Controlling The Implosion Of The Biggest Bond Bubble In History

testosteronepit's picture


Wolf Richter

In theory, the Fed could continue to print money and buy Treasuries and mortgage-backed securities, or even pure junk, at the current rate of $85 billion a month until the bitter end. But the bitter end would be unpleasant even for those that the Fed represents – and now they’re speaking up publicly.

“Savers have paid a huge price in this recovery,” was how Wells Fargo CEO John Stumpf phrased it on Thursday – a sudden flash of empathy, after nearly five years of Fed policies that pushed interest rates on savings accounts and CDs below inflation, a form of soft confiscation, of which he and his TBTF bank were prime beneficiaries. That interest rates were rising based on Fed Chairman Ben Bernanke’s insinuation of a taper was “a good thing,” he told CNBC. “We need to get back to normal.”

A week earlier, it was Goldman Sachs CEO Lloyd Blankfein: “Eventually interest rates have to normalize,” he said. “It’s not normal to have 2% rates.”

They weren’t worried about savers – to heck with them. They weren’t worried about inflation either. They were worried about the system, their system. It might break down if the bond bubble were allowed to continue inflating only to implode suddenly in an out-of-control manner. It would threaten their empires. That would be the bitter end.

Andy Haldane, Director of Financial Stability at the Bank of England, put it this way: “We’ve intentionally blown the biggest government bond bubble in history.” The bursting of that bubble was now a risk he felt “acutely,” and he saw “a disorderly reversion” of yields as the “biggest risk to global financial stability” [my take... Biggest Bond Bubble In History Is Turning Into Carnage].

Preventing that “disorderly reversion” of yields is the Fed’s job, in the eyes of Stumpf, Blankfein, Haldane, and all the others. The Fed should let the air out gradually to bring yields back to “normal.” So the Fed hasn’t actually changed course yet. It’s keeping short-term rates at near zero, and it’s still buying bonds. But it has started to talk about changing course – and the hissing sound from the deflating bond bubble has become deafening.

Long-term Treasuries went into a tailspin. The 10-year note had the worst week since June 2009, the days of the Financial Crisis; yields jumped 39 basis points (13 bps on Friday alone), to 2.55%. Up from 1.66% on May 2. And almost double from the silly 1.3% that it briefly bushed last August.

The average 30-year mortgage rate increased to 4.17%, from 3.59% in early May. In response, the Refinancing Index crashed by almost 40%. Banks have sucked billions in fees out of the system via the refinancing bubble, but that game is over. And the Purchase Index dropped 3% for the week, a sign that higher rates might start to impact home purchases.

Then there was the junk-bond rout. They’d had a phenomenal run since the Fed started its money-printing and bond-buying binge. Average yields dropped from over 20% during the Financial Crisis to an all-time insane low of 5.24% – insane, because this is junk! It has a relatively high probability of default, and then the principal vanishes. That was on May 9, the day the rout started. The average yield hit 6.66% on Thursday. Investors have started to take a gander at what they’re buying and would like to be compensated for some of the risks that they’re suddenly seeing again. The feeding frenzy for yield is over. A sea change! Some companies might not be able to find buyers for their junk. And there will be defaults.

To preserve the system, as dysfunctional as it has become, the Fed has set out to tamp down on that feeding frenzy for yield, the hair-raising speculation, and blind risk-taking that its easy money policies have engendered – that is, financial risk-taking which doesn’t create jobs and doesn’t move the economy forward but just stuffs balance sheets with explosives. With its vague and inconsistent words, the Fed pricked the bond bubble but now is scrambling to control the implosion and soften that giant hissing sound. It doesn’t want the bubble to go pop. Its strategy: sowing confusion and dissension so that investors would react in both directions, with violent swings up and down, not just down.

The first big gun to open fire on the “taper” promulgations was St. Louis Fed President James Bullard when he announced on Friday that he’d dissented with the FMOC’s decision “to authorize the Chairman” to discuss publicly “a more elaborate plan” for the taper and an “approximate timeline.” They were premature. “Policy actions should be undertaken to meet policy objectives, not calendar objectives,” he said.

As stocks were heading south, three hours before what might have been a very ugly Friday close, after Thursday’s plunge, Jon Hilsenrath was dispatched. He is considered a backchannel mouthpiece of the Fed, and markets feed on his morsels. “The markets might be misreading the Federal Reserve’s messages,” he wrote in the Wall Street Journal. Stocks turned around on a dime. Others chimed in. The cacophony grew. And any consensus of when the Fed might actually taper its bond purchases dissolved into hot air.

That’s the plan. To accomplish its goal of preventing, as Haldane called it, “a disorderly reversion” of yields, the Fed will redouble its efforts to spread dissention and uncertainty, to intersperse periods of misery with periods of false hope, to stretch out the process over years so that big players have time to reposition themselves – and make some money doing it, or fall off the cliff and get bailed out, while others will end up holding the bag. Which is how bubbles end.

While most investors were focused on the collapsing stock market last week, rising bond yields hit the US housing market on the chin. Read....  Good-Bye Low Mortgage Rates; Good-Bye Housing Recovery.

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Sun, 06/23/2013 - 23:03 | 3685499 Colonel Klink
Colonel Klink's picture

Virtually every one of these large Bank CEOs have sold their soul to prey off humanity.

Sun, 06/23/2013 - 17:13 | 3684658 dizzyfingers
dizzyfingers's picture

"You’ll be pleased to know that the US Congress has as its vision for the US to compete with the likes of Bangladesh and Cambodia on the world economic stage.   The American Textile Technology Innovation and Research for Exportation Act(ATTIRE--see what they did there?) has as its goal to support innovation and research in the US textile and fiber products industry by establishing a public grant program. Yes, spending taxpayer money to strive for underwear with a "Made in the USA" label is the way to go. "

Sun, 06/23/2013 - 16:04 | 3684462 LongSilverJohn
LongSilverJohn's picture

For some reason, I never bothered to read, "When Money Dies" (about the Weimar hyperinflation), until this week. It's worth reading and provides a good picture of how deficit spending, money printing and inflation leads to polarized right/left wings and eventual dictatorship (after five years of high or hyperinflation has vaporized the middle class).

Sun, 06/23/2013 - 15:59 | 3684447 SKY85hawk
SKY85hawk's picture

Who knows if the MBS's the Fed's buying have asset deficiencies?  Are all the mortgages paying on time and supporting the estimated/reported returns?

I suspect the good bonds are still in the bank's cofferes as money good collateral!

Somebody prove me wrong, c'mon I'm waiting .  .   .    .

Sun, 06/23/2013 - 14:31 | 3684268 eddiebe
eddiebe's picture

As bad as things are around the world, I shudder to think how bad it could get. Remember, just a measly 100 years ago WWI hadn't even started. People back then actually knew how to do things and grow food. If some black swans start landing or even some gray ones ....Well, let's enjoy the summer as best we can, cause most of us still can.

Sun, 06/23/2013 - 13:36 | 3684150 Jake88
Jake88's picture

Cat's out of the bag. Most now understand that tapering is about serious Fed fear of the instabilities it has created.  It has nothing to do with recovery or inflation fears. Tapering will occur. The Fed can no longer keep this bubble afloat with bullshit from Hilsenrath or anyone else. We know it can't continue. Buy low. Sell high.

Sun, 06/23/2013 - 13:23 | 3684117 toadold
toadold's picture

Well the saying is that power corrupts and absolute power corrupts absolutely, I used to think of that in terms of corrupt morals but it also looks like that in the long term, it corrupts intellectual competence.  The system doesn't require the banking big dogs to think much as they steal so they get wrong footed when things "unexpectedly" go pear shaped.

 I've noticed that a lot bankers, MBA's, business majors, and such don't have much of an understanding math when it comes to exponential functions. They've let the whiz kids sell them on derivatives not realizing that it should be spelled "deerintheheadlightsivitives".

Sun, 06/23/2013 - 13:05 | 3684075 falak pema
falak pema's picture

watch what Soros does : the man who broke the bank of england.

After Abenomics where he made a killing on the YEn short; he is waiting for new BOE head to further ease the inflationary QE pump in UK à la Abe, before he comes back again to short the £, like Jaws resurging.

Sun, 06/23/2013 - 16:53 | 3684601 New_Meat
New_Meat's picture

Poor George, he really didn't get his happy ending last time, did he?

Sun, 06/23/2013 - 12:56 | 3684050 moneybots
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"As stocks were heading south, three hours before what might have been a very ugly Friday close, after Thursday’s plunge, Jon Hilsenrath was dispatched. He is considered a backchannel mouthpiece of the Fed, and markets feed on his morsels. “The markets might be misreading the Federal Reserve’s messages,” he wrote in the Wall Street Journal. Stocks turned around on a dime."


How many times did stocks turn around on a dime, all the way down to 6,500?  Never argue with the market.  The marklet is never wrong.

Sun, 06/23/2013 - 12:49 | 3684032 Muppet
Muppet's picture

Yes, conservative savers & retirees were being brutalized by the low rates, but "normalizing" rates harms them even further!   Those who have avoided equities are sitting in bonds & bond funds, inspite of their poor yields.   This recent rate activity has wiped away all this years yield for consersative savers & retirees.   Its f-ing those people again!   Now, what do they do?   It is likely correct and valid to let rates "normalize", but there is no alternative path of safety available... no safe harbor.  


This is epic destruction of wealth for main street being done by heartless, incompentent policies.   Oh the huge manatee.

Sun, 06/23/2013 - 13:43 | 3684166 TBT or not TBT
TBT or not TBT's picture

Spell check pulled huge manatee out on you, or was that intentionable?

Sun, 06/23/2013 - 12:46 | 3684020 Trusiz
Trusiz's picture

The Fed was doing a test run.  They have boxed themselves in a corner and will continue QEternity.  The can was kicked down the road and the "alternative" to intervention will cause a global ripple to banks, gov bonds, derivitives on a global scale.


If you take the central banks liquidy organ and place it in ice water then all the market motion will grind to a halt.

Sun, 06/23/2013 - 12:43 | 3684012 moneybots
moneybots's picture

"Preventing that “disorderly reversion” of yields is the Fed’s job, in the eyes of Stumpf, Blankfein, Haldane, and all the others"


Since the begining of May it looks prettty disorderly.


Major manipulations tend to blow up in the face.  It is the nature of math.  Bankers are supposed to know something about math.

Sun, 06/23/2013 - 12:52 | 3684038 Midasking
Midasking's picture

Rising Rates will blow this fake economy sky high and take the currencies with it... welcome to the inflationary depression..

Sun, 06/23/2013 - 13:50 | 3684185 TBT or not TBT
TBT or not TBT's picture

Correct voting is all the productivity the democrat political machine cares about for its masses of useful idiots. They pay for votes, their wards vote correctly, and fuck the real economy of real demand and real supply, which are exogenous to the hermetic zero sum game political economy of statist pricks and their fellow travelers. They'll get theirs and the rest will get it good and hard.

Sun, 06/23/2013 - 12:18 | 3683943 fonzannoon
fonzannoon's picture

This slow unwind of a bubble may theoretically be successful if you were paying down debt at a substantial pace while it was happening.

Since we are just tacking on billions it will never work. We are close to red lining right here. Maybe another percent and we are in deep shit.

Sun, 06/23/2013 - 12:26 | 3683962 Black Swan 9
Black Swan 9's picture

Will it be this fall, in your opinion?

Sun, 06/23/2013 - 15:39 | 3684396 ebear
ebear's picture

"Will it be this fall, in your opinion?"

Just after the new Fed Chair is sworn in, at least that's been the pattern so far.

Sun, 06/23/2013 - 22:02 | 3685385 Black Swan 9
Black Swan 9's picture

Thanks. I still can't help but think things are going to spin out of even their control.. but maybe that's just wishful thinking.

Sun, 06/23/2013 - 12:31 | 3683977 fonzannoon
fonzannoon's picture

I don't think we are there yet. But then again I am shocked that we are here.

Sun, 06/23/2013 - 13:25 | 3684119 Vint Slugs
Vint Slugs's picture

How about this long bond yield analog vs the USDJPY?  It looks as if we are there now (I think the current reading is >3.6 on the yield's scale).



Sun, 06/23/2013 - 11:52 | 3683895 Winston Smith 2009
Winston Smith 2009's picture

“Savers have paid a huge price in this recovery,” was how Wells Fargo CEO John Stumpf phrased it on Thursday – a sudden flash of empathy, after nearly five years of Fed policies that pushed interest rates on savings accounts and CDs below inflation, a form of soft confiscation, of which he and his TBTF bank were prime beneficiaries."

"Soft confiscation"?!  More like $500 BILLION per year according to David Stockman transferred without anyone voting on it from savers to banks.  I'd call that grand theft, not "soft confiscation" you thieving slimebag.  And all to accomplish no lasting fix to the economy.

Sun, 06/23/2013 - 13:52 | 3684191 TBT or not TBT
TBT or not TBT's picture

And thank gods, eh? The bank balance sheets are so repaired now.

Sun, 06/23/2013 - 11:58 | 3683892 Kiss My Iceland...
Kiss My Icelandic Ass's picture



Off  topic, but today I saw on a piece purporting to be an article encouraging people not to bother saving 20% for a house down payment. 10% is just fine, and will save you money in the long run !!


"Normally, it really would be best practice to put down 20 percent. But we're betting that home prices will rise in the [next] two or three years  ...  Don't wait; don't be afraid to start the process. Talk to lenders, talk to banks, talk to mortgage brokers and real estate agents."


The "article" just happens to be followed by an advertisement for mortgage lenders ! Find the Best Mortgage Rates !!


Pathetic. This is MSM financial "news" at its finest.



Sun, 06/23/2013 - 12:35 | 3683988 Trusiz
Trusiz's picture

10% down?  I took a nice drive yesterday looking at homes with unfinished yards. Surprised me how many in the newer neigborhoods.

If the goverment required rock landscaping that could free up some consumer coin.



Sun, 06/23/2013 - 13:56 | 3684196 TBT or not TBT
TBT or not TBT's picture

We bought a McMansion in the bay area and grew native plants and soils in the yard for the first nine months. Thing is , the same house sells for 25% more now than last year. So now we are growing Turkish travertine back there, going forward. Because, home equity. Wealth effect. It s really working I tell you.

Sun, 06/23/2013 - 11:39 | 3683865 wisehiney
wisehiney's picture

Higher mortgage rates won't help. I believe that there is more pent up supply than there is pent up demand. How many people do you know that would sell real estate if they could recoup? Besides, when did real estate ever recover before jobs?

Sun, 06/23/2013 - 16:48 | 3684588 New_Meat
New_Meat's picture


Sun, 06/23/2013 - 11:38 | 3683863 q99x2
q99x2's picture

"The Fed will redouble its efforts to spread dissention and uncertainty, to intersperse periods of misery with periods of false hope, to stretch out the process over years so that big players have time to reposition themselves."

Fuck Bernanke the Gand Wazoo. It might work in a place like Greece where they don't have a shade tree to sit under or a pot to piss in but Banksters could get into some real trouble they try to pull that shit areund here.

Sun, 06/23/2013 - 11:17 | 3683816 CapitalistRock
CapitalistRock's picture

The federal reserve cannot possibly let "interest rates" return to their historical mean. The federal government could not then roll over its maturing treasuries as there isn't enough revenue to pay the higher interest rates on our gargantuan debt.

What they did was give themselves room to keep printing $85 billion per month.

Sun, 06/23/2013 - 17:48 | 3684774 Al Huxley
Al Huxley's picture

Totally agree with the assessment about interest rates, and why the FED has to do whatever it can to prevent them from rising.  Not sure how they gave themselvers room to keep printing here (other than via a 'well if you insist, mr market, I suppose we can keep buying').  Also, it seems the FED must understand where all this is going, (unless they actually believe their own bullshit) so they can't possibly like the idea of holding ever increasing amounts of worthless garbage on their balance sheets, but at the same time, what's their end-game at this point, when even the slightest hint that they might want to just SLOW DOWN THE BUYING triggers a race for the exits?

Sun, 06/23/2013 - 16:43 | 3684564 Dingleberry
Dingleberry's picture

precisely rock. Same with japan.

Sun, 06/23/2013 - 11:12 | 3683799 Hedgetard55
Hedgetard55's picture

All those people pushed into riskier assets by Bubbles Ben and ZIRP - your chickens are coming home to roost. Prepare for financial destruction.

Sun, 06/23/2013 - 16:43 | 3684560 Dingleberry
Dingleberry's picture

Inflation=the 1% win, you the unwashed lose.

Defaltion=the 1% lose, you the unwashed lose.


The die has been cast. 

Ben or no Ben. There will be no deflation in assets allowed. If bonds drop, the big boys will know well before the unwashed and get out and even front run the drops.

I would not be surprised to hear of "foreign crises" or more fed speak to drive rates back down. They went up a bit too fast for my taste.

Ultimately, stagflation is coming to a wallet near you.

Sun, 06/23/2013 - 13:16 | 3684103 max2205
max2205's picture

Lets see.  Savers got zero interest...forced to spend principal.   Forced to buy t notes.  Now have another 20% loss of face value to sleep on.


Well palayed Ben....hope those nice people get a hold of you someday

Sun, 06/23/2013 - 14:14 | 3684228 RockyRacoon
RockyRacoon's picture

It's like a burglar with a key to your front door, coming in at irregular intervals to steal just one thing at a time.  You just don't notice until suddenly most of your stuff is gone.  Hey!  But whom do you get mad at?  Whom do you call to report the thefts who won't think you're some kind of nut-case?  Where did your stuff go?

When all the low-hanging fruit is picked and the savings and chattel of the regular populace is gone, they will burn down the house and what miserable little stuff is left to cover the crime.

Sun, 06/23/2013 - 14:37 | 3684276 Seasmoke
Seasmoke's picture

Just like in Goodfellas

Sun, 06/23/2013 - 12:13 | 3683927 Popo
Popo's picture

All of this is yet another (obvious)
headfake until there's a bonafide hawk in the Chairman's seat.

And since everyone knows the next monkey is Yellen, this whole thing is another lame charade.

The game isn't to keep Americans from buying gold, it's to keep the bond vigilantes from going for the trade of the millennium.

But here's the thing: Bankers aren't the smartest or the fastest people in the market. Traders ARE. In a head to head game of chicken, the Fed will eventually flinch and then this thing is as disorderly as they come.

Sun, 06/23/2013 - 15:25 | 3684367 Black Swan 9
Black Swan 9's picture

They might not even have to flinch; they can't control things 100%. It seems other events could trigger this painfully slow downward spiral into utter overnight chaos. Any excess cash over & above monthly expenses should not be left in any banks (earning 0% interest..), imo.

Sun, 06/23/2013 - 13:27 | 3684126 DeadFred
DeadFred's picture

The Fed may (or may not) be able to save the Treasury market but corporates and munis are going to cascade. I have no idea where the bottom is but reaching it will take less time than most will think. Watching the carnage in 'safe' bonds will be a big psychological blow to many.

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