Wall St's Bond Addiction Intensifies

Stocks closed the day relatively flat as money continued to pour into the treasury market.

Lets take a look at the 10 year today:

My Take:

This chart has gone parabolic!  The contrarion in me is starting to believe this move is getting way over done.  Especially when I see articles like this:

"SAN FRANCISCO (MarketWatch) -- U.S. Treasury bonds, often a top choice for risk-averse investors, are attracting more interest from hedge funds now, according to a study released Wednesday by consulting firm Greenwich Associates.
Hedge-fund trading volume in U.S. government bonds surged by more than 70% in the past year. In 2009, hedge funds generated about 3% of trading volume in this market. This year, that share jumped to roughly 20%, Greenwich Associates said.

The move is being partly driven by demands on the $1.8 trillion industry by institutional investors."

Is Wall St Blowing More Bubbles or have They Been Paralyzed by Fear?

This is the million dollar question.  I am ALWAYS highly suspicious of any "pile on" trade that I see on Wall St.  Just look at the "pile on" trades we have seen just in the past 10 years:

-  The tech bubble in the 1990's...Need I say more?
-  The Housing Bubble...Enough Said.
-  The commodities bubble in early 2008 where oil soared to $150/barrel.

There are many other smaller versions of such trades but I will stop at these examples.

So are Treasuries the next bubble?  I am starting to think so.

Before I get into the reasons why let me start off by saying there are many reasons to be in treasuries right now.  The economy is a mess and nothing looks safe.  It makes total sense to own treasuries during such a chaotic time in history.

However, the reason I am skeptical about the current move is because the market isn't trading like it should be if this was a "risk off/Armageddon on" trade.

I mean think about it:  If people are so scared then why are stocks holding up so well?  If this was a flight to safety then wouldn't investors be selling stocks and buying bonds?

You would have expected to see a 4000 point sell off on the DOW the way treasuries have traded recently.  Yet the DOW was only down 3% last week.  I smell a rat especially since the hedge funds are now in the game.

IMO, he whole thing is very suspicious.  What I think is really going on here is the "unintended consequences" of the Fed's zero interest rate policy.

This policy has provided too much liquidity for the banks.  What I believe is happening is the banks have decided they are better off borrowing at zero and buying bonds on the longer end of the curve then they are lending the money to a bunch of unemployed potential borrowers.

Making matters worse is the fact that potential borrowers have zero desire to lend more money in the first place because they are too busy paying down their debts from the last bubble.

As a result, the banks are flush with cash and they don't have to take the losses on their books thanks to accounting standards that are non existent which makes them even more flush with cash!.

This treasury trade looks HIGHLY speculative to me folks and these things usually end very badly.

The Bottom Line

The treasury trade looks tired but I still thinks it has legs so I will sit on the sidelines for now.  The economy continues to tailspin and this will only put further pressure on our deficits.  Any push back by the bond market as a result of our irresponsible spending could force this trade to unwind.

What angers me here is we shouldn't even be here in the first place.  Our interest rate situation is really putting the fianancial system at risk.

Allowing the banks to make a killing using a zero interest rate policy is all well and good for the banksters.  The problem is it's destroying the rest of the economy because the money is not being allowed to filter down to Main St where it is badly needed.  

It's being hoarded by the banks and then being thrown into the treasury market.

This is killing the last place investors could find some yield and the "consequences" of such policy of this are extremely dangerous.  I say this because it's forcing investors to take on enormous risk elsewhere because they are desperate to fiend yield. 

Just look at the the corporate debt that's going bananas right now.

Corporate high yield debt issues has turned into a feeding frenzy as soon as it's offered.  Companies I have never even heard of are raising money via selling 10 year debt because they are offering 8-9% yields.

Ummm...How is this going to end well?  Many of these companies will not even be here 10 years from now.  MBS's were offering the same returns and we all know how that worked out.  The problem with the MBS instruments was the underlying debt was no good.

The same thing is going on this go around.  Most of these companies are using this money to roll over BAD INVESTMENTS/DEBTS. 

Example:  Commercial real estate is down 40% for the most part from it's bubble highs.   Yet companies like Simon Property Group have seen their stock price soar from $30's last year up into the $90's recently because they have been able to take advantage of the appetite for corporate debt

How on earth does this make any sense fundementally?  The debt they own is garbage.  Who is going to be shopping at the 100's of malls they own as unemployment soars?  How many of their stores will go bankrupt as the consumer evaporates.  How much more value will be lost on these properties when they do?

What if interest rates move higher?  What happens to this debt then?  

Let's get real here:  The only reason SPG is alive right now to begin with is because they got a free pass by the banks to roll over their debt at full value despite the fact that it's woth wayyyyy less.

The fundementals should be telling investors to stay the hell away from companies like this because their underlying debts are 30-40% over vauled. 

We all know what's going to eventually happen here:

SPG's cash flows will dry up as their tenants go BK and they will then be in deep doo doo as they try and make their debt payments to the banks and to the debt investors who allowed them to leverage back up.

The bottom line here is I believe we are seeing more bubble blowing throughout the financial system. 

The problem is the balance sheets are bad this go around from the beginning and investors are getting sucked into it because they feel like they have no other options because stocks and treasuries are doing nothing at this point.

I tell you one thing:  If the 10 year treasury gets down to 2% it will be time to get short treasuries because none of this is sustainable. 

The markets once again is having a party.  The problem is Main St wasn't invited this time because they are unable to profit from it like they did when they could flip houses.

The problem with this bubble party is only rich are invited, and without Main St. participating, it's likely to be a 4 hour affair versus an all nighter.

Disclosure:  No new positions held at the time of publication.