Which Black Swan Will Pop the Treasury Bubble?

As we've discussed previously, there is a bubble in the US Treasury bond market. And as we discussed in Ka-Poom Theory, bubbles always find black swan events -- "pins" to pop them and cause a market panic. As John Mills, a historian of market panics, said, "Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works."

What will be the pin that pops the Treasury bubble, causing a panic that reveals its true value? While it would be futile to try to predict an outlier event, understanding areas where it may be more likely can help us identify potential triggers for what will cause a market panic, so that we can more easily recognize it when it occurs.

There are three pins I think are most likely:

1. Mass monetization announcement. We are seeing appetite for Treasury bonds decline. If the Fed either significantly begins to monetize the debt (i.e. print money to pay it off) or announces it will do so, this could trigger an exit from Treasuries.
2. Military threat. 9/11 was a black swan event that punctured the dot com bubble significantly. As there is still a significant amount of conflict and political tension in the world, a military event triggering a mass exodus out of Treasuries seems possible -- particularly when one considers that some of the largest holders of Treasury bonds are foreign central banks with economic interests that run contrary to those of the United States.
3. "Legislation". The Federal Reserve can modify its charter, Congress can assign more authority to it, and central banks can come into new agreements amongst themselves. For instance, a regional currency which national currencies would be re-valued against is becoming a more commonly voiced idea in many parts of the world. If there is a monetary agreement of sorts, it will likely have the impact of devaluing the US dollar, as a way of compensating foreign US Treasury bond holders.

As a dollar trader, I'll be keeping an eye on potential pins for the Treasury bubble, as well as price charts that can show when momentum has turned. Though when the bubble will pop, as well as how bit it will get before doing so, remain unclear.

Comments

[zalo:]

zzzzzzzzzzzzzzzzzzz

Jan 18 02:51 AM

[Steven Hansen:]

"Legislation". The Federal Reserve can modify its charter"

doubt that changes will not require constitutional amendment.

Jan 18 05:36 AM

[Maxe Paul:]

Simit, it is interesting to note that this is a "fear" bubble rather than a "greed" bubble. I think we realy need to also add the possibility that this bubble may slowly deflate over a long period of time instead of "pop". Noone is realy forecasting this......which is all the more reason i think to add it into the "outlier" catagory.

I know many people will say, a bubble is a bubble, but a fear bubble is not the same as a greed bubble. I wish i could give an example from history but i simply cannot think of a similar case ATM.

Jan 18 08:38 AM

[allan skye:]

It looks pretty obvious to me that the peak of the treasury is happening simultaneously to what is probably the final low of the stock market,also the obama bounce effect which will trigger off a big rally is due in a few days time therefor its a no brainer,the stocks will burst the treasury bubble.

Jan 18 09:40 AM

[Kelly Liebe...:]

What will burst the bubble is the realization that foreign governments, and their wealthy investors are no longer buying our debt! November report is already out!
No one wants to be the last one in.. There will be no small unwind, just one mighty pop.

Jan 18 10:20 AM

[Lonestar1:]

Dumping of Treasuries by Foreign central banks is not a pure economic event. One should look for clues in strategic arm twisting among the world's largest geopolitical power brokers.

On the same basis, doesn't it make everybody wonder why Tokyo-Mitsubish (?) executed its $9 billion investment in Morgan Stanley for a 20% stake while they can withdraw without any penalty? More ironic is that the same Japanese bank raised capital for its own capital adequacy..

Jan 18 11:41 AM

[Hurricane S...:]

We need China to buy 2 trillion of freddie fannie and treasuries. They started with a 560 billion infrastructure investment in their own country months ago and I think they recently added another 1/2 trillion bailout. China is where to watch for the pin. Maybe they will sell some of their treasuries quietly and try to make consumers out of their own people. There wont be any american consumers to justify them chiping in on our national debt just as we try to take the 5 trillion debt(bush in) to 11 trillion (bush out) with 8 trillion in backings and promises on top of that as he goes out the door? We need China to buy 3 times as many treasuries as Obama spends his 10 trillion. Once we cant pay the interest on the debt, that will be the pin. China will get us there by not buying and interest rates will go up.


On Jan 18 10:20 AM Kelly Lieberman wrote:

> What will burst the bubble is the realization that foreign governments,
> and their wealthy investors are no longer buying our debt! November
> report is already out!
> No one wants to be the last one in.. There will be no small unwind,
> just one mighty pop.

Jan 18 02:13 PM

[schnickelfritz:]

Exactly correct as previously expressed, the bubble wil surely pop when foreign governments stop buying US debt and/or the US government can't pay the interest on the balooning debt it's created.
Who's going to buy a ticket to ride the Titanic?

Jan 18 03:12 PM

[bigbubbber:]

nothing will stop the US Govt from taking say, 25% of all stock market accounts and forcing the buying of 99 year US Treasuries or Bonds at 1% rate.

Jan 18 06:02 PM

[Econ 101:]

And when all those CDO's and mortgage backed securities go into default and the banks cant handle it, who will be the one left holding them? It will be chinese banks. They will own your mortgage and home, if you dont pay. And our llilly livered politicians will let them foreclose and you will get to watch them take over.

We have been sold out and all that is left is for the owners show up to boot us out...

BTW SP, these are NOT Black Swan events. BS events are unforseen, these are there if only you and the rest of the sheeples would look.

Jan 19 02:23 AM