Thursday, December 31, 2009

2010: The Year of the Bond Market

Hello Folks!

Before I start I hope everyone has a safe and Happy New Year! I wanted to hop on here and talk a little about the year ahead as 2009 comes to a close.

IMO, 2010 will be the year of the bond market. The US government plans on borrowing over $2.5 trillion in 2010 after borrowing a record $1.5 trillion(give or take) in 2009.

Somehow the banksters and the US government found a way to get their treasuries sold in this year. They achieved their goals in 2009 in a couple of different ways:

First they kept borrowing rates at 0 which allowed the primary dealers to make a fortune buying treasuries. this allowed the primary dealers to make billions by borrowing at zero and then investing in higher yielding assets like the 30 year bond.

As I have explained before, the banks pocket a sweet spread when you borrow at 0% and then buy the long bond at 4.7%.

Secondly, they also found a way to talk the FCB's into going along with this charade(probably through threats) as the world continued to buy treasuries.

This zero interest rate environment allowed Wall St to make more money this year than any other year in their history including the housing bubble years of 2004-2006!

In a nutshell: The Fed's games allowed the Street to gorge on profits at the expense of the taxpayer. Meanwhile, Rome continues to burn as the average American continues to suffer from unemployment and low wages as this country remains mired in worst economy since the 1930's .

If you are a banker you are sitting on top of the world right now! On the flipside, if you are one of the "peasants" in the USA as the greatest fraud in the history of this country continues to roll on, your lives have probably never been so tough.

I know I am personally feeling it. I went home during Christmas and saw the toll that this recession/depression has taken on my family. I am sure many of you have seen the same thing within your own families.

Folks, we are being screwed more ways than a $5 hooker on a busy Saturday night by the oligarchs of this country.

For Example: If you were responsible over your lifetime and saved money, the Fed is now rewarding your responsibility with CD's that basically pay nothing. Gee thanks Mr. Bernanke! NOT!

Meanwhile the bankers continue to gorge on profits as they take advantage of historically steep yield spreads. I continue to be amazed that there are no torches and pitchforks in DC yet.

What is it going to take to make people rise up? There are reports out of Detroit that unemployment is nearing 50% and yet no one says a thing! How bad does it have to get before you wake up and do something? Where is the anger folks????

If you want to take action I suggest you follow the Huffington Post's advice and begin starving the "too big to fail banks" by yanking your money out of them and placing your funds into a community bank.

The Post has created a safe way in which you can find a solvent community bank by starting up the website Move your Money. This site allows you to find a safe community bank in your area by simply plugging in your zip code.

It's time that we "starve the beast" and take away the liquidity that allows the TBTF banks to manipulate the market, buy and sell unregulated derivatives, and then pay themselves ridiculous bonuses at the end of the year.

Remember folks, without taxpayer funds via the TARP, NONE of these banks would exist! The fact that their enourmous profits are going into the bankers pockets instead of the taxpayers is simply disgusting. Do you need any more proof that you are being blatantly robbed? I hope you all take action and move your money like I have.

The "Bondzilla" 2010 Bond Market

IMO, the banks have had their day in the sun when it comes to low interest rates and big profits. Moving forward, the bond market is increasing getting very agitated over the huge spending programs that have been announced in the past few weeks.

Take a look at the ten year(TNX) over the last 20 days:

My Take:

Yikes! That is one ugly chart! Yields hit 3.9% at one point today on the 10 year before pulling back as stocks began to fall. This is a monster move thatwe have seen over the past three weeks. Some would call it parabolic.

Remember, if rates soar to 6% housing is toast. You think the drop in housing prices is bad now? HA! You ain't seen anything yet if the 10 year continues to soar. As we all know, mortgage rates are set based on the ten year bond.

So why are bonds selling off(resulting in higher yields)? The real question you should ask yourself is why wouldn't they?

I mean the spending programs that have been announced over the past couple weeks are mind boggling.

The Senate passed a healthcare bill that is going to cost us over $1 trillion dollars(I believe it will be much more than that when its all said and done). This will be accompanied by massive tax increases and if you think its only the rich that will be taxed you are nuts.

The Fed/Treasury then added to our woes on Christmas eve when helicopter Ben and his pals announced that Fannie and Freddie's losses over the next 3 years will covered by the Treasury no matter what the cost.

I find it funny how they Fed/treasury conveniently annouced this right before the holiday hoping no one would notice. As you can see above, the bond market sure noticed!

How much money are we talking here? Who knows? It will depend on how bad the economy gets. We are talking at least $400 billion from what I have read. If the economy worsens and homeowners continue to walk away in droves from underwater mortgages the tab could be much higher. Could it be $1 trillion or more? Perhaps. Time will tell.

The Bottom Line:

Higher rates are inevitable in my view. There are some deflationists that are convinced that we headed back to 2% yields ala Japan in the 1990's. I just don't see it with the $2.5 trillion in treasury issuance's that are scheduled for 2010.

One thing is for sure in my view: The bond market will be the story of 2010. If interest rates soar on treasuries as the world begins to question our ability to pay the money back, the economy is TOAST.

The Fed may be forced to raise rates faster then they expected if the bond market goes berserk. Ironically, if the economy recovers, the Fed will be under even more pressure to raise rates because fears of inflation will arise.

I am afraid that 2010 will be a year where we transition from a low rate/high growth environment into high interest rate/low growth one.

This does not bode well for the stock market. An even bigger risk to the stock market is the bond market. Ben won't hesitate to pull liquidity and crash the stock market if he can't sell his treasuries. He knows that investors will run to bonds if the market falls apart.

2010 will be another year of caution for investors. "Buy and hold" worked this year. I don't see anyway possible that we see a repeat this next year. The road we are travelling heading into 2010 is filled with potholes and landmines.

Buyer beware.

Disclosure: No new positions at the time of publishing. Short treasuries via TBT in longer term accounts.


TomOfTheNorth said...

Great post Jeff. Good to have you back.

Happy New Year!

Jeff said...


Thanks bud. Happy new year to u as well! It felt great to write again. Its been awhile! I look forward to many more posts in 2010.

CT-Hilltopper said...

Happy New Year, Jeff.

Like Tom said, it is good to have you back.

You have been missed.

Maybe now we will both have time to post. LOL

getyourselfconnected said...

Happy New Year!

Great to read you again, always top quality stuff.

For maybe the first time I am at odds with your call here and I may post some ideas on why tonight. In no way do I think you are wrong, only that another trick is coming from the sleeves of the FED/Treasury to circumvent rate hikes for mortgages.

Welcome back!

Jeff said...



Great to hear from you as well! I hope you are enjoying the time off.

I have had the week off and I have really enjoyed the R&R.

Happy New Year!

Jeff said...



I will check out your thoughts. I think the Fed has ran out of sleeves but I could be wrong.

The fact they have pulled this trick off this long is certianly impressive.

Happy New Year!

Flipdippy said...


Just curious if you read the bernanke interview from Time. I wouldve agreed with you prior to reading it myself, but he flat out stated he could give a rats ass about inflation, china, scope of debt...he would keep rates low until he feels the threat from deflation has passed.

Given the Fed's long and storied history of failing to act in time I don't see it being any different this year. I would even wager we see new all time lows on 30 year fixed rate mortgages, especially now that freddie and fannie are essentially the bad bank and will probably be handing out mortgage mods and refis to anyone who wants one.

We'll see. I think they hold things together past elections before beginning the real rape of J6P.

jeff said...


I gotta look that article up. The problem Ben has it will be the bond market vigilantes not the Fed that will take rates higher.

The won't be a damn thing he can do about it. If he tries another QE the dollar will crash.

I think the game is about over. Just my opinion and I could be wrong.

Go back and take a look at what the bond market did to interest rates when Clinton tried to nationalize healthcare.

They went through the roof and forced the Clinton's to bail on the healthcare reform.

Never underestimate the bond boys. If they think things are out of control they will take matters into their own hands.

flipdippy said...

I so want to agree with you.

My biggest lesson for 2009 was not to underestimate the Fed. The dynamics of the finance sector are far different than they were in 1993. The bond market was rumbling a few times in 2009 and somehow magically was always muscled around by TPTB when they needed it to behave a certain way.

Gravity always wins in the end but betting against the Fed in 2009 was a big loser for many including myself, and with a lot of forward looking economic indicators pointing up (for now), it's hard to see them letting the foot off the gas just yet.

I'm wagering we get confirmation for which way 2010 goes during the state of the union address in a few weeks. I am guessing homeowners get a bone tossed their way resulting from the FNM and FRE actions the administration has taken in the past few weeks. Could be up up up again or down down down.

We'll see - I'm excited for what comes either way!

BTW - happy new year and how did the move go? Still in Bawlmer?

Jeff said...


I hear ya. There is that old saying "Don't fight the Fed".

I am guessing that the Fannie Freddie unlimited check is going to be huge news next year. I smell a rat here too.

My guess is it will become the toxic dump for the millions of foreclosed homes that the banks are holding.

Once again the taxpayer will get hosed.

I am hearing rumors that there is going to be a huge dumping of shadow inventories by the banks in Q1.

I am sure they have this all orchestrated. 2010 should be interesting!

Haven't moved yet. I will let you know. Probably sometime in Jan.

psbyowner said...

glad your back.

just seems like a loot fest now; a coverp of epic proportions.

Art said...

Just hope rates stay low till Sep 2010 when I renew :o)

Jeff said...


Good luck man. I hope the market holds up until then. I don't think anyone can predict the timing of all of this.



Its great to be back. I am moving so things might be quiet for awhile but I will be back.

If anything big happens I will put a post up

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Anonymous said...

"I am hearing rumors that there is going to be a huge dumping of shadow inventories by the banks in Q1."

Ive been hearing such rumors since mid 2007 when stated inventory started teasing out a peak. "just wait til ____ the DUMP in shadow inventory is just around the corner"...

After 2.5 years I have quit listening. How much longer are you willing to keep thinking its "just around the corner"?

Jeff said...
This comment has been removed by the author.
Jeff said...


That's because the fed got rid of market accounting. Why would they dump and take a loss when they can held onto it without taking a hit.

Eventually as the economy goes nowhere they will force the banks to puke them up. The fed wants the banks make more profits before the foreclosures hit the market. This way they will hopefully have enough capital to handle the losses.

Anonymous said...

"Eventually as the economy goes nowhere they will force the banks to puke them up. The fed wants the banks make more profits before the foreclosures hit the market. This way they will hopefully have enough capital to handle the losses."

Thats fine Jeff. The question is, why is that magical event going to happen in 1Q 2010 and not in
2Q 07
3Q 07
4Q 07

1Q 08
2Q 08
3Q 08
4Q 08

1Q 09
2Q 09
3Q 09, or
4Q 09 as originally predicted? What makes it different this time?

Jeff said...


I have no idea when. But I do know its when not if.

My point is you should NOT be buying a house now because there are too many unknowns.

The markets can stay irrational longer then you can stay solvent.

IMO. Housing will fall further. Enter at your own risk.

Anonymous said...

"IMO. Housing will fall further. Enter at your own risk."

I know your opinion. Your opinion is we havent seen the bottom of anything -- even the stock market. Hows that one working out for you.

My question was simply why does the big dump happen in Q1 10? What makes this rumor any different than any other rumor we have heard over the last 2.5 years?

The answer is, you have no idea either. Thats all I wanted to confirm. Thanks.

Jeff said...

I answered your question. As the banks shore up their balance sheets with the benefit of lower rates it will allow them to start dumping you not read?

Anonymous said...

No I do read. In the first instance you cite 1Q 2010 as the start date for the big dump.

Yet, when pressed, you admitted as I suspected all "have no idea when" the big dump happens.

Thanks for clearing that up.

Jeff said...

Nobody knows exactly when. I can only tell you why it is sooner rather than later with a framework as to how they will do it. It won't be another 2-1/2 years that's for sure.

flipdippy said...

Well, I happened to catch the bachelor season premiere, which should've been called the 'rail of tears'. If anyone watches the show or saw the season teaser at the end of the show, you'll get it.

Makes for a good analogy to where things stand in the banks.

The time is soon...make no bones about it.

If it's not gravity that forces banks to show losses it will be the FASB and IASB regulations which banks are being forced into (moreso for IASB) in order to remain competitive with other financial institutions globally who are moving quickly to IASB.

I'm guessing if we don't get a sharp reversal in the markets this week, we get one right after the state of the union. Seems about the time banks should start announcing profits and I bet they ain't entirely roses.

Tio Slael said...

2010: The Year the Housing Time Bomb finally ended!!! LOL

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jeff said...


Lol....The housing time bomb will be back.

I am in the middle of moving.

Hang in there all. Sorry for the silence.

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getyourselfconnected said...

How are things? Drop me an email if you have a chance and be nice about the Patriots!!

getyourselfconnected said...

45-14, what a show.

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Jeff said...

Saints Colts Super Bowl?

Or is it J! E! T! S! JETS! JETS! JETS!?

I have one thing to say tonight folks.

Movers suck! Should be back soon.

Anonymous said...

Brim over I assent to but I think the collection should acquire more info then it has.

James B said...

Hey Jeff - if Obama's bark on banks is anything like his bite on healthcare, I'm going long financials immediately!

Jeff said...



I wouldn't take that bet. This new stance against the banks is all about the Mass senate loss.

The people finally spoke and the President is listening.

I think the days of bailout nation are toast. America has had enough with the spending. This will not be good for the banks.

Jobless claims were god awful today as well.

I will have a post up at some point within the next week.

Things are finally settling down

James B said...

Sorry your move is such a pain - I'm in the process of one too... urgh...

I'd really like to believe that banks will be reformed in the right way, but since money talks in Washington I'm suspicious the lobbyists will derail any really major legislation.

I hope they prove me wrong, but murmurs about regulations all derivatives "except the ones most commonly traded" make me think this is all a popularist smokescreen.

On the flip side, it's nice that the good folk in Mass managed to get Washington scared about 'we the people'!

Jeff said...


Good luck with the move. Mine is almost complete!

Yeah it could all be lip service. I think the market sold off today because the bankers wanted to throw a temper tantrum in protest of more regulation.

The whole market is so frickin rigged right now it's ridiculous.

Hopefully Obama meant what he said. The corruption needs to stop or weare going to destroy ourselves.

The economy is in shambles. Sad times. I hope the politicians took Mass seriously.

flipdippy said...


The mass election and the crackdown on the banks (if there's followthrough) are a big turning point for ol' Barry. I think he sees the writing on the wall. The liberal wing of the D party is going to harpoon his chances for re-election, as is relying on his major political donors to give him enough money to buy a win in 2012.

He has been working on the crackdown for a while - I think he was working with Rahm and Axelrod on the calculus of doing the right thing (in this case which happens to be populist) and then being able to fall back on his donor network in 2012.

If he's lucky, he'll gravitate towards the center, avoid stupid mistakes the far left and far right want to make, govern from the middle, and be Clinton II.

We'll see.

Hope your move went well and looking forward to you getting the blog back off the ground again.

BTW - WTF is with all the short sales and foreclosures in Phoenix 21131? Is this a leading indicator for Alt-A and prime strategic defaults we have coming?

jeff said...



Great thoughts. I agree although hopes of a CLinton II are slim to none due to the deep hole that Bernanke has dug for us.

Its going to take a generation to wipout the debt thats now overwhelming the country.

Whats so scary right now is we are about to roll over again except this time there is no floor beneath us in the form of Fed bailouts because we are totally broke.

That fact that Americans are finally waking up is the one glimmer of hope that I see right now.

We need to take our country back. Hopefully Geithner and Bernanke and the rest of the criminals get thrown out of office.

The will of the people is the only thing that can save us.

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