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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Sudden Debt's picture

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

hedgeless_horseman's picture



And if Goldman believes this - why is their (and their primary dealer friends') holdings of Treasuries so extremely high?

redpill's picture

No wonder Bill Gross has been so cranky lately.

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%.

derek_vineyard's picture

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.

hedgeless_horseman's picture



Many here support the idea of government workers taking action to reduce the number of government workers.

NotApplicable's picture

Thing is, you'll never run out of "Al Qaeda No. 2" candidates.

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?

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.

derek_vineyard's picture

well i hope the next dorner learns from this

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.

TruthHunter's picture

"Dorner lost all credibility"


Just another brain full of viruses...

LawsofPhysics's picture

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...


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.

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

derek_vineyard's picture

whouda thunk 2.00 10 year yields when spx hits new all time highs?

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.

buzzsaw99's picture

Two words: bull fucking shit (okay, three)

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

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.

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.

Whiteshadowmovement's picture

That sounds just about right, somewhere between 2.5-3.5 by 2017. 

Obama4Ever's picture

That's what they said last year, and the year before, and the year before...

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

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.

apberusdisvet's picture

Bonds:  the new toiler paper in upscale bathrooms.

recycling is good for Mother Earth

WhiteNight123129's picture

Short the toilet paper, it makes a good fire.

Sudden Debt's picture

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

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.




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.

SmallerGovNow2's picture

Don't forget lead and food...

WhiteNight123129's picture

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.



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.


buzzsaw99's picture

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

WhiteNight123129's picture

Invest the short proceeds in risk arbitrage or better by AIG it is the same negative duration trade...

Dr. Engali's picture

Good luck with that. The Bernank will cram your short position down your throat when he takes the ten year to sub-one percent.

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).


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.

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!

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.


Dr. Engali's picture

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

NitneLiun's picture

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

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.

game theory's picture

Negative interest rates are coming. 

LawsofPhysics's picture

Correct, many TIPS rate already negative.

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.

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.

Yen Cross's picture

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