And Another Reason Why Bonds Just Refuse To Sell Off

Tyler Durden's picture

In addition to the countless other reason already presented here over the past year why the bond market simply refuses to sell (scarcity of "high quality collateral", shadow banking lubrication, fears over a slowing economy, reverse rotation by pension funds from stocks into bonds, etc), here is one more reason: today the spread between the 30 Year Bund and the 30 Year Treasury just hit a record wide.

Which means the global correlation arbs, those who know that global liquidity is fungible and in the global yield scramble all yields will converge (right LTCM?), have a wide berth in bidding up US paper, and in fact, based on Bund yields, have never had a better reason to buy the US long end. The catalyst: Europe's triple-drip recession, increasing European deflation, Europe's trade war with Russia and the paradoxical kicker from the ECB, which may or may not launch QE and the threat of which (if not actual execution) will keep pushing yields lower (because once QE is active yields actually rise as per QE1 and QE2 until easing actually ends when there is a "great rotation" from stocks and back into bonds).

Which means to all those bank strategists, traders and pundits who hope, pray and daily recommend that finally yields will rise, but not too much - by just the right amount, to justify the equity stock bubble, will have to wait much longer in the meantime the disconnect between the narrative told by the broken stock market and the broken bond market will continue to grow until one day not even the Fed's backstop of every risk assets can support it.

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Al Huxley's picture

Wow, these FED guys have totally got this market under control - such deftness of touch, such finesse - always just the right amount of tightening or loosening talk, just the right amount of FED buying and selling - it's like watching a virtuoso violinist.  Bravo Mrs Debtfire, Bravo.

El Oregonian's picture

You know if you pull money out of one pocket and place it the other. Then visa-versa, eventually you too will look like you got a lotta money...

Just keep on switching it back and forth, from pocket-to-pocket.... Rinse... repeat...

Amish Hacker's picture

So, time to back up the truck on TLT?

wallstreetaposteriori's picture

The time to back up the truck on both Treasuries and Gold was last December when Bernake announced the taper...  Funny how the things which should have crushed bonds have been the driving force to the rally.

Amish Hacker's picture

Agreed. Once you disconnect prices from supply and demand, anything can happen, no matter how counter-intuitive and illogical it might seem. So, time to back up the truck on TBT?

Dr. Engali's picture

At these rates it won't be long before we are to borrow money...... Oh wait.

disabledvet's picture

Yeah, I'm not expecting a tax holiday anytime soon either.

My reason for saying "be even longer Treasuries" remains the same:  PREPARE THINE SELF FOR YE MASSIVE ISSUANCE SINNERS!

I don't expect anyone to understand of course...but if on thy lazing daze of yore ye decidith to pondereth ye olde double top (all time low yield, all time high price) treasuries have a long way to go from the top they hit a couple of years ago.

SAT 800's picture

LOL. Verrry interesting article.

HUGE_Gamma's picture

S&P 2000 is all that matters

Unknown Poster's picture

Why sell, the US is good for it. ;-) Perhaps if China feels compelled to defend the Yuan by selling US debt, then rates will rise.

Dazman's picture

My thesis for this spread is that there is a general distrust of the US fiscal house (where did the debt ceiling go?)... Which is why the US bonds have a higher yield. There had been no austerity in the US. In Europe there has been. 

dead hobo's picture

Bonds won't sell off because 1) The potential for flight to safety exists 2) The Fed and those with compatible interests still want low interest rates and big pressures there continue .... for now.

Sam Spade's picture

"...once QE is active yields actually rise as per QE1 and QE2 until easing actually ends..."

It's amazing how few investors (and even bond "experts") know or remember that simple fact.  And when QE1 and QE2 each ended, long term interest rates fell over 100 basis points in a matter of months.  Contrary to popular belief, QE was never about "lowering interest rates" (dismal economic conditions would have kept them low anyway); it was about pumping liquidity into the system to reinflate asset values.

Augustus's picture

Is it at all possible that the world just finally has a belly full of US govt debt?  Only buyer is Fed?

I don't quite understand the percieved safety of German debt though.  Any euro zone QE will result in more issuance of debt to fund other country problems and Germany will ultimately be on the hook for it.  At some point the circle of euro banks buying bonds from governmentw which have bailed them out will have to end.  The regulations related to bank leverage my be bendable but cannot be bent enough to hide the extreme leverage for ever.

hedgiex's picture

US Try not a bad parking space given its liquidity to park your trading earnings even if you have to pay for the parking. Nowhere else in the markets that justify the return/risk/liquidity to trade. Just wait for the meltdowns that shall reward you in spades to more than recover the front-end parking fees paid.

Of course, banksters do not want it as this kills their "churning" books. So let's see who is more assiduous (i.e. can sit on their asses longer).

matagorda's picture

Another reason might be the 48% drop in MBS issuance ytd through July, per SIFMA.  If it continues to year end, would be the largest percentage and dollar decline in issuance of any fixed income category since at least '97.  Overall fixed issuance has declined 15% ytd and if it continues to year end, would be the first two-year decline since at least '97.