Have you been doing as you were told and watching the 10 year?

Eek!  As previously (and repeatedly) noted, high yields on the 10 year bond will translate into high interest / mortgage rates. In turn this will negatively impact an economy already overburdened with debt.

The increase in rates has several likely causes; increase in the supply of bonds (the US government increasing borrowing); reducing in demand for bond due the rally in the stock market; increasing reluctance on the part of nation states to finance addition dollar debt (as it drives down the values of their current holding when the Fed prints dollars to buy bonds from the treasury…)

Something will have to give… but what?

The best outcome for the US would be if Asia would just shut the fuck up and eat the debt. That seems unlikely in the long term – they are already turning the screw, and attempting to extract additional value from the relationship.

Aside, don’t know if you’ve seen it, but there is this amazing report in the press this week, involving a couple of Japanese citizens attempting to smuggle billions of dollars of bond certificates out of Italy into Switzerland. The implications are pretty wild. Is Japan trying to secretly dump US bonds? If it was any other country i’d speculate that the planning is so amazingly amateur, that it can’t possibly be the action of a Ministry… i mean, if any country wanted to get physical bonds into a country undetected, wouldn’t they just stuff them into a diplomatic bag? The diplomatic service doesn’t even have to know… why risk a border crossing? Insanity… but we are talking about the Japanese here, so who knows? I doubt we ever will… the cover story for this one is going to be wild!

Which leaves the US with two rather unpleasant short-term solutions: reduce the debt (haha! no need to comment further – it’s not going to happen); get people back into buying bonds as part of a ‘flight to safety’. How does one engineer a flight to safety? Seems to me that it would require sacrificing a piece of the financial system (Lehmen pt. II) at home, or a coordinated operation to destabilise part of the world. Such destabilisation could take the form of armed conflict (war / terrorism), or an attack on the financial system of some nation state, a la Argentina, RussiaAsian crisis (what a lot to choose from!)

It’s easy to see either of those scenarios playing out. The US stock market has seen a massive run up over the last three months, all without any fundamental underpinnings. There is a lot of speculation that this rally has been engineered by the prime dealers, acting under orders from the Treasury / Fed (see Zero Hedge for lots on this), pulling the plug should be just as easy. Although, cynical as i am, it’d be a lot easier if the blame / pain / suffering could be exported somewhere far far away… which makes me think that’ll they try to engineer collapse somewhere else, and live with the consequences at home. Easier than running the risk of getting caught fiddling at home…

Fun times.

Wise words...

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