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goldminingXpert (29.50)

Bond Auction Results at 1:00ET--Look out...

Recs

49

June 10, 2009 – Comments (39)

Between 10s today, and the long-bond results tomorrow, we should get screaming higher yields or sharply falling stocks. I highly doubt that Bernanke has come up with a magic potion to stop gravity--there just isn't enough capital to keep both the stock and bond markets propped up. The 10y hit another 6-month high this morning, and the 30y yield is also sharply higher--yet the stock market is barely up--the Nas and Russell have gone negative. Yesterday, in the afternoon, the dollar was sold off to prop up bond yields (check out a chart of /dx (dollar futures) overlaid with /zn (10y bonds) and you'll see that it took a half penny drop in the dollar to keep the 10y bond boat from capsizing. What will have to be sacrificed today, tomorrow and over the coming weeks to keep the struggling bond market afloat? Hint, equities will be the first thing thrown overboard.

39 Comments – Post Your Own

#1) On June 10, 2009 at 10:06 AM, goldminingXpert (29.50) wrote:

P.S. I have a bet with TonyLogan that the TNX wouldn't go over 4 this summer... since I made that bet, the TNX has risen half a percentage point in roughly 2 weeks. Looks like I'm going to lose that bet--I didn't forsee Bernanke and friends letting the mortgage market get slaughtered quite this quickly.

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#2) On June 10, 2009 at 10:28 AM, kaskoosek (36.28) wrote:

Excess liquidity is causing the higher yeilds and not the other way around.

Some one needs a lesson in causality.

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#3) On June 10, 2009 at 10:34 AM, goldminingXpert (29.50) wrote:

Excess liquidity is causing the higher yeilds and not the other way around.

Some one needs a lesson in causality.

That makes absolutely no sense. There isn't enough demand to buy the entire supply of bonds. Escess liquidity would cause low rates--too much money sloshing around the system looking for a return. We've got the opposite. Not enough money in the system to fund stocks, bonds and mortgages at once. Report this comment
#4) On June 10, 2009 at 11:06 AM, russiangambit (29.32) wrote:

I am wit GMX here, there isn't enough money to support both Treasuries and stocks at the same time. Something gotta give sooner or later.

Bernanke would have to print a few trillions and then monetize them to do that. And he isn't desperate enough yet to do that.

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#5) On June 10, 2009 at 11:57 AM, goldminingXpert (29.50) wrote:

TNX breaks north to its highest since Oct. 08, TYX (30-year yield) is heading strongly north to its highest level since July 08. The stock market is still red on the day. That's very very bad. I'd hate to be bumbling Ben Bernanke right about now.

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#6) On June 10, 2009 at 12:14 PM, angusthermopylae (39.74) wrote:

I'm not a bond follower (though I believe I understand the basic mechanics and influences), but I have to go with GMX and russian--there really isn't that much money "sloshing around," since it's either tied up in bonds already, pulled out of the market by fearful investors, or held by banks sitting on their assets like a Tolkien dragon on it's horde of gold...

...for the younger generation, I guess that would be "like a Gringott's goblin on it's horde of gold."  Geez...I'm getting old.

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#7) On June 10, 2009 at 12:43 PM, FleaBagger (28.16) wrote:

GMX gets a rec for being the place where I read "held by banks sitting on their assets like a Tolkien dragon on it's horde of gold."

Rec for angus! (Though GMX gets the credit - it's not fair, really.)

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#8) On June 10, 2009 at 2:03 PM, tdonb (< 20) wrote:

Looks like the rate is up to 3.99%. Not good.

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#9) On June 10, 2009 at 2:06 PM, tonylogan1 (28.16) wrote:

http://finance.yahoo.com/q?s=^TNX

printed 4.0%.

I think it is not Sept 24th yet... I anxiously await your blog prasing me.

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#10) On June 10, 2009 at 2:19 PM, goldminingXpert (29.50) wrote:

Bonds down, stocks down, bernanke getting rammed on all sides, bulls in trouble and I own Tony a blog post. Today is a good day.

I'll give you your blog either tonight or tomorrow Tony--I was thinking about what I would say assuming I had to eat crow, but I honestly thought I wouldn't lose until at least next week.

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#11) On June 10, 2009 at 2:19 PM, goldminingXpert (29.50) wrote:

owe Tony*

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#12) On June 10, 2009 at 2:28 PM, tonylogan1 (28.16) wrote:

Ive been telling folks on the CIL that I thought I needed to win today or it would retreat and not give me another chance for a while... I still think the auctions were not that bad and we will get a better re-entry point to short  TLT.

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#13) On June 10, 2009 at 2:31 PM, sarcaz (20.97) wrote:

GMX - So which stocks are most likely to suffer from the bond auction failure?  Financials?  Real Estate?  I would have thought the financials, but it looks like SRS is up more than SKF at the moment. Perhaps that is due to the rising interest rates, and the ensuing drop of refinance applications.

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#14) On June 10, 2009 at 2:34 PM, angusthermopylae (39.74) wrote:

So, the auction was weak and yields had to hit 3.99% to get buyers...and the stock markets are down.

From a simplistic point of view:

--Money didn't want to get into bonds without higher payback (yields).

--Money doesn't want to sit in the markets, either.

The referenced article says "inflation fears."  I'm a bit confused, as this seems to contradict itself:  The "normal" response in bond markets is that you don't want bonds when inflation is a worry--the inflation rate will eat up your profits.  But you do want bonds when you believe that the markets will perform worse than inflation...or just perform worse, period.  They are the "safe" way to hold your money.

Since this was a 10-yr auction, then the "inflation fears" explanation doesn't hold sense--that's less than 0.4% inflation over the life of the bonds...

...so clearly, I cannot choose the wine in front of you!

But on the other hand, the markets also dumped a little...meaning that the money in people's wallets doesn't want to go there, so it should want to be in bonds....

...and clearly, I cannot choose the wine in front of me!

What am I missing?  Are both goblets of wine poisoned?  That's surely the only conclusion I can draw....

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#15) On June 10, 2009 at 2:36 PM, goldminingXpert (29.50) wrote:

SRS will skyrocket--reduction in credit directly kills consumers--which directly kills malls. My favourite short of all right now is industrials (XLI) as people are pricing in an economic recovery this year and XLI is made up of "early-cycle" stocks. We are *NOT* turning economically and so those buying early-cycle secular bull stocks are going to get rammed in a memorable fashion.

 

Today's Auction gets a C; definitely bad but not earth-shatteringly so. If Uncle Benny can survive tomorrow, he gets a few more weeks of respite before the bond vigilantes come hunting for him again.

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#16) On June 10, 2009 at 2:37 PM, goldminingXpert (29.50) wrote:

...and clearly, I cannot choose the wine in front of me!

What am I missing?  Are both goblets of wine poisoned?  That's surely the only conclusion I can draw....

Your reasoning is impeccable. You are correct.

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#17) On June 10, 2009 at 2:40 PM, angusthermopylae (39.74) wrote:

OMG, GMX!  Then that means....

...Bernanke is the Dread Pirate Roberts!

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#18) On June 10, 2009 at 2:42 PM, ttboydxb (28.79) wrote:

I think they'll get their man tomorrow, who realistically wants Benny's 30 year stink, other then Benny himself???

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#19) On June 10, 2009 at 2:42 PM, angusthermopylae (39.74) wrote:

...or would he be Humperdink?

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#20) On June 10, 2009 at 2:51 PM, ati2ud (29.67) wrote:

how many fingers does he have?

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#21) On June 10, 2009 at 2:58 PM, Robynbird (< 20) wrote:

Angus, REC REC Rec for you (by proxy of GMX).

 That must make Geithner......Princess Buttercup ;)

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#22) On June 10, 2009 at 3:02 PM, magnym (< 20) wrote:

I AM THE DWEAD PIWATE WOBERTS!!  Rec from me for awesome references (LOTR & The Princess Bride).  Informative and entertaining.

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#23) On June 10, 2009 at 8:11 PM, alexxlea (47.21) wrote:

I am all-in on FAZ, margined out 2x. If something goes horribly wrong with my judgement of the situation, then so be it. But there's only so many times the market can sustain its optimism and ignore reality.

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#24) On June 10, 2009 at 8:35 PM, Barebonez (92.65) wrote:

Fast Money Chartology – Untangling Mixed Market Signals

Don’t get bogged down with complicated formulas. To see where the market goes next just consult a very simple chart!

During the Fast Money's Halftime Report, technical analyst John Kosar of Asbury Research revealed a fairly simple and surprisingly accurate way to predict where stocks are heading – check out bond yields.

According to Kosar, the S&P 500 and the 10-year note yields have been trading in tandem for about two and a half years. See for yourself!

Investors are looking at yields as a barometer for economic activity, he said.

In other words, the stock market has been looking to the bond market to tell if things are okay.

And since it's been going on for a while, it stands to reason that the way yields react over the next few weeks should give investors a good idea of what’s next for stocks.

We thought you'd find that little tidbit useful!

 

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#25) On June 10, 2009 at 9:38 PM, ChrisGraley (29.66) wrote:

So, the auction was weak and yields had to hit 3.99% to get buyers...and the stock markets are down.

From a simplistic point of view:

--Money didn't want to get into bonds without higher payback (yields).

--Money doesn't want to sit in the markets, either.

The referenced article says "inflation fears."  I'm a bit confused, as this seems to contradict itself:  The "normal" response in bond markets is that you don't want bonds when inflation is a worry--the inflation rate will eat up your profits.  But you do want bonds when you believe that the markets will perform worse than inflation...or just perform worse, period.  They are the "safe" way to hold your money.

Since this was a 10-yr auction, then the "inflation fears" explanation doesn't hold sense--that's less than 0.4% inflation over the life of the bonds...

...so clearly, I cannot choose the wine in front of you!

But on the other hand, the markets also dumped a little...meaning that the money in people's wallets doesn't want to go there, so it should want to be in bonds....

...and clearly, I cannot choose the wine in front of me!

What am I missing?  Are both goblets of wine poisoned?  That's surely the only conclusion I can draw....

Welcome to stagflation.

You killed my father. Prepare to die!

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#26) On June 11, 2009 at 2:26 AM, ahobbs (34.27) wrote:

Angus:

The referenced article says "inflation fears."  I'm a bit confused, as this seems to contradict itself:  The "normal" response in bond markets is that you don't want bonds when inflation is a worry--the inflation rate will eat up your profits.  But you do want bonds when you believe that the markets will perform worse than inflation...or just perform worse, period.  They are the "safe" way to hold your money.

Since this was a 10-yr auction, then the "inflation fears" explanation doesn't hold sense--that's less than 0.4% inflation over the life of the bonds...

A couple of points:

(1) Bond yields are annualized – the 10 year Treasury is paying 4% per year, not 4% over the life of the bond.  If inflation is 0.4% per year, the bond investor would be getting a net 3.6% return above inflation per year.

(2) A better way of gauging anticipated inflation would be to compare the yields of a TIPS bond and a similar duration Treasury bond.  For example, the iShares TIPS ETF (Ticker TIP) has a 30 day SEC yield of 1.56% and a weighted average maturity of 9.12 years.  The iShares 7-10 year Treasury bond ETF (Ticker IEF) has a 30 day SEC yield of 3.25% and a weighted average maturity of 8.54 years (as of 6/9/09).  The implied inflation rate would be 1.69% per year (3.25% - 1.56% = 1.69%), as measured by the CPI, over the next 8.5 to 9 years.  [Not sure if my reasoning is correct, so I’d welcome corrections.]

(3) Inflation is only one risk of many that investors consider.

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#27) On June 11, 2009 at 8:15 AM, alexxlea (47.21) wrote:

M0 flew through the roof, expect inflation of all forms to ensue. Bonds at these rates are worthless, it would be better to use the paper they are printed on as food or clothing.

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#28) On June 11, 2009 at 8:18 AM, cthomas1017 (98.71) wrote:

All I Really Need to Know I Learned in Watching Princess Bride...

Berneke = Vizzini     "Now, a clever man would put the poison into his own goblet..."
Geitner = Miracle Max (Billy Crystal)      "You rush a miracle man, you get rotten miracles."

Bond Market = Fezzik (Andre the Giant)      "You be careful. People in masks cannot be trusted."
Stock Market = Inigo Montoya      "You killed my father.  Prepare to die."
Obama = Prince Humperdink      "This is your last chance! Surrender now!"

China = Count Rugen      "Beautiful isn't it? It took me half a lifetime to invent it."
The EU = The Albino      "don't even think about trying to escape. The chains are far too thick."

GMX = The Ancient Booer     "Your true love lives. And you marry another. True Love saved her in the Fire Swamp, and she treated it like garbage. And that's what she is, the Queen of Refuse. So bow down to her if you want, bow to her. Bow to the Queen of Slime, the Queen of Filth, the Queen of Putrescence. Boo. Boo. Rubbish. Filth. Slime. Muck. Boo. Boo. Boo."
Tony = Princess Buttercup      "Move? You're alive. If you want I can fly."
Angus = The Clergyman     "And wuv, tru wuv, will fowow you foweva..."

Me? Hmmmm...  Either the King or the Grandfather (Peter Faulk). Nah.... Westley!!! :)     "No one would surrender to the Dread Pirate Westley."

CT! :)

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#29) On June 11, 2009 at 9:03 AM, TigerPack1 (86.69) wrote:

The 30-year Treasury yield is today at 4.83 vs. a reading in the low 4.70ish range exactly one year ago.  This is the first time in quite a while that the yield trend is going in the wrong direction, Year over Year for the long-bond.

It now looks like the "market" sell-off (5%-10% in my estimation) can finally begin over the next several weeks into perhaps early October.

My master indicator I have developed is still quite bullish, but we are now subtracting some points from the YOY trend change in long-rates.  Higher and rising rates hurt lending activity and the way discount rates are used to value a business (especially earnings and dividend yields).  If the 30-year rate stays at 4.80 or above, it will definitely add some pressure to stock pricing the rest of the summer.  If however, the 30-year yield falls back below 4.65 soon, the market sell-off may be muted in terms of price decline, 5%-7% is my working hypothesis.

On the bright side, many individual stocks should be able to fight the downtrend, unless we get most of the drop in one or two days.  Plus, the stock market should trade markedly higher by January.  I will be buying the dip.

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#30) On June 11, 2009 at 9:44 AM, tonylogan1 (28.16) wrote:

tony = princess buttercup...

I am speechless

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#31) On June 11, 2009 at 11:03 AM, goldminingXpert (29.50) wrote:

Still working on that post Tony...stuck doing airport shuttle service for people because of the bad weather across the country...

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#32) On June 11, 2009 at 1:35 PM, angusthermopylae (39.74) wrote:

ahobbs,

I stand corrected on the 4% per year, not life  (I knew that; I don't know why I brain-farted in such an embarassing way...)

But again, while it does support the inflation-fears theory, it doesn't explain the market dropping yesterday.

OTOH, today the markets are up some...about 1.5%+ as of now...  We'll have to wait and see.

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#33) On June 11, 2009 at 3:30 PM, DeerHunter73 (73.30) wrote:

Where is that sell off to 666 on the S&P? Guess when i said in March it was going to 950 by year end then changed that in may that it would cross and close above 950 in June i was wrong. I'll eay my crow now!!

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#34) On June 11, 2009 at 9:39 PM, ahobbs (34.27) wrote:

Angus,

By no means would I call myself an expert on this subject, but I’m going to give it a shot at explaining a possible reason why the market would fall on inflation fears.

Typically, inflation is only a concern when the economy is doing well.  When the economy is doing well, consumers are more comfortable in spending, and companies can more easily grow earnings.  Rising earnings lead to rising stock prices.  Increased money transactions (i.e. velocity) cause inflation, even if the money supply is constant.  Conversely, during a recession, decreased velocity can cause lower inflation, or even deflation.

The concern recently has not just been about inflation, but also the strength of the economy.  The government is dumping huge sums of cash into the economy, which is inflationary, but the economy is still struggling.  Unemployment is officially at 9.4% and rising, housing prices continue to fall, and any recovery in the second half of the year may not be particularly strong.  When you have a stagnant economy with inflation it’s known as stagflation – something the country went through in the 70s.  Neither stocks nor bonds do well in a stagflation environment.

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#35) On June 11, 2009 at 11:10 PM, angusthermopylae (39.74) wrote:

...which pretty much describes where we are now, I would say.

The question is, how does stagflation go away?  (Note that I did not ask "How do you make it go away?" because my belief in the ability of our Beloved Leaders is pretty low...both the previous congress/administration and the current one...)

My guess would be that it goes away when a new form of growth can be found.  In the 70s, hardcore manufacturing was bottoming (steel, ships, TVs, etc), and it wasn't until the whole system rebooted itself with other industries (tech, others?) that things turned around.

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#36) On June 12, 2009 at 2:49 AM, goldminingXpert (29.50) wrote:

Yo Tony--I need a link to the original post our bet came from.

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#37) On June 12, 2009 at 3:55 PM, tonylogan1 (28.16) wrote:

I'm looking for it now

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#38) On June 12, 2009 at 4:00 PM, goldminingXpert (29.50) wrote:

cool. I couldn't find it.

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#39) On June 12, 2009 at 11:47 PM, SharpSEO (70.81) wrote:

Allexa said, "I'm all-in on FAZ, margined out 2x":

Jesus, man. Careful. FAZ is an insane gambler's toy, meant for no more than a few days at most. You might get lucky, but look at it's track record vs. the financial ETFs like XLF. Not good for long-term holds. Options/Swaps/Margin increase the risk of 2x and 3x ETNs like FAZ.

And this market is NOT rational, and arguably manipulated. Deck seems stacked against shorts until further notice. I am short a fair bit, but not leveraged with stuff like FAZ or SRS. Learned my lesson on those.

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