Bond Market Sends a Message

By now all of you know that I have ten times the respect for the bond market traders than I do for the bull obsessed equity traders on Wall St.

The bond market sent a strong statement Tuesday about their confidence in both the stock market rally and their fears around inflation.

As you can see below, we had a 4 week treasury auction Tuesday that saw a very strong BTC (bid to cover) of 4.7:

Quick Take:

Note that the participation in this auction from the indirect bidders (Foreign Central Banks) was over 61%, which is a very healthy number. This was an A+ auction in anyone's book.

The problem here folks is it's a 4 week auction with an interest rate of .04%. There is basically ZERO risk if you decided to participate in this auction.

My querstion here is if there was a lot of confidence in the recent stock rally then why would we be seeing such a strong flight (nearly $5 bid for every one dollar accepted) into short term bonds that pay virtually nothing?

Can you say Capital Preservation?

Now let's take a look at the 3 year treasury auction from Tuesday:

Final take:

As you can see above, the BTC was an underwhelming 2.76 and the indirect interest fell below 50%.

Personally, I am not impressed.

The Bottom Line

So what is the bond market telling us? It says short term treasuries are safe.

However, over the long term, the lack of interest in the 3 year auction tells you that the bond market has no interest in holding a 3 year bond with an average interest rate of 1.44%.

To me this signals that the bond market is worried about both inflation and the potential of a breakdown in the US dollar. Why wouldn't they be after seeing gold rising above $1040 an ounce Tuesday?

The FEAR of inflation and a dollar collapse is why the bond market is acting this way. Keep in mind that there are still tremendous deflationary forces on the economy via the consumer. The Fed is fighting this deflation by throwing trillions of dollars at it?

So who wins? In my opinion this is still anyone's guess. However, I continue to be attracted to metals in this scenario because I am beginning to believe that the world is losing confidence in the US and their ability to control their deficits and spending.

If they lose confidence in our ability to pay back our debts, then the dollar will eventually breakdown.

As a result, the world now feels they must diversify out of the dollar and into things like commodities and precious metals.

Bond Auction Alert

We have a huge 10 year auction today at 1:00 that will be fascinating to watch given Tuesday's action in the bond pits. If the world bails on the 10 year auction, you could see bonds sell off severely.

I expect a volatile day today. Hang on tight boys and girls.

Full Disclosure: I own gold and silver via GLD and SLV in longer term accounts. I am also short treasuries via TBT.

Comments

[Michael Clark:]

Antonio: Where is the master, boatswain?

Boatswain: Do you not hear him? You mar our labour: keep your cabins; you do assist the storm.

Gonzalo: Nay, good, be patient.

Boatswain: When the sea is. Hence! What cares these roarers for the name of king? To cabin! silence! Trouble us not.

Gonzalo: Good, yet remember whom thou hast aboard.

Boatswain: None that I more love than myself. You are counsellor; — if you can command these elements to silence, and work the peace of the present, we will not hand a rope more. Use your authority; if you cannot, give thanks you have liv'd so long, and make yourself ready in your cabin for the mischance of the hour, if it so hap.


On Oct 07 06:00 AM NATO wrote:

> Full fathom five thy father lies;
> Of his bones are coral made;
> Those are pearls that were his eyes:
> Nothing of him that doth fade
> But doth suffer a sea-change
> Into something rich and strange.
> Sea-nymphs hourly ring his knell

Oct 07 06:13 AM

[Angel Martin:]

How do 10 year treasury rates of 3.25 % reflect "fear of inflation" ?

Oct 07 09:46 AM

[sensey:]

Great points made and most salient - as the hour is nigh! (as long as we are waxing literary...) By 1pm we ought to know whether to dump the 10-year and full ahead with the silver and gold futures...

Oct 07 10:42 AM

[Steak:]

Bond folk go long the short end for the steepener trade and long the belly for a flattener, right? I see the end of the moneymarket guarantee program as the reason for short-term paper being so strong...and the flattener trade for a weak 3 yr and stronger 5 & 10 yr.

Just my $0.02

Oct 07 05:00 PM

[Albertarocks:]

>I am beginning to believe that the world is losing confidence in the US and their ability to control their deficits and spending.<

Man, if it took the world this long to become suspicious that the U.S. might be losing their ability to control their deficits and spending, I'd say they've either been asleep or attending classes at the school for stupids for the past 50 years, or they've just turned a blind eye and joined in the party.

The world has watched this insane story unfold every step of the way, has participated in it and indeed exacerbated it by loaning more and more and more money to the drunken sailor at the slot machine. What in hell were they (we) expecting to happen?

And much worse, now that nobody will loan any more cash to the king of all money destructors... what will the drunken sailor do when he realizes he can't afford his next fix? Will he go on a wild rampage in one final fit of anger and desperation... before his head implodes? And saddest reality of all, the question remains about what's going to happen to his children?

Oct 07 09:47 PM

[The Housing...:]

Angel

Good point. Keep in mind thought that there are a lot of primary dealers buying bonds at these auctions.

Once the auction is completed and treasuries rise as a result that the auction got done, the PD's then turn around and sell the treasuries at a higher price and pocket the spread.

There are a lot of games going on right now. The huge move in metals contradicts where bond yields are right now.

There are lots of economic disconnects out there right now that make no sense. This market is beating to its own drum. It's very difficult to interpret right now.

Best to all. Greatr thoughts!

Oct 07 10:23 PM

[elwind45:]

The Treasury changed the rules. Federal Reserve bond buying gets lumped into overseas demand. It is a little funny how China is on holiday, yet bonds are exploding. It seems to me a strange thing mystifying?

Oct 08 04:19 AM

[Michael Clark:]

I can't believe Willie the Shake got two thumbs down. What's the world coming to? (Oh, it wasn't Willie, it was me -- I can understand that, I guess.) Here's another:

A baited banker thus desponds,
From his own hand foresees his fall,
They have his soul, who have his bonds;
'Tis like the writing on the wall.

Jonathan Swife


On Oct 07 06:13 AM Michael Clark wrote:

> Antonio: Where is the master, boatswain?
>
> Boatswain: Do you not hear him? You mar our labour: keep your cabins;
> you do assist the storm.
>
> Gonzalo: Nay, good, be patient.
>
> Boatswain: When the sea is. Hence! What cares these roarers for the
> name of king? To cabin! silence! Trouble us not.
>
> Gonzalo: Good, yet remember whom thou hast aboard.
>
> Boatswain: None that I more love than myself. You are counsellor;
> — if you can command these elements to silence, and work the peace
> of the present, we will not hand a rope more. Use your authority;
> if you cannot, give thanks you have liv'd so long, and make yourself
> ready in your cabin for the mischance of the hour, if it so hap.
>

Oct 08 11:25 AM

[Michael Clark:]

Jonathan Swift, I meant to write.

Swife, swive, swifan...is actually a dirty word.

Oct 08 11:26 AM