Friday's Bond Outlook: Bursting of the Treasury Security Bubble? (Update) 16 comments
-
Font Size:
-
Print
- TweetThis
Prices of Treasury securities are registering mixed changes in overnight trading. “Mixed changes” in this environment is somewhat puzzling and even a bit troublesome.
The U.S. market has always represented the ultimate safe haven venue, yet this morning according to my screen at about 700AM New York time, the yield on the 2 year note was actually several basis points higher than where it closed late yesterday. Indeed, the yield on every Treasury issue is higher than the level at which it finished in late trading yesterday.
Is this the beginning of the end for the dollar and the Treasury market? Is this the first sign of the bursting of the bubble in Treasury securities? That market, in a sense, represents the ultimate bubble, as it exists at the whim and caprice of foreign investors who have, as participants in a Faustian bargain, financed our war(s) and our lifestyle so generously over the last decade. Maybe even that bizarre construct is crashing about us as we speak.
I can only say that with financial markets in full retreat and full meltdown, it is thoroughly uncharacteristic for prices of Treasury coupon securities to be lower.
The yield on the 2 year note has climbed 4 basis points to 1.59 percent. The yield on the 5 year note has jumped 11 basis points to 2.77 percent. The yield on the 10 year note has climbed 5 basis points to 3.83 percent and the yield on the Long Bond has edged higher by just a single basis point to 4.12 percent.
The 2 year/10 year spread is 224 basis points.
The 5 year point on the curve has taken a drubbing since Tuesday. On Tuesday, I closed the 2 year/5 year/30 year butterfly at minus 56 basis points. At the current time it is minus 17 basis points. That means it has underperformed the wings by 39 basis points. One can blame the Treasury with its surprise reopening of $40 billion of securities for most of that movement.
I do not have much to add, since you can see for yourself the carnage all about us.
Update
In my opening comments this morning I launched into a diatribe which suggested that the preeminent position of the Treasury bond market was about to fade away.
I have spoken with friends and read some emails which I receive from the street, and that exercise leads to a different but plausible alternative hypothesis.
To distill their thoughts, it is about a giant systemic margin call, and the means to meet the margin call is via sales of liquid assets. So, the wreckage floating in the street results from those sales.
One correspondent noted that the serious damage in the mortgage market resulted from the same phenomenon and stemmed from margin calls at leveraged S and P funds that were forced to raise cash. This particular trader reported that some of those funds were mortgage sellers.
Another portfolio manager made an interesting point about the manner in which large portfolios have chosen to operate recently. He suggests that many funds have moved to private equity funds from public stock. He also notes that many had retreated from individual stocks and bonds for the glitz of hedge fund returns.
The problem there is that the new technique of management parks money in a place from which it is not extracted with ease, speed and dexterity. So the only stuff that is not nailed down and available for sale is Treasury and mortgage paper.
I still think that if we are bursting bubbles, the Treasury bubble is the ultimate bubble. But certainly this other interpretation is a plausible explanation for some of the recent price action.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Philip Davis
-
3
Bill Gross
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 16 comments:
fear that the cure for the deflation we are currently experiencing is inflation.
Thanks.
Default = currency collapse.
Inflation = currency collapse.
Failed bond issue = currency collapse.
What am I missing? Someone tell me please, I really want to know.
Disclosure: owns TBT
SWRichmond - As John mentions, the Treasury auctioned off $40 billion in securities earlier this week that still may be running through the system. Such a huge auction dilutes current supply in the market, driving price down.
It could very well also be loss of confidence, but there really isn't anywhere else to go...
About about buying puts on the IEF, an ETF which investes in 7 to 10 year Tureasuries?
Trying to make a quick buck what got us into this mess. Why do you guy try to produce something useful instead of trading paper assets?
Err, provided that there is any credit left on our credit cards. ;)
Not quite.
It was borrowing a ton of money with little or no collateral trying to make a quick buck that got us into this mess.
I speculate with money I wholly own and which I don't have an immediate need for. If I lose it I will still be able to make ends meet and continue saving from my income.
Banks borrowed trillions to speculate and earn billions. When the losses set in they wound up owing trillions and had nothing left to pay off with.
There's a big difference.
if you want to check the ultimate bubble...
Jolly Rancher: I have sixty days food & medicine at all times and the means to hunt, a pool full of water etc. Every American should always have this at any time. As Ben Franklin so aptly put it, 'better to have it and not need it then need it and not have it.' Once you have those supplies in a dry container move on with your life.
SWRichmond: I don't expect the collapse of the US economy at this time, stop holding your breath. If history rythmes things will appear to settle a bit after the election and we'll see some significant bear rallies. The earthquakes have indeed gone off but only part of the tsunami waves have reached the shore. 10% ovecapacity seems to have come off the real economy since 2007, another 10% more to go in the next couple of years. And if there is an outright collapse of the US economy, would think it would be more in the year 2011 and due to geopolitical events, such as a Middle East war that turns nuclear and oil and other costs of living put the nails into a coffin. A very scary and real possibility but I am not going to live my life in fear of that.