock market rally and their fears around inflation.

As you can see below, we had a 4 week treasury auction today that saw a very strong BTC(bid to cover) of 4.7:

Quick Take:

Note that the participation in this auction from the indirect bidders(Foreign Central Banks) was over 61% which is a very healthy number. This was an A+ auction in anyone's book.

The problem here folks is it's a 4 week auction with an interest rate of .04%! There is basically ZERO risk if you decided to participate in this auction.

My querstion here is if there was a lot of confidence in the recent stock rally then why would be see such a strong flight(nearly $5 bid for every one dollar accpeted!) into short term bonds that pay virtually nothing?!!!!

Can you say Capital Preservation?

Now let's take a look at the 3 year treasury auction from today:

Final take:

As you can see above, the BTC was an underwhelming 2.76 and the indirect interest fell below 50%.

Personally I am not impressed.

The Bottom Line

So what is the bond market telling us? It says short term treasuries are safe.

However, over the long term, the lack of interest in the 3 year auction tells you that the bond market has no interest in holding a 3 year bond with an average interest rate of 1.44%.

To me this signals that the bond market is worried about both inflation and the potential of a breakdown in the US dollar. Why wouldn't they be after seeing gold rising above $1040 an ounce today?

The FEAR of inflation and a dollar collapse is why the bond market is acting this way. Keep in mind that there are still tremendous deflationary forces on the economy via the consumer. The Fed is fighting this deflation by throwing trillions of dollars at it?

So who wins? IMO this is still anyone's guess. However, I continue to be attracted to metals in this scenario because I am beginning to believe that the world is losing confidence in the US and their ability to control their deficits and spending.

If they lose confidence in our ability to pay back our debts, then the dollar will eventually breakdown.

As a result, the world now feels they must diversify out of the dollar and into things like commodities and precious metals.

Bond Auction Alert!

We have a huge 10 year auction tomorrow at 1:00 that will be fascinating to watch given today's action in the bond pits. If the world bails on the 10 year auction tomorrow, you could see bonds sell off severely.

I expect a volatile day tomorrow. Hang on tight boys and girls!


SPECTRE of Deflation said...

Several months ago, the PTB changed the category, "indirect bidder = FCBs", to include more components to muddy the waters regarding what the FCBs are really up to. They are playing the ole' shell game so that in the end they steal the last nickel from the American Treasury.

Anonymous said...

Thanks Jeff: This is why i follow your blog; you keep great tabs on the bond markets, great research, keep it up!

getyourselfconnected said...

Jeff and all,
if you need a laugh, please check out the chart comparing "Toilet Paper vs. The Banking System" from a friend of mine. It is very funny. Its on my site or the original:

Jeff said...


Yup. the pillaging continues.

Jeff said...


I am glad you enjoyed the read.

I will keep it up when I have the time!

Anonymous said...

time to start a blog "The housing bull market", you may be early by 6 months but thats about it. Housing time bomb exploded long time ago.

Jeff said...



Housing is getting hammered right now.

It could get hammered even more if interest rates rise.

There will be no housing bull for years I am afraid. People will begin to view homes as a place to live versus an investment.

Mr. J said...

The bond market is also the place that I believe everyone should pay attention to. That is where all the action is going to take place as our current problem lies within the monetary issues (debt, credit, etc)

Jeff said...




The 30 year bond auction was a disaster today.

Yields spiked. The US dollar got trashed once again.

Starting to wonder if this "orderly" decline in the dollar that the Fed would like to see is all of the sudden becoming not so "orderly" anymore.

If the dollar continues to slip things could get ugly real fast.

Anonymous said...

"Housing is getting hammered right now."

Housing got "hammered" in 2007-2008. It has gone sideways in 2009. You would know this if you spent even 2 seconds on the subject.

flipdippy said...

What to make of the dollar indeed.

Short dollar is a crowded trade right now. Dollar bearishness is in every publication, newspaper, and on network news.

Too many people are saying the dollar is going down the flusher ASAP...that makes me think it's about to take a moonshot.

I'm still dazed and confused by this rally, but IMO, we're going to have a nice pullback over the next few weeks before one last salvo for the bears.

Anonymous said...

Anon - Housing *is* getting hammered this year - just not in the same way.

Low end properties are seeing gains from foreclosures and no-brainer deals; anything > $350K has basically had a dreadful year and continues to decline.

jeff said...

"You would know this if you spent even 2 seconds on the subject."


Another disgruntled realtor? you don't "get it" yet do you.


Low end properties are seeing gains from foreclosures and no-brainer deals; anything > $350K has basically had a dreadful year and continues to decline."


You got it. Housing is nowhere near a bottom. The low end of the market is moving thanks to the home buyer credit.

jeff said...


You just inspired me to write a post.

Great thoughts as always.