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A 'Bloodbath' in US bonds?



April 09, 2010 – Comments (11)

I have a two part answer: Within a year? Yes I think that is likely. Within the next couple of months? Less likely. I have more explanation at the bottom of the post.

I have been discussing US sovereign debt in several posts
-- Debt Saturation -
-- What the Bond Market is Trying to Tell the Stock Market: A Look at the Yield Curve and Expectations -
-- Treasury pays most since August to sell 3-yr. debt -
-- Is Never Good For You? -
-- Something Very Strange Is Happening With Treasuries -


A 'bloodbath' in US bonds?
Apr 02, 2010


Are the markets losing patience with US government debt? Last week three US government bond auctions met with unexpectedly lacklustre demand. The yield on the ten-year Treasury jumped to a nine-month high of 3.9%.

In a further sign of market stress, the ten-year yield rose above the ten-year swap rate for the first time in living memory. The swap rate measures the cost of interbank borrowing. So this move implies the US government is a bigger credit risk than banks. The worry is that investors are now balking at the record debt sales needed to cover this year's deficit of $1.4trn and imposing a sustained rise in yields (via falling bond prices). In short, they want higher interest rates to compensate for the huge supply increases. The trouble is Treasury yields are the benchmark for interest rates across the economy. Higher yields will mean higher mortgage, credit card and corporate borrowing costs. That's a nasty cocktail that could choke off the anaemic recovery and hit equities.

But this could well be just a "short-term bout of jitters" that occasionally hits markets rather than the beginning of a "bloodbath" in US bonds, says Capital Economics. A disappointing German auction earlier this year raised similar concerns, but German yields have fallen back. A key trigger for last week's panic was the passage of the $940bn healthcare bill. This must have reignited concern over the scale of spending, says Richard Barley in The Wall Street Journal. But the healthcare fuss is hardly news. Technical factors also explain the bond sell-off. Speculators betting on the yield gap between Treasuries and swaps were probably caught out by the sudden market move and were forced to sell Treasuries to close out positions.


Considering this last paragraph, I agree. I think soverign debt issue in the Eurozone is far more acute than it is in the US at the moment. But this is a falling domino that eventually spreads to the US and hits the US harder. Consider this scenario:

1. Abosolute Greek (or other EU) bond failure, rates skyrocket and bond investors go to the "safe havens" = Germany debt and more likely US Treasuries

2. Ben and Timmy have been waiting for a moment like this. The US Governement is insolvent. Running massive and growing defecits in the face of shrinking tax revenues. The US Sovereign yield curve is already steep so the bond market is already giving them warning that more shennaigans will not be tolerated. But in a panic event outiside the US that drives buyers to the US debt market is exactly what Drs. Bernanke and Geither ordered.

3. With fresh, panic-stricken buyers then can offer debt with impunity. In fact based on how badly the Governemnt is invsolvent, expect a statement like "In order to guarantee that 'this doesn't happen in the US', the Fed and the Treasury are authorizing another round of Quantitative Easing"

4. The Fed *needs* to do this. The governement is broke. But this paradoxically will bring on the next crisis: Debt Saturation -

5. US Monetary policy over the past several decades has forced the world to become speculators, and when speculators perceive higher risk than reward, then bad things happen.

11 Comments – Post Your Own

#1) On April 09, 2010 at 10:46 AM, Starfirenv (< 20) wrote:

Binve- Have you seen this?

Seems I read somewhere that GS employed similar tactics with Greece. Ah, creative financing. Keep it coming. +1 rec.

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#2) On April 09, 2010 at 10:54 AM, binve (< 20) wrote:


Holy sh**! Yeah, I had heard about those same tactics in Greece by GS, which was amplified by the fact that GS also took out massive CDS's on Greek debt. But that article shows the ruthlessness that financials display, and even I (someone who calls financials the Cancer of the Economy) am a bit surprised by the magnitude of ruthlessness displayed toward US municipalities.

Thanks for the link!! Very eye opening!..

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#3) On April 09, 2010 at 11:54 AM, Starfirenv (< 20) wrote:


ANYONE considering the "safety" or tax advantages of bonds should read that. Agree with ruthless, or treasonous, or even financial terrorism abetted by corruption. A better title might have been "How to Build A Nookyaler Bond for Dummies". Yeah, and the CDS's, " the frosting on the cake", truely evil. Run with it. Regards.

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#4) On April 09, 2010 at 4:58 PM, Option1307 (30.65) wrote:


That's a really good article, you need to make it a post of it's own. Fools should read it.

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#5) On April 09, 2010 at 6:55 PM, Starfirenv (< 20) wrote:

Option1307- Thank you. I thought so too. I did post it a couple days ago and the only response was a tongue-in-cheek comment from Chicken Little. I think this is a better place for it as the B-Man is a rock star that many follow and it will serve the greater good right here. Unbelievable $hit. The real story was alluded to in "comments" regading the Greek situation (especially the CDS's) as these tactics took down a whole country. Seems there was some funny-business in Iceland as well. Explore that! I believe this story comes out on the 15th, so it will be seen. I'm following Matt (the author). Ck out his other stuff of late at Rolling Stone. Got Vampire Squid? Run with it.  Regards.

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#6) On April 09, 2010 at 7:44 PM, Option1307 (30.65) wrote:

I seemed to of missed it the first go around, oops!

I honestly think you should post it again though, too good to miss out on. While Taibbi can be way over the top on ocassion, I really liked this piece by him. Thanks again for the link, enjoy your weekend!

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#7) On April 09, 2010 at 8:16 PM, Starfirenv (< 20) wrote:

Option1307- You too. Wish I was in LV running amok with Checklist but I will do my best. Probably ski Squaw on Sat and Rose on Sun. Whole lotta shreddin' goin' on. Plan to hit my favorite steakhouse at Northshore (Tahoe). The story is there- build on it, repost it, send it to your contacts (as have I). Regards from 5000'.

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#8) On April 11, 2010 at 1:59 PM, Starfirenv (< 20) wrote:

binve- It seems the PIIGs should have stayed away from the poison trough. Milan (who's next?) has brought suit against JPM et al for similar "Birminghamesque" tactics. Don't know how I missed it, but this is from a few weeks ago. Thought you might be interested-

Another on-topic story, from an excellet site I frequent. Worth a "drive by" if you're unfamilliar.

Maybe Taibbi will do a follow-up. Seems there's alot more "digging to do. Regards

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#9) On April 11, 2010 at 2:06 PM, binve (< 20) wrote:


I did find and rec your original post on the issue. Thanks!!

These two new links are very good and informative too. Before this crisis is over, debt will be a 4-letter word and finanicals will (necessarily) be revamped/broken-up. There is a groundswell of anger at the changing of laws (abolishment of Glass-Steagall, etc.) that allowed this behavior to take place, and against those (GS and JPM being the worst offenders) that took part.

After the crisis resumes and the sh** really hits the fan with regards to the economy (2008 was a little league warmup, unfortunately), Politics and financials in the next few decades will be very different, IMO. And I think that will be a good thing.

Thanks for the articles!..

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#10) On April 11, 2010 at 2:23 PM, Starfirenv (< 20) wrote:

binve- Respectfully disagree. Predatory lending yes, but debt can be a very valuable "tool". And thanks for the rec. That was one of those "Idon't know why I bother moments". Again congrats for your excellent work here and on your T+A blog. Maybe leaving a link to it more often would help. Good stuff. Regards.

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#11) On April 11, 2010 at 2:36 PM, binve (< 20) wrote:


I am not fully disagreeing with you. I wrote this a few months ago:

But just to clarify my stance, I am not bearish just for a sake of being a bear. I do not want to be down on the economy. I mostly an optimistic guy and would rather be positive on the economic outlook.

Financials are not, at their core, bad businesses. They do perform a very vital role of facilitating the dispersion of resources. It it not productive, so there is a loss of efficiency, but there is an overall economic good that comes out of it.

But today, financials comprise a disproportionate size of the economy to the amount of economic usefulness they perform. This non-productive garbage has to be cleaned out, just like cancer. This is precisely why I call financials the cancer of the economy. They are a huge drain that transfers the economy's money (the wealth of the productive part of society), largely between each other, collecting fees for their "work".

Excess debt has allowed this behavior to happen. So while this cycle is marked by excess debt, the next cycle will correct to the other extreme and have huge savings / abhor debt.

Eventually we will balance and find sustainable ratios between debt and savings.

But this current crisis is 100% a debt crisis that is trying to be solved with more debt. And it will burn a *lot* of people. And they will not forget it after the crisis is over.

Thanks for the comment!!.

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