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nuf2bdangrus (< 20)

Treasuries telling us something

Recs

5

July 31, 2009 – Comments (1) | RELATED TICKERS: TLT

There was huge buying in treasuries with high volume today...especially into the close.  Since they're inversely related to equities, that is suggesting to me that the smart $ may be taking a break from the equity rally.  This was a violent move, it remains to be seen if the tlt peaks here, or takes out the 97 high.  Perhaps I'm looking for vindication on the fact that I was building my short positions today....as i have been since spy 950, increasing them at 990 and shorting luqxury retail  and financials.

 

http://stockcharts.com/h-sc/ui

 

I wanted to go long tbt, but since I believe there is a major selloff pending, I won't go long the TBT until that selloff occurs.

1 Comments – Post Your Own

#1) On August 01, 2009 at 11:52 AM, StopLaughing (< 20) wrote:

The big buyers in treasuries are govenments. That accounts for the huge buying. It is coordinated buying among governments.

There is a major problem looming out somewhere in the future. 

One reason housing prices bubbled is because as an asset class, they are interest rate sensitive (long term rates). As long term rates lowered over  10 years to near record lows the price of houses shot up. It shot up more in areas with strong growth and/or restrictive zoning/supply restrictions (land, water).

American interest rates can not stay low given the current situation (without a global depression). America has imported "cheap" goods and paid with cheap "IOUs" (T-bonds). Indirectly the government has traded  manufacturing jobs for "cheap" debt in the mid run. 

America is running out of jobs that it can trade for "cheap" debt. In the mean time, China is moving toward a less export oriented economy. The price of energy is also moving higher.  The $ is getting weaker.

Somewhere near the end of the recession. The Fed will need to start to raise rates. That will precipitate a panic in the T-bond market. It may also crash the stock market (with or without a lag).

Why buy T-bonds if the interest rate is going to be higher next week (year).  As the interest rates rise the deficit will be harder to finance. As the interest rates rise beyond the normal rise coming out of recession the economy will start to choke off. Tax receipts will fall and the deficit will get worse putting more pressure on T-bonds. Adding to the pernament welfare state and government spending (socialized medicine) will make the problem more severe.

The bubble economy of the last 10 years will reverse as the interest rate sensitive sectors of the economy will crater on higher interest rates  (instead of bubble on lower rates).

Government buyers of T-bonds may moderate the problem by accomodating the US (transfering their citizen's wealth to the US) but they will only do so to avoid larger problems or in exchange for other favors.  The US will pay in some way at some time. 

However, non government buyers will stop buying T-bonds as they know buying fixed income in rising rates is a loser. 

There will be a W bottom but the second leg down will be partly caused by the stupidity of the government and their massive deliberate deficit creation.

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