Guest Post: The "Bloated" Bond Bubble

Tyler Durden's picture

Via Gordon T. Long,

The Fiscal Cliff theater was great 'off Broadway' drama, but the real show for traders took center stage Sunday December 16th in Japan. The curtain went up for the newly elected Prime Minister of Japan as the star actor in the unfolding global fiat currency drama. In the last 90 days the US, EU and now Japan have announced "unlimited", "Uncapped" monetary policy with UK's soon to be bank of England Governor, Carney indicating he wants inflation & growth targeting also when he assumes the reins. The goal has been to get interest REAL interest rates as low as possible, and the expected duration to be as long as possible. Market have reacted to this strategic and obvious debasement by stampeding, relentlessly into the Bond Market and creating a disturbing potentially destabilizing bond bubble. However, remember, Financial Repression is at work here and US Bond Yields and Interest Rates must be further reduced. We presently expect the 10 Year US Treasury Bill to eventually break below 1% and Equities will fall on the re-pricing of credit and risk, earnings revenue and margin issues and slowing real global growth.


GTL Bond Bubble by xxyyxxyy123123

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kaiserhoff's picture

Save and invest.  Get raped by your gubbermint.  When has that ever worked?

Dr. Engali's picture

The generation right before mine.

Vampyroteuthis infernalis's picture

Desperate attempt to keep the game going. Those things like profit margins and the real economy be damn!

Manthong's picture

“Financial Repression”?

Ben Davies is calling it “Financial Domination” now.

I prefer something that is indicative of the despotism, like

“Fiscal Subjugation”.

GetZeeGold's picture



I'm not sure I like the sound of that.

All Risk No Reward's picture

Debt Money Tyranny + Fractional Reserve Lending + Bucket Shop Derivatives = Society Destroying Debt Star




“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.”
~Henry Ford

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.” (Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.)

“Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.” (Congressman Charles A. Lindbergh, The Economic Pinch, 1921.)

The highest for of Sun Tzu's "Art of War" ever perpetrated on a population.

"War is all about deception."

"The best warriors never have to fight"

"If you find yourself in a war, end it quickly or you will BANKRUPT THE NATION."

The corollary being - anyone selling the nation on never ending war has the EXPRESS PURPOSE OF BANKRUPTING THE NATION!

“There is no instance of a country having benefited from prolonged warfare. ”

“Engage people with what they expect; it is what they are able to discern and confirms their projections. It settles them into predictable patterns of response, occupying their minds while you wait for the extraordinary moment — that which they cannot anticipate.”

“When you surround an army, leave an outlet free. Do not press a desperate foe too hard.”(incrementalism...  tick tock, tick tock on your liberties and wealth)

"Appear weak when you are strong..."

“Pretend inferiority and encourage his arrogance.”

~Sun Tzu, Art of War


NotApplicable's picture


max2205's picture

Govt behind closed doors:

Can you believe the public let's us zip their savings account interest.

Yeah, duh, back in my day they would have voted us out or worse.

We're golden for at least 8 more years


GetZeeGold's picture


Govt behind closed doors:


Oh come's the most transparent government ever. Just pass it....and we'll show you what's in it.

Go Tribe's picture

I thought it was a nipple, not a bubble.

Freddie's picture

U.S. Govt bonds are backed by the full faith and credit of Uncle Sam's tireless printing presses, The Ben Bernank, Timmy Geitherner/Lew, Our Mullah, The JP Morgue and The Goldman Sack.

No wonder the Germans want their gold back.   Hugo Chavez was the smart one in asking for Venez gold first.  I would not leave anything at the NY Fed.  They are scum! 

BigDuke6's picture

If Obummer appoints Hagel as the secretary of defense then i wont hear another bad word said about him.


kaiserhoff's picture

Yaz, yaz.  Been watching that.  I never bought into that enemy of my enemy shit, but this is getting interesting.

As Grandad liked to say, wouldn't that beat the bugs a fighting?

BigDuke6's picture

Plans within plans i know

But if the USA is ever going to stop being Isreals poodle it has to start somewhere.

its so obvious its a tribute to the media branch of the firm that americans still dont see it.


kaiserhoff's picture

So..., he only hires Jews, 24/7.  Doesn't even trust the Chicaga crowd anymore.  The game is..., split the New York Jews from the Zionists?  I'd rather try to fill an inside straight while gambling with Wookies, but no one ever claimed Barry was the sharpest knife in the drawer.

BigDuke6's picture

Speaking of wookies i found out the other day that the new versions of star wars have Han Solo shooting first in the cantina.

WTF.  May not mean much to many but,

Its a symptom of the goddam thought control rubbish that every fucker wants over me and my spawn.

Too many lines in the sand being crossed.

Good luck with that straight.


kaiserhoff's picture

As they understood in the Old West, and early Sci-Fi, a well armed society is a polite society;)

Vaya con dios.

Boozer's picture

11 - 1

Not hard at all some days.

Impossible on others.

max2205's picture

And Chavez gets the cancer dart from you know who.... Rip

Dr. Engali's picture

I wonder which insurance company will be the first to blow up with the continued flattening of the curve. They are already scrambling to raise cash, reduce benefits, and sell everything they can. Sooner or later one of them is going to blow up.

NotApplicable's picture

Why wonder? It was AIG.

Okay, I know, "different" bomb at work there, cuz we all know, CDSes aren't "insurance."

Not that it matters, after the bigger fish eat the littler ones, they will all be nationalized anyway.

fonzannoon's picture

maybe the insurance companies got tipped off from Timmay too Doc. maybe they were told to throw their reserves in the SPX and take a nice ride up to give them a big buffer?

WhiteNight123129's picture

Just one little problem, inflation expectation have bifurcated away from bond yield, you push 30 years bond below inflation expectation for the 30 years and you get comex Silver market to blow up!! Ok I will lose a bit on my short treasuries but the pressure cooker on inflation will be unrenable.


WhiteNight123129's picture

manipulation of markets always failedin history, markets have wrenched centeal banks many times in history. The market participant as a whole have cornered bad central banks, not the other way around. Gravity always bring back flying objects to the ground as long as their speed is < 11km/s. I would not assume that Bernanke as such stellar speed of thought.



WhiteNight123129's picture

Just one little problem, inflation expectation have bifurcated away from bond yield, you push 30 years bond below inflation expectation for the 30 years and you get comex Silver market to blow up!! Ok I will lose a bit on my short treasuries but the pressure cooker on inflation will be unrenable.


Monedas's picture

I'm investing in soap bubble sculptures, cotton candy and canned lizard farts ! That's my core investment strategy .... for my speculative fling thing .... I dabble in government bonds !

WhiteNight123129's picture

+ 2 Well said this post is like trying to catch the tech rally between dec 1999 and march 2000, totally idiotic.

Mr Pink's picture

Thanks! Just learned Milwaukee's Best doesn't feel good coming out of my nose


Monedas's picture

Don't encourage me too much .... I inflate the number of my posts .... and .... the quality plummets !  Sort of a joke bubble dead cat bounce syndrome ! We'd all do Ponzi .... if we could get away with it !

Jim in MN's picture

Dude, seriously, I know that austerity is in but Milwaukee's Best?  Surely even PBR would feel better.

Go Tribe's picture

You drink it while you're wearing your gray, woolen, governmint-issued overcoat, to wash down the stale saltines with American cheese.

PUD's picture

The singular goal of the money men is the re-saturation of debt for the sole purpose of gdp pumping exponential consumption. 

This is neither possible mathematically or environmentally


NotApplicable's picture

Even they know those days are behind us in this monetary regime (regardless of rhetoric promoting the lie).

Besides, the singular goal is "gotta get mine"  (your version was merely the means to that goal). All of that consumption pump priming only works when there's still unencumberd wealth to steal. After nearly 100 years of Fed issuance, anything they don't already own is pledged to one of their minion banks as collateral.

Like you stated, saturated debt.

Now, comes the next step, collecting all of the loot from its former owners.

WhiteNight123129's picture

Each time the Fed was printing you had a postive reaction on bonds because the Fed was printing while money market premium over Fed funds waswidening while inflation expectations were plunging and banks were weak = systemic fear

Now this not happening now so if the Fed prints while inflation expectation rise people will do what they did on Dec 12th when the journalist asked about monetization, market on Treasuries sunk. If Fed prints will inflation expectations rise, people dump their treasuries because they read "monetization" instead of systemic fear.


The US treasuries can not rally while the systemic fears are gone onbanks, and inflation expectations rise.


AUD's picture

There is too much distinction made between stocks (shares) & bonds. As if stocks are somehow fundamentally different to bonds.

No, stocks are just a type of unsecured bond. You give the company your $ & in return the company undertakes to give you no guarantee of anything in return. Stocks are just the worst kind of junk bond.

Stocks, along with government, quasi-government, investment grade, junk etc etc bonds, also the the various derivatives, all comprise the 'money' market. All trade to one extent or another 'money good', or in a financial panic, don't trade at all - worthless.

The actions of government, through their central bank, is to put a bid under the 'money market'. They are increasingly making longer term bonds trade at par, that is, 'money'. They do this because the 'money market' is actually junk, including government bonds. Thus the $ is junk, since the value of a bankers obligation - the $ - is as valuable as its assets. You just don't know it, you are being scammed.

WhiteNight123129's picture

stocks are a residual claim after bonds. They do worse in maasive deflation, bonds can recover some value in bankruptcy proceedings, but stocks are better in hyperinflation,they plunge in real terms but benefit from from debt holder spoilation. If hyperinflation starts buy a company with very long date bonds with fixed coupon and huge leverage, there would a massive transfer from debt to equity.


NotApplicable's picture

While true, those are legal distinctions, rather than fundamental ones. Fundamentally, both are methods of capitalistic investment within a company.

Absent legal distinctions, both ROI's would tend to approach each other over time, as it presents an arbitrage opportunity. (theoretically, that is, as per Rothbard's analysis)

AUD's picture

stocks are better in hyperinflation

If you'd been eyeing off that yacht based on your share portfolio in early 2007, you'd have suffered a hyperinflationary nightmare in 2008 if you hadn't sold. And looked like a chump. How many shares would it have taken you to buy that yacht in early 2007, as opposed to the end of 2008?

Stocks are part of the 'money market', a high & rising stock market means stocks are moving closer to 'money', like the price of a bond moving closer to par. Notice 'money', since the reality is the $ is junk, about as far from money as it is possible to be. The $ is the King of credit bubbles, not the King of Kings.

WhiteNight123129's picture

Stocks are better than bonds, but real deal is Hard Assets and commodities long and Short Treasuries, in hyperinflation, nominal rate move to the moon while way behind inflation while hard assets move up in relative terms to everything else (super transfer of wealth).



NotApplicable's picture

Rothbard has written much along these lines of equities and bonds being functionally equivalent from an investor standpoint (legal stuff, notwithstanding).

hooligan2009's picture

before TBTF, greenspan and bernanke puts, massive government intervention in mortgages, there used to be someting called the default rate; similarly credit ratings were a proxy for the probability of default.

sure investment grade bonds (down to BBB- @ S&P, Baa3 @ Moody's) had low probabilities of default, but you had the chance of losing most all your money in junk/high yield bonds

wind-ups were generally thought to have a 30% recovery for unsecured debt and 70% recovery for secured debt/loans) in "junk" bonds with ratings of BB, B, C and those in default of D.

Extra yield of 6-8% would cover you for the probability of default with some illiquidity premium and those large bid/offer spreads for these 5-10 year unsecured or three year secured bonds.

The implied default rate in markets has collapsed to just 2-3% with all this government and Fed manipulation.

The credit ratings (Ratings ssessment of the probability of default) haven't changed, neither has the amount recovered on default.

The key point is that, as you migrate up the credit rating scale, it matters less whether it is debt or equity. Once you are below investment grade, the spread compensates you for deafult.

A spread of 8% for junk, means that 1 in 12 companies go tits up. Zero value returned to equities. The bonds generally recover 30% of their nominal.

The market is now assuming default rates of 2-3% so a failure rate of just one in 50 or one in 33 companies fail.

Junk companies operate at the margin in the economy. You can make money out of these if the number that fail are compensated for the number that succeed by a margin of 12 or so (@6-8% default rate) or one fail per thirry or so (@3% default rate)

The disaster/"crap out" of the "system" occurs, post the correction to the fiscal deficit, with more bullshit money removed from the economy, when the default rate will return to 6-8% (one in 16 to one in 12 companies with junk status) failing. 

Low spreads for junk, represents the misallocation of capital to crap, as a result of macro economic interference.

To say that bonds are the same as equities works only at investment grade, where spreads over govies compensate for bid/offer price spreads at the point of dealing plus the chance of ratings migration to lower quality and junk.

To say that bonds are the same as equities at the junk level (below investment grade) is misleading, naive and ignorant.

There is a rwason why junk/high yield is correlated with equities and why bonds are a prior claim on recoverable assets ahead of equities. It is the principle of subordination of rights that has been part of the financial markets since the 17th century.

Robot Traders Mom's picture

A bubble that could pop with a disappointing post Fiscal Cliff debt ceiling resolution and consequential downgrade of the US debt.


1. The debt ceiling is theatrics. Nothing will happen. 


2. The ratings agencies only downgraded before to fool the people into believing they are somehow objective. They may do it again, and we'll see the same thing: A brief sell-off and then a return to idiocy...

CrashisOptimistic's picture

When talk turns to hyperinflation and what happens when, it just starts to interweave onto itself and make no real sense.

What does make sense is the source of all money says they are buying a particular piece of paper No Matter What.  85B of them per month.

All the other handwaving and moral hazard stuff and deep thinking into what it means conceptually may have some merit, at some point, in some way.  But for now, the source of all money says they are buying a particular piece of paper no matter what.

That is a guaranteed bid.  Hard to see how you lose money owning that piece of paper.  Last year that as good for about 8%, with zero equity risk.

WhiteNight123129's picture

Yup if they buy no matter what while the 30 years inflation expecation goes to 2.75%, 3% I think other markets are going to look funny... An non Fed participants not only would stop buy the long bonds (see Bill Gross letter) but more ~evil~ market participant say guys like Jim Rogers, will keep shorting more and more and the plain long will dump. Inflation expectation will rise even further. That will make bond yield rise and Fed will be trapped into buying even more forcing making the other side very worried and dump more..,.... KAAAAABOOOOOOOMMM! 



Herdee's picture

I can hear the joke now, "How many Yen does it take to buy an ounce of Gold?"

TooBearish's picture

THe puncturing of the bond bubble the deflation of stocks and the moon shot of gold to 10,000 mantra here at no hedge getting quite redunant - just BTFD and go back to sleep u sheep

DowTheorist's picture

Declining paper gold has provided tailwind to bonds. However, when/if paper gold strengthens, bonds may face a tough time. Furthermore, irrespective of gold, technically bonds turned bearish in mid December 2012 as they broke a significant trend line. So the investors have to keep an eye on the BLV (long-term bond)/ term bond)/ GLD (gold) ratio as it is explained here: