Doom or Gloom?!

Doubt that’s a choice we’ll have to make…

As feared, stocks decline and bond yields rise, aka. a bond dislocation. <gulp>

It has begun. Today equities fell significantly and the “safe haven” bid was not large enough to overcome a deluge of selling. Yields rose. Again. This is not likely to be an isolated incident. This while happen with greater frequency and increasingly disruptive consequences.

Hmm. I’m still not convinced. There was a huge auction of 7 year bonds today, which might have distorted the market. For sure there is a lot of stress in the bond markets due to amazing volume of government debt… but one swallow doesn’t make a summer, and all that.

Keep watching!

The Financial Ninja (also linked via the image above) seems to have his eye on the ball:

Giddy talk of “green shoots” has completely drowned out a more sober and rational assessment of the global situation. Random statistical noise in various minor economic indicators have over the past two months resulted in wild exclamations of “the worst is definitely over”.

It most certainly is not.

Yet another blog worth following as we mosey along in this wicker basket… can you smell sulphur? Perhaps it’s just me.

Update: I was wrong about the 7 year auction being yesterday, it was today. Yesterday was an auction of 2 and 5 years. The 7 year auction went off smoothly. More evidence for continued randomness rather than being at the point of systemic collapse. In theory the short end of the bond market should be more resilient than the long end… patience!

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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