Bond Talk

There has been more bond talk[1] this weekend. The following rather cryptic (in my opinion) Reuters wire snippet has a lot of people worrying:

[11:41 US GOVTS: Real Money Using Coupon Passes To Exit; FM Blast]

Boston, May 21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning’s coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs — in the higher coupons — also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street.

Which pretty much says that central banks (European and Asian) are using the US Treasury’s bond auctions to dump existing holdings. Meaning that they are getting creative at dumping long term treasuries, without unduly freaking the market.

Denninger comments:

So now what Ben?

If Foreign Central Banks are selling into Ben’s bid then the game is literally weeks or even days away from being over.

I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse.

and i can see why he might think that… if the real money is looking for the exits, the Fed will be left holding all the long term (10 to 30 year?) debt, with the rest of the world closing out at short-end.

However, i don’t think this game is going to play out in the suddenly apocalyptic fashion that people like Denninger (and many like him) fear. The holders of these bonds (mostly China, Japan, and other asian central banks) know that if they crash the dollar, debt they hold is going to be worthless. My guess is that they are going to push this as far as they can without actually letting it break. Over time they’ll push the yield higher and higher, hoping that they can bleed America dry without actually sending it into cardiac arrest.

If you’ve been watching the yield on the ten and thirty year you’ll see that they are still heading up. And that has to be halted or it’ll set off a next wave of defaults in the housing market… certainly agree with the question, “So now what Ben?”

As an aside, there are a bunch of stories[2] out there about the rating agencies (S&P, Moodys, Fitch, etc) downgrading the national debts of the US, UK, and Japan. This looks like a side- show to me – these are the same clowns who stuck AAA ratings on MBSs, and obviously don’t understand that Japan doesn’t give a flying about it’s debt rating because it’s not borrowing externally… ignore it, and keep an eye on that bond yield!

[As always, Cynicus Economicus is worth a read.]

1. Bond market Week of Reckoning, Lighten upBond Market To Bernanke and Obama: F&$k You

2. UK credit rating under threat as debt hits £8.5bnWhy US Debt Rating Poses Such a Big Worry to InvestorsTreasurys fall further ahead of auctions

The Liquidity Pyramid

Go look at the picture the accompanies this piece, take note of the numbers:

Much speculation lately focuses not so much on what the stock market will do (the answer to that should be self-evident, especially once shorting stocks again becomes a practical reality), but what the impact of recent economic policies will be not just on inflation (regional or global), but also on that most sacrosanct piece of paper, the U.S. dollar.

Not much to add… seems like a reasonable analysis to me.

The trap is closing. Terrifying.

Vampire Banks

[M]ost of the capital to be raised will come from the earnings of a banking system able to borrow on the favourable terms arranged by the central bank and then to lend more expensively to its customers

 — Obama’s conservatism may not prove good enough by Martin Wolf


Take a little, leave a little. But they always take more than they leave by the basic nature of the vampire process of inconspicuous but inexorable consumption. The vampire converts quality-live blood, vitality, youth, talent-into quantity-food and time for himself. He perpetrates the most basic betrayal of the spirit, reducing all human dreams to his shit. And that’s the wrongest wrong a man can be. 

 — Immortality by William S. Burroughs

Just sayin’…

More Misplaced Optimism

Cynicus Economicus writes some good stuff. His latest piece, titled ‘Optimism and Economics‘, mirrors some of the confusion i’ve been trying to express recently:

I will freely admit that I have been increasingly puzzled by the optimism that is emerging. I have always accepted that commentators, analysts and markets can be somewhat irrational, but have always insisted that reality must at some point intrude. I still believe that reality will catch up with delusions, but have had trouble understanding the level of self-delusion that is taking place. I keep on wondering just what will it take for the underlying reality to sink in.

The examples are all things that have gone past in the stream of news and left me shaking my head. Most telling is the US GDP “only” declining 6.1% as opposed to the previous quarters decline of 6.3%, which was hailed as the ‘green shoots of recovery’ (by some idiot)… is 0.2% even within the margin of error?!

First quarter profits for major US banks? In what kind of world is it even possible for people to maintain the level of delusion required to believe that kind of crap?

CE is taking the tack that this degree of self-delusion is just another element of the system, and therefore worth study. My views lie more inline with those of William S. Burroughs who, in a piece entitled ‘Some words of advice for young people’, opined:

Do not proffer sympathy to the mentally ill; it is a bottomless pit. Tell them firmly, “I am not paid to listen to this drivel — you are a terminal FU†!” Otherwise, they make you as crazy as they are. 

Advice well worth heeding.

† “Avoid fuck-​ups. FUs, I call them. You all know the type — no matter how good it sounds, everything they have anything to do with turns into a disaster.”