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The Great Treasury Bond Crash of 2010
OK, maybe it hasn’t really crashed yet. But the 3 1/2 point sell off in the futures for the 30 year Treasury bond (TBT), at the end of last week was the sharpest drop in 18 months. Winston Churchill’s great 1942 quote, which marked the turning of the tide for Britain in WWII, comes to mind. “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
In my recent piece on the extreme overvaluation of government debt, I pointed out that the last time rates were this low, Treasury bonds brought in a miserly 1.9% yield for a decade (click here for the piece at http://www.madhedgefundtrader.com/august-26-2010.html ). Professor Jeremy Siegel at the Wharton School at the University of Pennsylvania has one upped me. After yields bottomed in 1956, bonds suffered negative returns for 30 years!
This should have occurred to me, as the first mortgage I took out on a Manhattan coop in 1982 carried an 18% interest rate. That was then Federal Reserve governor Paul Volker was waging a holy war on inflation and eventually won. I took out one of the first ever floating rate mortgages, and by the time I sold it three years later for my first double in real estate, the rate had melted down to only 11%. I tell this story to kids buying their first starter homes now and they look at me like I’m some kind of dinosaur.
I have always believed that markets will do whatever they have to do to screw the most people. A big part of the parabolic move in bond prices was caused by so many investors going into this the wrong way. Hedge funds were short Treasuries and long steepeners, while mutual and pension funds were underweight.
Remember, this was supposed to be the trade of the year? Of the decade? Only individuals and momentum players have been in there buying with both hands, not because they love low yielding bonds so much, but because they hate equities. All it took to set the cat among the pigeons was for Q2 GDP to come in at 1.6%, not as bad as expected, and for Ben Bernanke to remain silent about any plans to flood the markets with more liquidity.
This may not be the top in the bond market, but it is starting to resemble what tops look like. One more equity puke out in September could easily get us there.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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That dip in bonds last Friday was upsetting. Ben says he'll do whatever is necessary to support the economy and bond money floods into the stock market. Why didn't those in cash go into equities and leave my bonds alone???
don't know how to search the site, but if I could I'd be putting down how long you have been talking this very trade and loosing money.
I think maybe we are at the bottom now, but I will let the charts do my talking.
Honestly, I find the fact that you don't talk about the other times you have pushed this to be a bit dishonest.
worse I was buying bonds because the signals told me so, and you were anti bond at the market peak. I made the mistake of listening to you.
list and link all the other articles and the times you have suggested this trade. shame
Here comes madhedgefundtrader again
trying to thwart bonds for the umpteenth time. Here's some alternate long term advice: Buy the Treasury dips and sell the rallies and short equities for the long run. The hedgies haven't the balls or common sense to do either.
Leo and MHFT pretty good fade trades.
Why waste the bandwidth and eyeballs?
Based on site search,
MHFT wrong on CSCO, Gold, MSFT, 0, TBT etc for at least 11 months and -40%.
http://www.zerohedge.com/article/interview-mad-hedge-fund-trader :
"My goal in life was always to get in the way of history, and let it run me over."
About sums it up...
Fortunately the US.Gov has already stated it has the right and power to convert any and all Treasuries into 30 yr fixed rate bonds...at its discretion.
Everyone has rushed to the same side of the boat...
...get off the boat.
MHFT,
Just like all the end of the world predictors, someday MHFT will be right too, with respect to TBT, TMV, TIPS. By the way, how much are these down since you first started reccomending them? 5, 10, 15, 20, 30, 40 some percent? Change your first name from "Mad" to "Martingale."
Everyone and his impaired brother are running to buy US T's as a "flight to safety" play (rational) but really as a means to profit from the USFR's effort to compress US$ interest rate structures to match its ZIRP.
USFR is trying to control interest rates in order to prevent rises in US$ denominated interest rates, which would simultaneously destroy both the Housing Market AND Economy in general, as well as blowing up the US Government's short end dominated financing model.
Everybody's got a thang...
Interesting bit on the bonds...Well, if you can screw a lot of people for a small amount each, they become less likely to notice how much blood you suck.
Also, are you subtley implying a run-up in equities? With ZIRP being FED policy for the discernable future, cash will not be a good place to be either.
D-Falt -
Also, are you subtley implying a run-up in equities? BINGO!!!!!!!!
Sure smells that way, although the equities that 'run up' may very well not be US-based, or at least, certainly not equities that are primarily exposed to the US economy.
Gold, oil, commodities, and the export-oriented stocks will likely do very well. Too bad there's not very much exposure to that in the contemporary indicies. While ponzi junk like Google will probably drop severely.
Panafrican, you're simply way off about the Fed being a major buyer of Treasuries. That has not happened, at least not yet.
Let's start with direct. The Fed started this crisis, in June 2007, with $790 billion of Treasuries. It sold off about $300 billion during the first leg down in 2007-2008, using the money to lend to banks and give gifts to JPM and Bear shareholders.
Then the Fed bought $300 billion of Treasuries in 2008-2009. But Treasury deposited about $250 billion of the proceeds in demand deposits at the Fed, about $50b in the general account and $200b in the new supplemental account.
The Fed's recently begun shifting of mortgage debt to Treasuries will likely add up to about $250 billion a year.
So currently, the Fed's direct transactions with Treasury add up to a net decrease in Fed lending to Treasury of about $250 billion. In about a year, the score will be zero.
Next, indirect. Commercial banks' holdings of Treasuries have increased by only about $150 billion since the crisis began. Whooopee.
Look at the flow of funds, table L.209, and you will see who has been buying Treasuries. Biggest category is foreigners.
The fact is there is a lot of scared private capital out there that still sees Treasuries as the safest bet, especially money managers who think their clients can't blame them for taking it. You could call it a bond bubble, but I see it more as nominal wealth exceeding the real productive capacity of assets, and thus, capital being mainly interested in preservation.
BUT ... that doesn't mean the Fed won't swoop in with major monetization of Treasuries, should the Treasury market turn bearish. Ben's hints that the Fed will do just that are surely the main reason for the Treasury market's recent leg up. Treasury shorts only pay if the Fed refuses to monetize, and that's not a bet I would recommend to anybody.
actually they have been using UST as collateral for MBS. Puts them on the sell side doesn't it?
at some point the people who work for their money will cry no mas, no fair, I work, you print money, and you tell me what to do?
Treasuries won't collapse. They're one of the least worst things you can own. Yes, purchasing power of the currency gets chopped in half - but that's better than a total zero.
Most financial assets - including stocks, bonds, whole life insurance policies, etc - will go to zero as the political economy devolves into a state-run criminal enterprise. Treasuries will hold up well under such conditions - at least the shorter durations
No
The dollar is the most flawed fiat currency in the world, the only reason it is considered a safe haven now temporarily is because it WAS backed by gold.
If most financial assets go to zero, then who is going to service the debt on these treasuries ?
I disagree. It is not just because it used to be backed by gold.
1.US is the largest economy in the world in almost all categories
2. Oil is traded in dollars
3. lots of countries back their currency with dollars
4. US has more political stability than most places other than Canada and Switzerland
5. US has the biggest military in the world
6. US has the largest and most developed capital markets in the world
7. All Federal, State, and local taxes must be paid in dollars
8. The US Govt has influence inside many international organizations and banks
The dollar may be doomed, but it is the least worst MAJOR currency for the time being.
Precisely! If the economy ends up collapsing and pulls equities down, then treasuries will also be revealed as being completely and utterly worthless. Whereas, at least if treasury bonds are rendered worthless, equity can benefit.
Shorting equity, or being in bonds is the epitome of 'stupid' right now.
Most flawed, but best of the worst?
For some silly reason, USD still targeting 115,
until it breaks below 76, while gold targeting $1050,
until it goes above $1270.
http://stockcharts.com/charts/gallery.html?s=%24usd
http://stockcharts.com/charts/gallery.html?s=%24gold
With all the debt default deleveraging asset deflation
going on and driving nominal interest rates lower,
and real interest rates of 40% (-35% RE + 5% mortgages) higher,
consumers, economy and jobs may continue to choke,
while Fed and Treasury operations continue to service the usury,
at IRS taxpayer expense if possible, MHFT fantasies notwithstanding.
OK, maybe it hasn’t really crashed yet
Indeed...
Gold could print 1270 tomorrow.
No, not best of the worst.
It is only perceived that way because it WAS backed by gold.
1. The Fed has unlimited dollars.
2. Treasuries are priced in dollars.
3. The Fed is the primary buyer (either directly or by proxy) of Treasuries.
4. The value and stability of Treasuries is the primary driver of the value of dollars.
5. Ergo, the Fed is permanently incentivized to prop Treasuries as needed.
6. Ergo, Treasuries will never experience a failed auction.
7. Ergo, your assumptions are incorrect, and therefore, your argument is incorrect.
Great points. One question however, if you please.
1. The Fed has unlimited dollars.
2. Treasuries are priced in dollars.
3. The Fed is the primary buyer (either directly or by proxy) of Treasuries.
4. The value and stability of Treasuries is the primary driver of the value of dollars.
5. Ergo, the Fed is permanently incentivized to prop Treasuries as needed.
Here's the question: At what point is this printing by the Fed damaging to the value of a dollar instead of supportive of it's value and stability?
6. Ergo, Treasuries will never experience a failed auction.
7. Ergo, your assumptions are incorrect, and therefore, your argument is incorrect.
Until some Central banks come out and say things like Schiff, Rogoff et al-the game goes on
There has to be a mutiny among the pirates for the 'SHTF scenario'
Until then, Bernanke is God.
You think central bankers worldwide don't know what's going on????
They must be scared shitless....but where are the alternatives???Are they feasible????
If India and china agree for a currency exchange deal like China and Brazil, the oil drillers in gulf can defect the dollar
But India and china in a bilateral deal???- Naaaah, very unlikely!!!!
That is wrong.
There is still a limited amount of purchasing power that get eaten up the longer the scheme goes on. The purchasing power will run out, no different then running your car out of gas.
MHFT -
I think I read this piece somewhere else a week ago ( maybe last weekend ) . All the talk last week of bonds being over priced - of being in a peak (bubble), I don't buy . Feds want interest rates down ( solve housing slump they surmise) . Pumping more QEII coming . Rates will drop furthur, can't have Mom and Pop making any money in CD's you know . Treas bond prices will continue to rise . Demand is infinite from the Fed . Relax and be happy . Tell us about the Bond yeild , price contango , please .
Well, the market has acted is a surprisingly contrary way for many and the fed seems to have many clever devices to keep things going...
As MHFT knows "this guy doesn't like people who short treasuries." I take note no matter the analysis that MHFT is not recommending that, either. There's a lesson in this and of course it's called "the lesson of Wall Street." The Street makes money on the spread...what a beautiful spread yes? In short "this is to die for." By definition such liquidity provides market support and therefore makes it VERY risky to short. in other words "you can lose all your clothes" which isn't necessarily a bad thing depending upon who you're "doing it" to.
When the stock market crashes money will flee to bonds causing an even larger bubble. China will sell into this bubble knowing the game is over. When they start selling TBT will be very attractive.
Yes, we have a winner! Everyone is going to flood into bonds as the equity massacre proceeds next month. The bubble will get even bigger!
this is just an infomercial. why is it here? there's nothing backing anything up - just drivel. per usual.
Stephen King infomercial, tho! True or not gotta admit it's entertaining.
speaking of churchill, does anyone here know about his connection with rothschild? just google the words churchill and rothschild together and you will get some "interesting" wwII history...
How low yields can go is anyone's guess. I thought the housing market was dramatically over-priced in 2005... But despite that it took several years for it to run it's course before the subsequent collapse. My question isn't so much when, but rather how. Will we get a slow and gradual move higher in rates as investors become ever more skeptical about the Treasury market, or will we wake up to a failed auction one morning and see a sharp violent move downward...
i had one of those adjustables too on an apartment i bought in 1984....by the time, i sold that place, it was under ten......
and i also tell the story to kids who believe that rates on their adjustables might "go up just a bit".......
those "good ol' days" are long gone. to make any comparisons to the last 30 years (good or bad) is pointless. the 30 year credit bubble has burst. game over...and it's not just about the u.s.... it's about one giant global clusterfuck.
What countries in the world will likely refrain from nationalizing foreign companies or taxing them to death when the SHTF? Chile, Canada, know any more? They don't teach this kind of Risk management anywhere and everybody is on their own.
Nobody and I mean nobody.
When the Swiss are all fucked up on keynesianism then you know its hopeless. Although, maybe Poland but their central banker died in a plane crash.
again stupid as it gets,,
######## is, perhaps, the end of the beginning.
hey stupid,, have you checked US debt recently, its over $ 13.5 trln already,,
this fin year deficit is about $ 1.6 tlrn, next year might be is around 1.4$ trln.. cross fingers..:)
so does it mean? US gov will keep on printing money, so in normal times %rate
would shoot up to the skies.. so to not allow this FED will keep on buying bonds perpetually to keep rates in check,,
so this #ucking cycle will keep on moving until ALL THIS WILL #UCKING BLOW OFF IN ONE HOUR..
and western civilization will end as we know it...
but nobody wont be able to profit from it as there will be chaos on streets,, all contracts will ben nilled,
so only REAL CURRENCY WILL be food, guns, AND GOLD..
good luck
alx wst
I hereby unjunk this comment and knight thee "Sir Alex of West".
Your scenario seems as logical as anything to me.
Al, baby. Chill. Take a break from money management and do a little anger management. That big vein in your neck is starting to pop out.
how u doin' Dr. Sandi? I hear he has more than just one "big vein."