How Bad Could It Get For Bonds?

Tyler Durden's picture


With stocks pushing to new multi-year highs - seemingly all-in on the Fed's newfound transmission mechanism - the bond market is beginning to quake just a little. 10Y rates shifted quickly through 2.00% today - hovering around 10-month highs - but the question is, just how bad could it get for bondholders if the Fed were to lift their repressing foot of the yield-seeker's throat. While we believe they are missing the circular nature of any Fed implied tightening on stocks (and therefore bonds reflexively), Goldman sees 10Y yields 120-240bps under 'fair' currently thanks to Fed QE efforts - and believes 4.0% yields are on the cards by 2016. Our question - what exactly would HY spreads look like under this 'bullish' scenario? And for the stock bulls - is this just catch-up by bonds or the great rotation so many hope for? And if Goldman believes this - why is their (and their primary dealer friends) holdings of Treasuries so extremely high?

Goldman sees a one-way street to 4% yields by 2017...


as the Fed's footprint knocks 120-240bps off Treasury yields...


Of course, as we noted, this unilateral analysis misses the one big point - that a (belief in the) removal of the punchbowl by the Fed (which is realistically the only way yields will rise this far this fast) would have a liquidity-crushing impact on the difference between equity valuations and fundamentals - and while Treasuries may see volatility rise (from record lows)...


...we suspect safe haven flows (to explicitly more attractive bond yields) will temper the real explosion (and rotation) so many expect.


As we will not go gracefully back to an old normal market any time soon...


We suspect - just as oil will eventually self-regulate the expansion hopes of local economies via energy price margin compression - that treasury weakness will not be seen as hope-for-recovery-driven but an opportunity for better yields as the boomers remain far more risk-averse (especially at almost all-time highs in stocks).

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Wed, 02/13/2013 - 12:03 | 3240355 Sudden Debt
Sudden Debt's picture

relax... the FED will buy back your investment...

Wed, 02/13/2013 - 12:12 | 3240372 hedgeless_horseman
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And if Goldman believes this - why is their (and their primary dealer friends') holdings of Treasuries so extremely high?

Wed, 02/13/2013 - 12:12 | 3240374 redpill
redpill's picture

No wonder Bill Gross has been so cranky lately.

Wed, 02/13/2013 - 16:20 | 3241007 DeadFred
DeadFred's picture

We are only one missile away from breaking the bond market and if/when it breaks it won't stop at 4%.

Wed, 02/13/2013 - 12:18 | 3240382 derek_vineyard
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off the subject.....i was unable to post comments on most prominent websites about the dorner situation.   the post comments section just was not there.   its fairly obvious dorner had a lot of supporters and that censorship was used online.   blocking my ability to communicate freely online about this topic makes me even more pro-dorner.

Wed, 02/13/2013 - 12:25 | 3240396 hedgeless_horseman
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Many here support the idea of government workers taking action to reduce the number of government workers.

Wed, 02/13/2013 - 12:43 | 3240433 NotApplicable
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Thing is, you'll never run out of "Al Qaeda No. 2" candidates.

Wed, 02/13/2013 - 12:26 | 3240397 I need more cowbell
I need more cowbell's picture

It smells false flag, but who knows these days? That manifesto so pro- Obama, pro-CNN et al, anti-gun, pro-Feinstein stinks to high heaven.

I get the anti-LAPD stuff, but it seems like it could be cover ( a truth to support the garbage ). Again though who knows?

Wed, 02/13/2013 - 12:33 | 3240412 redpill
redpill's picture

Dorner lost all credibility when he killed the innocent couple instead of the people who supposedly wronged him. Then the dumb ass inexplicably decided to try to hide in a mountain community that only has 3 ways in and out of it - great plan dude! And instead of Rambro going out in a blaze of glory like his manifesto suggested he might, once the coward was surrounded his sat down and ate a bullet like a pussy instead of making a final charge. Whatever. After all the hype about how well trained he was, it was pretty anti-climactic.

Wed, 02/13/2013 - 12:40 | 3240430 derek_vineyard
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well i hope the next dorner learns from this

Wed, 02/13/2013 - 12:59 | 3240478 maskone909
maskone909's picture


Wed, 02/13/2013 - 16:27 | 3241025 DeadFred
DeadFred's picture

Over the months I've posted numerous times that the US is very, very far from resisting the status quo using as evudence the fact that not a single trained individual has taken any concrete actions. I will now need to change that to "only one" has taken action. The anger meter has risen one notch, there are many more notches to go.

Wed, 02/13/2013 - 15:17 | 3240811 TruthHunter
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"Dorner lost all credibility"


Just another brain full of viruses...

Wed, 02/13/2013 - 12:10 | 3240356 LawsofPhysics
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Take the final chart back 100 years.  The death of the underlying fiat provides the only explanation.  Since the Fed refuses to acknowledge the true cost for capital (artificially crushing interest rates) and continues to crush savers and holders of the dollar, "investors" will choose to hold something else or conduct transactions with something else...


Wed, 02/13/2013 - 12:39 | 3240425 Stock Tips Inve...
Stock Tips Investment's picture

I think the Fed is still enough ammunition to prevent a collapse in the bond market. However, it will be increasingly difficult to manipulate the market. It is very likely to see a gradual but steady increase in interest rates.

Wed, 02/13/2013 - 12:57 | 3240471 Hippocratic Oaf
Hippocratic Oaf's picture

Even Merideth Whitney can't fight the FED

Expect a gradual sell-off and more printing.

Ben has been stealing from yield investors long enough

Wed, 02/13/2013 - 12:05 | 3240358 derek_vineyard
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whouda thunk 2.00 10 year yields when spx hits new all time highs?

Wed, 02/13/2013 - 12:46 | 3240438 NotApplicable
NotApplicable's picture

*raises hand*

If you think this is fun, just wait until it does the same thing at 1%, then .5%, then .25%...


Zimbabwe markets, FTMFW!

I just wonder how much pain will be inflicted when they are forced to start flattening the 30 yr.

Wed, 02/13/2013 - 12:06 | 3240359 buzzsaw99
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Two words: bull fucking shit (okay, three)

Wed, 02/13/2013 - 12:08 | 3240362 Shizzmoney
Shizzmoney's picture

The IRS has announced that all taxpayers will get a free bushel of tulips for those taxpayers who file their W2's early.

Hedge accordingly, slaves

Wed, 02/13/2013 - 12:08 | 3240363 resurger
resurger's picture

They will never lift their foot of the yields seekers throats, they can't afford that...

wait untill they start buying the IGs and HYs very very soon.

Wed, 02/13/2013 - 12:09 | 3240366 Laser Shark
Laser Shark's picture

Interest rates will not be allowed to rise significantly.  They will destroy the currency and launch the minuteman missiles before they allow any significant increase in interest rates.  It's been a fun debt binge for the past thirty years, but it's over.  One way or another, it's over.

Wed, 02/13/2013 - 12:08 | 3240367 Whiteshadowmovement
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That sounds just about right, somewhere between 2.5-3.5 by 2017. 

Wed, 02/13/2013 - 12:57 | 3240472 Obama4Ever
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That's what they said last year, and the year before, and the year before...

Wed, 02/13/2013 - 13:03 | 3240497 Whiteshadowmovement
Whiteshadowmovement's picture

Yeah exactly and look how steady the ship goes. Its not hard to imagine the Fed "allowing" around 3% ten year (capped around there) to accompany a market that endlessly grinds higher

Wed, 02/13/2013 - 12:10 | 3240369 khakuda
khakuda's picture

The only thing guaranteed is for more bubbles and busts, more dislocation and capital misallocation as a result of central planning crowding out markets.

If Dalio is right and velocity spikes as people rush to buy 'stuff', the market can overwhelm the central planners and rates could rise.  Even in a depression, rates don't belong below inflation forever.

Wed, 02/13/2013 - 12:10 | 3240370 apberusdisvet
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Bonds:  the new toiler paper in upscale bathrooms.

recycling is good for Mother Earth

Wed, 02/13/2013 - 12:55 | 3240467 WhiteNight123129
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Short the toilet paper, it makes a good fire.

Wed, 02/13/2013 - 12:12 | 3240376 Sudden Debt
Sudden Debt's picture

Scientists call this self organising entities... like tornadoes, vortexes...

Wed, 02/13/2013 - 12:13 | 3240377 WhiteNight123129
WhiteNight123129's picture


You want to know how bad? It will end up somewhat like Great Britain post world war II, inflation topped 26% at the end of teh bear market in bonds.

Relax on your Gold, you wioll not have hyperinflation very quickly or maybe at all, but seriously bad inflation with something in double digits for yearsss.

At first the long duration idiot crowd (long bonds and long equities) will claim hourrah and hyperinflationist disappointed. You could see Gold at 1300 USD. That would be the second stealth entry point.


Watch out the top in Gold in Yuan, after the Gold tops in Yuan, hold Yuan fixed income.




Wed, 02/13/2013 - 12:22 | 3240392 donsluck
donsluck's picture

Right, the only problem is spotting the "top" and, of course, dealing with the fact that corruption is much higher in the Chinese bond market than the US (which is why WE are the safe harbor). I would suggest holding cash and PMs and that's about it. The risk in all other markets has gotten so high as to make them too dangerous for capital protection.

Wed, 02/13/2013 - 12:33 | 3240414 SmallerGovNow2
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Don't forget lead and food...

Wed, 02/13/2013 - 12:49 | 3240446 WhiteNight123129
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No, actually US is more corrupt in many respects. As for bonds, it is about the net debt.

In the US corporations have net debt, some have cash (But thus the Fed creating cash).

In the US people have net debt.

In the US the Governemtn has net debt.

That makes for shitty currency and rising and rising long bond yields.

In China there is a lot of Local gov debt and little central gov debt, but there is also a huge pool of Gov assets. In China there is a large net asset position in the form of savings.

There is a need for a crunch in China to write down bad debt, but no need fo massive printing. The only case of deflation possibly in is China. Inflation prompted by excessive credit boom leads to deflation and crunch (china).

Inflation driven by a boom in non levered money (base money) thanks to Ben Bernanke and Obama pushes up wages, does not have a crunch potential as long as we do not see yet another credit boom.

If you print a lot of currency units, eventually those are used. This generates an inflationary recovery without increase net debt to GDP. We have a beautiful deleveraging (read shitty currency and sticky inflation).

Today FT announces that UK is tolerating inflation in order to boost growth. They are just tolerating stagflation, that is no growth but healthy dose of inflation to inflate away debt.



Wed, 02/13/2013 - 12:55 | 3240462 WhiteNight123129
WhiteNight123129's picture

Top was last year. No coming back, the longer it holds and if we have a recovery now which looks likely, than it is over for bonds Caput. PIMCO can buy himself a sail yacht (boost the GDP and inflation) and retire.


Wed, 02/13/2013 - 12:24 | 3240394 buzzsaw99
buzzsaw99's picture

short treasuries, yeah right. have fun paying the coupon bitchez.

Wed, 02/13/2013 - 12:50 | 3240450 WhiteNight123129
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Invest the short proceeds in risk arbitrage or better by AIG it is the same negative duration trade...

Wed, 02/13/2013 - 12:29 | 3240402 Dr. Engali
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Good luck with that. The Bernank will cram your short position down your throat when he takes the ten year to sub-one percent.

Wed, 02/13/2013 - 13:02 | 3240491 WhiteNight123129
WhiteNight123129's picture

Do you really think he can afford to print when inflation expectations rise above 3% (only 40 bps left)? I suggest politely that you reconsider your position.

The only thing the Fed can do is what UK does right now pondering pausing on printing and tolerate stagflation (in fact they are happy that stagflation and inflate away has started).


Wed, 02/13/2013 - 13:06 | 3240502 Dr. Engali
Dr. Engali's picture

I do expect him to print and he will. He has no choice especially when we are running and will continue to run 8 to 10% deficits.

Wed, 02/13/2013 - 13:51 | 3240590 marathonman
marathonman's picture

He will print to pay all the Boomers retirement and medical bills.  In nominal dollars he can cover all the promises fucking Democrats have made over the generations.  In real purchasing power the chained CPI will have them eating dog food and killing them by the IPAB denial of treatment board.  But they'll have that fucking check, hoo-ah!

Wed, 02/13/2013 - 15:56 | 3240935 WhiteNight123129
WhiteNight123129's picture

Consider this. Why do government want inflation? Because by flooding the economy with paper, here what happens once the idiotic crowd in cash give up one by one as inflation expectation rise. they won't spend out of credit (consumers) but corporations will be forced to spend or see their cash melt. idem for rich guys sitting of dowlers.... if the minimum wage rises to 9$ an hour, what happens to nominal tax revenues? Rise.

ARgentina has 162% debt to GDP in 2002 now 41%, ok shitty currenyc but the beautiful deleveraging happened nonetheless. Argentina did not have Weimar. US will have mild Argentina.


Wed, 02/13/2013 - 12:17 | 3240385 Dr. Engali
Dr. Engali's picture

But..but..but  bonds are "safe" assets..they aren't supposed to go down in the new normal.

Wed, 02/13/2013 - 13:02 | 3240489 NitneLiun
NitneLiun's picture

No, dude. It's real estate that never declines. Get with the program.

Wed, 02/13/2013 - 15:58 | 3240941 fonzannoon
fonzannoon's picture

If you take the ten year to 1.5% on the way towards 1% you have to drag the market down substantially. I don't see how they get away with a lower 10yr and a higher market.

Wed, 02/13/2013 - 12:21 | 3240389 game theory
game theory's picture

Negative interest rates are coming. 

Wed, 02/13/2013 - 12:23 | 3240393 donsluck
donsluck's picture

Are here. Catch up.

Wed, 02/13/2013 - 12:35 | 3240419 LawsofPhysics
LawsofPhysics's picture

Correct, many TIPS rate already negative.

Wed, 02/13/2013 - 16:17 | 3240995 WhiteNight123129
WhiteNight123129's picture

Absolutely but it is not because of bond yield going down, it is because inflation expectation ILBE rising, the inflation is pulling down the long bonds. That steepens the curve and kicks idle cash (as Ben printed a lot of base money) in the balls.

Wed, 02/13/2013 - 12:25 | 3240398 derek_vineyard
derek_vineyard's picture

they've been here since 2009/10.    check the yields on the TIPS---they are negative all the way out to the 20 year.

Wed, 02/13/2013 - 12:29 | 3240399 Yen Cross
Yen Cross's picture

 Ten year now up almost 5bps but the dow down .39%.  What a farce these markets are.

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