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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WhiteNight123129's picture



MARKET THINKS Fed Prints because of deflation threat ==> FRONT RUN THE FED. 


MARKET THINKS Fed Prints because monetization ==> DUMP THE TREASURIES 

The market has called the bluff of the Fed on Dec 12th 2012. Eitther the Fed stops printing soon and the long bonds are declining orderly, or the Fed keeps printing more while inflation expectation keep rising and then A LOT MORE DUMPING on bonds. 

The Maya calendar was not 12-21-2012 but 12-12-12, the day when the treasuries are dumped while teh Fed prints even more  = FATAL ERROR from the Fed. THIS WILL BE REMEMBERED AS THE POLICY MISTAKE FROM THE THIS FED AND HENCE THE SCRAMBLING A FEW WEEKS LATER!!!! 



DowTheorist's picture

That was a good one! To bear in mind.


any thoughts on paper gold?

sgorem's picture

Are you talking about GOLD LEAF paper, or the kind that many consumers keep next to their toilet for another purpose altogether?

illyia's picture

Nice to see Gordon Long over here.

Jim in MN's picture

As with real estate, the primary symptom of the US Treasury bubble possibly entering a terminal stage is the rapid runup in 'hot money' holdings.  You can count Carribbean banking centers, the UK, Luxembourg, Switzerland and Hong Kong all increasing holdings by 15-50% in the past year.

Suffice it to say, there is a hair trigger in place that could cause a snap-back in rates that will just blow the shit up--the shit being the remnants of the real economy.

And you know, our luck lately just hasn't been that fucking great.  So no, it doesn't HAVE to happen...but it will, just because it will suck even worse.  Therefore it will happen.

dolph9's picture

Do not buy bonds, ever.  Even a slight rise in interest rates will wipe out principal.  And if liquidity goes down you won't get interest much less your principal back.


If you buy a bond, consider that money gone forever.

Jim in MN's picture

You know the funny thing is, there is actually one bond investment that would break the Curse of Japanification (zero real return, at best, across all major paper investment classes).  That investment is, simply, to buy actual paper bonds in companies paying a decent, say 5% interest rate and....LOL....HOLD IT TO MATURITY.

I feel like crying....this simple thing that people used to, get is virtually impossible to get an actual, paper bond certificate today.  Just think of that.  Pretty much all are bought at issue by filthy thieving global elite, sorry, large financial institutions....and only placed on the secondary markets in large lots for other large financial institutions.

We've really sunk this low.  Go, buy a simple power company commercial paper issue.  Stick it under your mattress.   Redeem and collect the interest + principal.  Go ahead, call your broker and tell him you want that. 


Bond funds, yes, total death traps.

magne13's picture

dolph, apparently you don't understand the differnce between yield and price.  You must be listening to those morons who keep touting the simple coupon as income and sole source of bond income, please don't fall for that commoner misbelief, I ofter hear "why would anyone buy a 10yr note at 1.75%, that is a small return with a lot of downside risk.  unfortunately there is no downside risk to the bond, you will get both your principal back and you will earn 1.75% a year.  There is reinvestment risk upon your coupon payment streams, however you must also consider the prospect of capital returns if the note rises in price or goes lower in yield to say 1%.  This capital appreciation is never talked about on CNBC because they placate to equities and all the idiots out there.  Don't be an idiot.  There is no risk to buying treasuries, they will beat equities this decade as they did last decade.  Interest Rates cannot go up, ever.  Japan is just the beginning and we are next, we will have sub 1% 10yr yields just like them, Why? Because it does not take a genious to figure out that our Debt grows exponentially thus to afford future interest payments which is the only thing that matters, then the only thing to do is to debase currency and ZIRP to infinity it is a Black Hole that is the only way to define it, NO WAY OUT.

smacker's picture

"There is no risk to buying treasuries..."

I agree with your price/yield relationship comments, but what happens in a default scenario? Do you still get your money back? ...just asking

WhiteNight123129's picture

There is no risk in buying treasuries?

Has this guy any clue? Does it confuse real return with nominal one?

Does he not know that the yield never keep lower? They just fluctuate.

The statement is totally completly idiotic.


smacker's picture

Maybe he works for the Fed ;-)

katchum's picture

Keep in mind that even when yields go to zero on the 10 year treasury, You would only have a profit of 20%. When it goes to 1%, you have like 10% profit.

Gunga's picture

I have long thought that the following was a very fundamental principle of wealth management:
When the real interest rate (interest minus inflation) is below zero, buy real assets.
The US markets are so corrupted that I don't believe stocks are a viable option. It has gotten to the point that if you don't hold an asset closely it is not reasonable to believe you will have it when you want to realize whatever gains you may have made.

WhiteNight123129's picture

Yup this principle has been tested time and time again, and described in great detail by Fullarton (1844)


WhiteNight123129's picture

Yup this principle has been tested time and time again, and described in great detail by Fullarton (1844)


Dubaibanker's picture

US bonds are in dire straits...but a crossover is happening, in my opinion. Crossover may be defined as the fact that US bonds which used to be 'risk free' are no longer having that status due to facts such as high debt, lower than AAA rating, political horseshit, high unemployment, low growth, financial suppression, socialised losses, rampant banker fraud et al...

On the other hand, bonds such as from Korea, Singapore, Philippines, Indonesia, Africa, China, India, Russia etc are increasingly coming out with USD denominated bonds. To establish their own yield curve and a deeper bond market besides accessing investors directly since banks are insolvent most places anyways.

In the past all these countries and their corporates had to give 300 to 500 bps above US Treasury yields.

However, with my crossover theory, all US corporates as well as European Govts and European corporates are paying same rates as Asian and Russian issuers. This was not possible just 5 years ago. Today, it is equal in terms of risk and hence the same yield being offered.

In 3-5 years from now, the yields in Asia and Russia and Abu Dhabis and Qatars of the world, who are all cash rich and low on debt, and have growing economies just like US and Europe were back in the 70's and 80's, will allow them to isse USD bonds at lower rates than in Spain, Greece, all of Europe and US corporates. US Govt bonds will hold, until it won't.

Once the yields on Asian, African and Russian issuers go below the US and European yields, my crossover theory wil hopefully be proven accurate. In many cases, even currently, there are examples, but this has to hold over a longer period of time. 

Bonds are not fun in US and Europe but in rest of the world, which is still growing, they are not as bad because they generate high coupons of 4% to 6% p.a. and with lower risk in coming years, they will still keep rising and grant very decent capital appreciation. In evidence, just look at some of these bonds, all in USD, and issued in the last 6 months to 3 years, by non US corporate issuers, amazing profits, eh?:

Russian Gas, Gazprom

Novatek, Russia

Philippines Govt, Issued 2009

South Africa Govt

Abu Dhabi Govt

Indian Oil

Govt of Angola, Africa

All these countries or companies are not scary because they all have a mandate to grow, the GDP in their countries is rising, unemployment is not as dire, as say, 10 years ago, Govts have low debt, banks have for the most part not been fully bailed out in the true sense since most banks are Govt owned anyways, plus all these companies or countries have decent cash reserves. Having seen what has happened in US and Europe, I believe, they have actually cleaned up their act in the last 4-5 years and are stronger than ever before.

Any comments are appreciated.

ActionFive's picture

The difference between the terms risk and safety going forward.

But, US bonds put risk in all bonds to me.

moneybots's picture

" 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%..."


Does this mean that eventually there will be ZERO (Hedge) percent home loans, followed by bankers paying interest to people who buy houses?