Bond Market - Phone Home

Tyler Durden's picture

If the U.S. Federal Reserve were a hedge fund, its phones would be ringing off the hook with prospective investors wanting fresh allocations and Ben Bernanke would be zipping around the French Riviera in a gold-plated helicopter.  The Fed’s multibillion-dollar position in Treasuries is nicely in the money with the recent moves to record lows risk-free yields, after all.  But it’s policy outcomes, not returns, that the Fed is after.  By that measure, the current record low payouts in “Safe Haven” bonds (U.S., Germany, U.K, for example) are troublesome.  There is, of course, the worry that they portend a global recession.  This concern cannot be waved away with the notion that a worldwide flight to quality totally upends the bond market’s historical function as a weather-vane of economic expansion and contraction.  Beyond this concern, however, Nic Colas of ConvergEx sees two further worries.  The first is that the Fed has needlessly compromised its independence by pursuing bond purchases that, in hindsight, were unnecessary in the face of the current economic outlook and investment environment.  The second is that interest rates have been demoted to a supporting role in kick starting any global economic recovery.


Movies about aliens usually come during the summer blockbuster season of lightweight entertainment, but the history of this science fiction genre is solidly grounded in the world of social commentary.  That’s the upshot of an article by Laura Miller in a recent edition of the The New Yorker, and it got me thinking about everything from Darwinism to the state of the global capital markets.  She traces the history of fictitious accounts of alien invasions all the way back to 18th French literature; Voltaire wrote of a 6,000 foot alien who comes to Earth simply to examine life here.  After Darwin’s publication of On the Origin of Species in 1859, the story lines change to invasions of deadly creatures from outer space, hungry for either natural resources or human blood.


The landmark book of this version of evil aliens, of course, H.G. Wells War of the Worlds, published in 1898. Made even more famous by Orson Welles’ compelling radio adaptation in 1938, it told of an invasion of Earth that was only defeated when the aliens succumbed to bacterial infections to which they had no defense.  At the time England was still a colonial power, subjugating millions of indigenous peoples around the world while occasionally suffering from the local diseases against which they had little defense.  That made War of the Worlds a thinly veiled criticism of colonialism, of course, but the notion that Darwin’s theory of “Survival of the fittest” might apply across planets was another subtext a reader in turn-of-the-century Britain would also understand.


To stretch the allegory of alien invasion to the capital markets, I would put bonds – specifically government securities of less-risky sovereign nations – into the role of the unwelcome newcomer.  The recent drop to record-low interest rates for U.S., German, Swiss, Swedish and other government issuers over the last 10 days is a powerful signal that much has changed in global capital markets.  A few supporting points here:


  • Consider that current U.S. 10 year Treasury rates are roughly 100 basis points lower than the depths of the last recession.  A yield of 1.45% on this security certainly indicates that markets have soldered closed the “Risk on/Risk Off” switch which has governed market action over the last three years.  Long dated Treasury yields are also a bet on inflation, however, and such paltry payouts certainly make the U.S. government bond market a significant Doubting Thomas on the topic of domestic economic expansion.
  • Similar action in the German bond market – sovereigns there now yield just 1.17% - is a large flapping red flag on the sustainability of the euro in its current form.  Buyers of this debt are no only seeking out a safe haven – U.S. Treasuries yield more, after all.  They are also handicapping the direction of a currency, the euro, and expecting that future actions will strengthen it.  Lastly, yields on German bonds are an indictment of the safety of similar sovereigns in periphery countries.
  • While the U.S. and German bond markets get much of the press, we cannot ignore the fact that the last 10 days have seen sharply lower sovereign yields everywhere from Hong Kong to Australia to Sweden and even marginal credits such as France.  Just like the old Elvis record – “50 Million Fans Can’t be Wrong” – there is something daunting about any move in capital markets to new highs/new lows.  “Return of principle” has won the day.


As with unfriendly aliens unpacking their bags at a landing site, the move to record low rates around the world is a truly menacing development.  It says, essentially, that there is real trouble ahead.  Those who are bullishly inclined to risk assets might counter with the notion that these recent moves are just the latest round of hand-wringing in what is still a slow growth recovery with reasonable profits need to consider the following points:

  • The U.S. economy is weakening, as exemplified by – but not limited to - last Friday’s Jobs Report. The Federal Reserve’s primary weapon – Quantitative Easing/Operation Twist – has proven more shotgun than phaser-set-to-kill when it comes to creating sustainable growth.  Granted, the Fed’s +$2 trillion book of bonds must be nicely in-the-money.  But central banks aren’t hedge funds, so this is a pyrrhic victory at best.  The Fed may not be out of bullets/shells, but a third round of Quantitative Easing will likely be greeted with more yawn than rousing cheer by markets already scared deep into their rabbit hole.  And there is the question of whether the Fed even had to pursue such a strategy.  If QE has lowered interest rates by 30-50 basis points, as the Fed claims in several papers, then its moves take second fiddle to what the market has accomplished on its own.
  • Recent moves to record low yields are a loud vote of “No confidence” when it comes to European policymaker steps to stem the ongoing problems in Greece and Spain.  There is a no-polling rule in Greece which will limit visibility this week on the outcome of the next round of voting there on Sunday.  The state of Spanish banks, beset by a horrible local economy, seems to weaken by the day.   Germany hasn’t yet changed its tune on Eurobonds.  I can go on, but you get the idea.

The most optimistic bit of our aliens-bond market analysis is that, in the end, the humans always win.  Sometimes we find the mother-ship and destroy it.  And, as with War of the Worlds, sometimes victory is the result of time and lucky happenstance.   It seems like we are heading down the second narrative.  Historically, low interest rates have generally sparked economic recovery.  In the current environment, this gas-down-the-carb approach seems to have simply flooded the engine of growth.  Other factors are at play, as I have outlined here. The real answer is simply more time. 

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Cult_of_Reason's picture

Germany may be open to euro-zone bonds: WSJ

SYDNEY (MarketWatch) -- Germany has signaled that it may be open to euro-zone bonds or further support for the region's banking sector, The Wall Street Journal reported late Sunday. Any lifting of Germany's objections to such moves would depend on other countries agreeing to transfer more power to Europe, the report stated, citing a unnamed German official. "The more that other member states get involved with this development and are prepared to give up sovereign rights to get European institutions more involved, the more we will be prepared to play an active role in developing things like a banking union," the official told the newspaper.

lolmao500's picture

Duh. Germany wants total control over Europe OR ELSE...

Typical of the crazies running Germany.

GtownSLV's picture

I call bullshit on the WSJ story citing an unnamed German.... blah fucking blah. But since its in the WSJ would should just drink it down and take their un named source over Merkel's own word's just yesterday.

LetThemEatRand's picture

Wouldn't it violate the German Constitution to approve Euro bonds without a vote of the people?  And aren't 60-70% of Germans against the idea?  I think your bullshit call is correct.

knukles's picture

But but but but but

1. Mayhaps nobody's noticed, but been a while since last time a government listened to its subjects.

2. This horse shit has been linked to (and not properly noted in all of the articles thereupon) utilizing the PIGGIES gold reserves as collateral against the loans.

Which changes the whole fucling dynamic.
Living proof that women, even the Merkels and LeGardes of the earth, like shiny stuff. 

Oh regional Indian's picture

Once a downward move is begun with enough force, it will hit bottom before rolling back up. Just like core interest rates leaking lower since early 80's, this operation twist cannot be reversed easily. Macro patterns are habit forming. 

when backward is forward, downward is up. Look out below....

And Knuckles, right here: "government listened to its subjects" is the problem.

In a Govt. for, of and by the people, there should be no Sub-Ject.

Ergo, democracy is nothing but diseased monarchy in disguise. Else why are they called ruling parties? Prime Minister?

Second, Calling creatures like Merkeel, Laggard, NoClit, SoNear GoneDi and the rest of the ruling ilk of creatures with female characteristics is unfair to women.

These are constructs and given their glee at killing, death and dying, which in essence is the very opposite of what women do best, forst adn fore-most and uniquely (create life)... I suspect they all either have or aspire to Gold Man-Sacks and suffer tremendous penis envy to boot! 



Michael's picture

There will be no zombiemeal served at my residence.

It'll be just like Woody Harrelson in the movie Zombieland.

No need to worry about zombies as the residents have been thoroughly conditioned on what to do with zombies. Zombies will think twice before doing it.

Even I shoot zombie posters at the gun range with my SR9.

Zombieland Movie Trailer

Nukular Freedum's picture

The honest policy solution as I have said a few times is to replace QE(n) with negative coupon bonds. This would allow us to find the true, non-repressive price of treasuries pretty quickly. The reason they dont do this is because yields would quickly go through the roof in the absence of Fed purchases. Great for the economy, not so great for the mortgage holders and hence the banks or for the government trying to pay its various egregious bribe programs.
So the existence of an honest market solution to the ZIRP crisis is pretty clear from which we conclude what? The chaps in charge are not being honest about their motives for ZIRP (financial repression NOT economic recovery).

Harlequin001's picture

What a load of fucking gibberish. Aliens? Interest rates? and this 'Historically, low interest rates have generally sparked economic recovery'. Do me a favour.

Historically low interest rates have generally flooded the market with cheap credit thereby distorting the real prices of ALL assets temporarily.

All of these bonds (sold at low interest rates) are now coming back onto the cash market for sale, hence the Fed buying them up at the rate they are. Once this cash, (currently hoarded) is speculated in other assets the real impact of these 'historically low interest rates' will become very clear, very fast.

One thing they didn't do was spur any economic recovery. Just sit back and watch the show...

ITrustMyGut's picture

Greenspan alledged quote..

"the housing bubble.. was the next to last bubble.. bonds will be the final one.." ( paraphrased from memory.. )

this is all a rounding up the sheeple effort... so they can more easily destroy it all in one bomb as opposed to many ..

expansion and contraction in the money supply has only done one thing...  consolidate what wealth is not in the hands of the central planners.. this moment is just another example..

one word... PURPOSEFUL

lolmao500's picture

Merkel is full of it. I bet it comes to a vote, it passes very easily. Merkel is full of hot air. Talk tough but when it comes to voting, they vote EVERY SINGLE TIME to screw the German taxpayers.

Fact is, Merkel is an Europhile, she doesn't give a flying duck about Germany, she loves the EU way more... in the end, she's gonna stab Germany in the back and suck the EU's dong.

Cult_of_Reason's picture

Merkel is a typical politician.

She says one thing (what the public wants to hear) but do another (what her cronies, banksters, and plutocrats want her to do).

Cult_of_Reason's picture

B.S. or not B.S., but the market is extremely oversold, sentiment is extremely bearish, and it does not take a lot (a B.S. rumor will do it) to engineer a ~50-100 S&P points short squeeze.

Looks like a high probability technical bounce:

Dow futures are oversold,  RSI is 15, high probability it will bounce off lower line of the channel.


Mugatu's picture

Market was oversold in 2008 too!  How did that work out for you? 

BTFD if you want, but never fuck with Mother Nature.  When you use every man-made device imagineable to avoid a recesssion, eventually Nature will hand your head to you on a platter.  Just ask any engineer - every dam built is eventually going to fail.

Cult_of_Reason's picture

Mother Nature?!

If Bernanke hints QE-3 or Draghi hints LTRO-3, you will get squeezed.  Your mother or your Mother Nature will not save you.

The Monkey's picture

Sentiment trades work, until they don't.

Mugatu's picture

How did LTRO work for the Euros?  It was a disaster - more bad bonds concentrated with the banks.  The more they fight it, the harder the fall.

DeadFred's picture

I'm betting you're right but I won't be surprised if the waterfall continues on downward. The 200 dma is behind us for everything but the Nasdaq. There is bad news that's real. Trend lines, RSIs and support levels and such don't mean much when really bad news hits. Will more hit? Without that news I think we'll bounce, but I thought the 200 would hold against the first push.

As far as market sentiment I'm hearing it's remarkably complacent. Everyone thinks Ben will fly in with his helicopter. If he doesn't it will be a summer to tell your grandkids about.

Cult_of_Reason's picture

The central planners are actively oiling their printing presses. Now, Bernanke has an excuse (rising unemployment rate) and a political cover to print (to monetize the debt).

Last week's AAII Sentiment Survey Results:

Bullish: 28.0%, down 2.5 percentage points
Neutral: 30.0%, down 0.9 percentage points
Bearish: 42.0%. up 3.4 percentage points

Historical averages:

Bullish: 39%
Neutral: 31%
Bearish: 30%

gatorengineer's picture

As I said earlier, a stick save was in the works.  Never said it had to be factual.

justinius1969's picture

well.. there are a load of English idiots fawning over a German family well established in central London...completely brainwashed. First there was the Roayal wedding, now we have have the Diamond jubilee...oh aren't they just wonderfull  

CrashisOptimistic's picture

Not two hours ago Merkel was quoted on Bloomberg as saying "UNDER NO CIRCUMSTANCES" would she permit Euro bonds.

With Europe’s debt crisis cited last week for canceled IPOs, weaker-than-expected Chinese manufacturing figures and a rise in the U.S. jobless rate, Merkel rejected joint debt issuance in the 17-nation euro area as a solution, saying “under no circumstances” would she agree to Germany-backed euro bonds.

knukles's picture

The day is young.

Noticed that it gets gorier and worse every time they, the Leaders of The Vaunted EU speak to no one in particular?  Even themselves?

Best way to get this over with is a 24/7/365 Pan EU Economic Confab Broadcast Live.

Michael's picture

Have you ever lived through a complete and total worldwide bond market collapse?

They've really muzzled CNBC World's Steve Sedgwick these past couple of months and it looks like his head is ready to explode.

If CNBC un-muzzled Steve, their ratings would go through the roof.

DeadFred's picture

Have you ever lived through a complete and total worldwide bond market collapse?

Unless the doctor told you your prognosis is very bad, you will.

Michael's picture

Have you ever lived through a complete and total worldwide bond market collapse?

Have you ever lived through a complete and total worldwide 700 trillion dollar derivatives market collapse?

Have you ever lived through both at the same time?

What a great story you'll be telling your grand children if you live through it.


Michael's picture

In order to be a trillionaire you have to be a Zimbabwean for now, until...

Currency is Debt's picture

Yes Dead Fread you are on it indeed.

Global economic earthquake of 08 (starting in 06) has been shaking since and the bond market collapse is the global tsunami. The more it hurts the larger the bond bubble will get. Maybe when the 10yr reaches -0.05 yield in a couple of years it will be the end. Pure insanity.

I am not even a doomer but when you have psychopaths running the world....

The so-called jobless recovery.What is a jobless recovery? It is a misinformation term for The big boys are getting their money out and exchanging it for other assets - then we drop the world on you (main street motherfuckers).

The vampires are not American, or European - they owe you no allegiance. They go where there is plentiful blood, could be Asia and Africa in the future. Call it the Central Bank plague sweeping accross the earth. They will pump you and dump you.

world_debt_slave's picture

ha, ha, ET, phone home, bitchez!

Half_A_Billion_Hollow_Points's picture


AUD's picture

The Fed’s multibillion-dollar position in Treasuries is nicely in the money

But Treasuries are denominated in Fed credit. How can the ever increasing liabilities of the Fed be 'in the money'?

Go on, explain how that is not a Ponzi scheme.

LetThemEatRand's picture

Because We The Taxpayer are on the hook for the Treasuries. 

AUD's picture

That just proves it is a Ponzi scheme.

Bartanist's picture

The Fed may be able to book profits based on mark to market, but they can never sell their portfolio. Their profits will evaporate as the notes and bills mature.

CommunityStandard's picture

I believe that's the point Tyler was trying to make by the comparison to the hedge fund.  IF the Treasury was a hedge fund, they'd have a nice profit.  But they aren't, so they won't.

slewie the pi-rat's picture

didn't Robo_T hava recent comment comparing the FED to a hedge fund on one of tyler's pieces?

unununium's picture

Happening right now, every week, with maturing mortgage bonds.  The Fed "reinvests" the maturing face value of ~6B/week and never say how much principal was actually repaid to it.  And of course, the Fed never reported who sold them the $1.5T originally, or at what price.

Thankfully, it's not like lots of people are stiffing the man on their mortgages.  Oh wait.

CompassionateFascist's picture

4th Reich in Europe, ZOG in America. Who ever thought Germans and Jews would get along so well. Not: the debt overhang is simply too great, and time has about run out. Euro will collapse whatever the Germans do, and then the dollar as well. Within 90 days the operative currency is going to be be: lead. Invest accordingly.  

AUD's picture

Are you top calling the Government Treasury markets within 90 days?

CompassionateFascist's picture

I'm calling the IranWar, then total Ponzi Collapse w/in 90 days. The ducks are all lined up.

Matt's picture

I'll take the other side of the bet:

no Iran War within the next 90 days (drone strikes, assassinations, computer viruses that blow up equipment, trade sanctions, oil embargos, all do not count as war) and no total Ponzi Collapse within 90 days (as long as a Big Mac can be purchased within North America for under $20, the system is still going).

CompassionateFascist's picture

Bibi wants Barack Hussein to go away. BigWar sometime in August, shortly followed by oil price spike and dollar collapse. 

Currency is Debt's picture

Disclose your source, or state opinion

Dapper Dan's picture

Who would have thought?

German magazine Der Spiegel: Israel outfitting German subs with nuclear weapons - @dw_english
Element's picture

You realise they have had these subs (and earlier subs ... had them for decades) and their nukes and missiles for decades, right?

Why is that 'news'?

FlyoverCountrySchmuck's picture

As usual, the Bank-Of-Last-Resort is the U.S. Treasury, it's printing press, and the American Taxpayers Pocket.

If you think the current insane Berkeley et al, radicals in the White House won't sell-out America's Economic future to win in November, you are sadly mistaken.

If Europe Collapses before November, Obama LOSES, there is no other possible outcome. If they can stave this off by printing like crazy until then, they will.


These classroom Socialists honestly believe that for the Sheeple to accept the New Socialist World Order, (which they will head, of course), that the world's Democracy's must be BANKRUPTED, and the people literally begging for tyranny to save them from chaos.

What the hell did you think Obama meant when he said "Fundamentally Transform!", anyway?

StychoKiller's picture

All decepticons say that before changing their shape...

Inthemix96's picture

Flyover, while I agree with you here mate.  They have to go through people like me first.  Take heed mother fuckers, you want a NWO??  Then come and fucking get it.

This is going to get real nasty before it gets better folks, be prepared for it I wish you all well.  One more thing though, fuck you NSA, and fuck you twicw GCHQ.  Pick your sides, history will prove one of right.

Conman's picture

Maybe the fed should take all that bond profit and help Americans buy tvs like the Chinese are doing.