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.