Global Sovereign Bond Watch: Overstuffed Supply

The sovereign bond markets of Europe, the UK, and now the United States have been stuffed with supply. The goose simply can’t take it anymore. Yesterday, U.K. Gilts fell after an auction drew the least demand on record. Meanwhile, it didn’t help that the US Treasury came to market with more large tranches of supply, with no end in sight. Let me repeat: no end in sight.

The best performing currency yesterday was gold. Which climbed back above the 900.00 level (futures). There is no longer a problem with liquidity in global markets. Behavior in gold, silver, and commodity equities have been telegraphing a cessation to dry conditions for 6 weeks now.

The next source of capital for global markets will come from sovereign bonds. (The refuge of frightened money over the past six months). When this capital starts looking to exit, the recipient asset classes will surge. Oil looks to be struggling still with actual, real world industrial demand. And yet it’s hard to see gold going higher on a reflation thesis without pulling oil along for the ride.

Global sovereign bonds are just another asset competing for capital. But the world’s governments have been stuffing the channel with supply, to take advantage of the fear. I hope someone can make fois gras out of the situation, when it turns ugly.

Comments

[TheBookkeeper:]

"Global sovereign bonds are just another asset competing for capital."

Could today be a wise time to refresh our understanding of the word "capital," in the context of commercial trade? It's binary complement for centuries has been "cash." An artifact of value is brought to the marketplace and sold by a debtor to a creditor. The debtor in the trade receives "cash" as the "value" of the artifact in trade. The creditor who paid out the cash, receives in exchange "capital-potential." Capital's potential is an expression of rights to ownership of the artifact. Capital's expressed value will gain or lose real value in future trades. When money is the artifact in trade, the creditor is betting on the paper, or the gold, or the oil having real value in return for potential value spent in a future trades. Capital that has expressed potential value of one sort is seeking real value in trade by purchasing capital of different sort. "Money in the bank," has a whole new meaning in today's world as potential gets removed further and further from physical assets with real value. Sometimes, in changing times, it is helpful to go back to basics and to rethink what one thinks they already know.

Jan 30 05:51 AM

[DiggerUK:]

I recommend a viewing of Niall Ferguson's recent series "The Ascent of Money", it is a good presentation of the history of capitalism.

Fiat, bookkeeping, bonds, it's well presented. The classical liberal economists have been overlooked. I speak up in their honour

It also reminds viewers what happens when buyers lose confidence in government bonds.
The account it gives of Argentina a few years back should be a red flag, when looking at today's falling of sales of bonds.

Mr. Macdonald dreams of foie gras, hope he enjoys Spam.

Jan 30 07:05 AM

[ROLEX18K:]

Everybody is an expert, only why 95% of investors lost in 2008 and now anywhere from 40-90%.
But probably writers on SA are the 5% of winner takes it all.

Jan 30 09:23 AM

[kelm:]

The Financial Times had a small article in Thursday's paper citing a Burmuda based hedge fund that was offering a share class in gold. That is, you buy and sell the fund in troy ounces not dollars or pounds or Euro's. Increasing worries about the over use of printing presses prompted the move.

Jan 30 10:32 AM

[auto44:]

Some where yesterday I read an article about how the Chinese are quietly buying physical commodities as well as large positions in the stock of miners in Austrailia and Canada among other places. I am guessing they are using their dollars to do this instead of buying bonds with that money. i suspect It seems that to them the new reserve currency is something that is really useful, not paper. Maybe as investors we should be watching them.


On Jan 30 05:51 AM TheBookkeeper wrote:

> "Global sovereign bonds are just another asset competing for capital."
>
>
> Could today be a wise time to refresh our understanding of the word
> "capital," in the context of commercial trade? It's binary complement
> for centuries has been "cash." An artifact of value is brought to
> the marketplace and sold by a debtor to a creditor. The debtor in
> the trade receives "cash" as the "value" of the artifact in trade.
> The creditor who paid out the cash, receives in exchange "capital-potential."
> Capital's potential is an expression of rights to ownership of the
> artifact. Capital's expressed value will gain or lose real value
> in future trades. When money is the artifact in trade, the creditor
> is betting on the paper, or the gold, or the oil having real value
> in return for potential value spent in a future trades. Capital that
> has expressed potential value of one sort is seeking real value in
> trade by purchasing capital of different sort. "Money in the bank,"
> has a whole new meaning in today's world as potential gets removed
> further and further from physical assets with real value. Sometimes,
> in changing times, it is helpful to go back to basics and to rethink
> what one thinks they already know.

Jan 30 11:44 AM

[yellowhoard:]

Were the Fed not monetizing the long end of the bond market, what do you suppose would be the "real" interest rate?

Anybody?

Jan 30 12:17 PM

[Gregor Macd...:]

I agree with Bookkeepers remarks. I don't know if Bookkeeper agrees with mine. It's also possible I could have used different terms to transmit my views, thus getting closer in agreement to Bookkeeper's perspective.

However, I suspect that bookkeeper and are asking the same question: in a world where cash itself has been dislocated and may see further dislocation, does one become more concerned about holding non-cash assets. Or less? In a world where the "capital-potential" of all assets including cash comes under question, what to do?

I assert that since WW2 we have all lived in an era where the income stream behind senior sovereign debt was rarely if ever in question. The only real question in senior sovereign debt in this era was inflation risk. Not repayment risk. In addition, this era has also been marked by currencies that have only had to deal with the same questions, of inflation or deflation.(There are indeed OECD examples that don't conform to this view, but I will leave them aside for now).

For two decades you could have heard me say "I don't ever want to live in a world where paper money in the OECD becomes such a problem that holding gold becomes preferrable. Moreoever, I certainly don't want to live a world where industrialism comes under such enormous pressure from financial system issues, that gold mining, a worthless human endeavor, becomes not only profitable but a sector with a bright future."

I think we are living in that world right now.

I agree with bookkeeper, using his/her term of "capital-potential" that such potential continues to bleed away from physical assets with real value. However, in a world where the store-of-value is now bleeding away from cash and sovereign bonds, then perhaps we should make a grand leveling and ask anew where is there store-of-value?

Gregor

Jan 30 12:38 PM

[yellowhoard:]

Where is there store of value?

If the US were to use porn as a store of wealth, we could regain our leadership in the world. Nobody, except maybe the Dutch, are more knee deep in porn than us. Think about it bro.




On Jan 30 12:38 PM Gregor.us wrote:

> I agree with Bookkeepers remarks. I don't know if Bookkeeper agrees
> with mine. It's also possible I could have used different terms to
> transmit my views, thus getting closer in agreement to Bookkeeper's
> perspective.
>
> However, I suspect that bookkeeper and are asking the same question:
> in a world where cash itself has been dislocated and may see further
> dislocation, does one become more concerned about holding non-cash
> assets. Or less? In a world where the "capital-potential" of all
> assets including cash comes under question, what to do?
>
> I assert that since WW2 we have all lived in an era where the income
> stream behind senior sovereign debt was rarely if ever in question.
> The only real question in senior sovereign debt in this era was inflation
> risk. Not repayment risk. In addition, this era has also been marked
> by currencies that have only had to deal with the same questions,
> of inflation or deflation.(There are indeed OECD examples that don't
> conform to this view, but I will leave them aside for now).
>
> For two decades you could have heard me say "I don't ever want to
> live in a world where paper money in the OECD becomes such a problem
> that holding gold becomes preferrable. Moreoever, I certainly don't
> want to live a world where industrialism comes under such enormous
> pressure from financial system issues, that gold mining, a worthless
> human endeavor, becomes not only profitable but a sector with a bright
> future."
>
> I think we are living in that world right now.
>
> I agree with bookkeeper, using his/her term of "capital-potential"
> that such potential continues to bleed away from physical assets
> with real value. However, in a world where the store-of-value is
> now bleeding away from cash and sovereign bonds, then perhaps we
> should make a grand leveling and ask anew where is there store-of-value?
>
>
> Gregor
>

Jan 30 12:47 PM

[Yohei:]

Very good. Now is certainly a time when one needs to examine the situation from first principles.

Perhaps another way to look at what you say is that an "investment" is not an investment until after it is sold profitably; until then it is consumption.


On Jan 30 05:51 AM TheBookkeeper wrote:

> "Global sovereign bonds are just another asset competing for capital."
>
>
> Could today be a wise time to refresh our understanding of the word
> "capital," in the context of commercial trade? It's binary complement
> for centuries has been "cash." An artifact of value is brought to
> the marketplace and sold by a debtor to a creditor. The debtor in
> the trade receives "cash" as the "value" of the artifact in trade.
> The creditor who paid out the cash, receives in exchange "capital-potential."
> Capital's potential is an expression of rights to ownership of the
> artifact. Capital's expressed value will gain or lose real value
> in future trades. When money is the artifact in trade, the creditor
> is betting on the paper, or the gold, or the oil having real value
> in return for potential value spent in a future trades. Capital that
> has expressed potential value of one sort is seeking real value in
> trade by purchasing capital of different sort. "Money in the bank,"
> has a whole new meaning in today's world as potential gets removed
> further and further from physical assets with real value. Sometimes,
> in changing times, it is helpful to go back to basics and to rethink
> what one thinks they already know.

Feb 01 03:38 AM

[dlaw:]

The Treasury option found two bids for every sale.

The demand for Treasuries has been extraordinary and shows essentially no sign of diminishing.

Feb 01 11:58 PM

[Gregor Macd...:]

I would just comment that long-dated UK Gilts and long-dated US Treasuries are on pace to lose 20% of price, from the top. We're not there yet. But look at UK long-dated Gilts. They are leading the way down.

Feb 03 07:02 PM