Bonds: Maybe Loaning Money at Less than 4% for 30 Years Isn't a Good Idea

| About: Vanguard Total (BND)

I was foiled again Thursday on time. Now understand that I only need about an hour to write a good post, maybe an hour and a half for a really good one, as long as I am in the flow of things. I had errands to do when I got home and packages to open (Christmas presents bought online) so I am a bit out of rhythm. I will try my best tonight to cover some ground. I have today off as well as next Friday as well so I hope to have a better post up later today.

Reader Input
In response to my included piece about the resurgence of home flippers, reader Talia posted a comment that made some great points, but missed what I was trying to say. From the comments:

Talia said;
"The very first question Ben Bernanke, Tim Geithner, or any official that matters should be made to answer in no uncertain terms is why the same kind of reckless lending and speculative behavior is happening again while they watch."

Well what do you expect to have happen. People sit on the sidelines forever- so risk averse to where the refuse to move in til prices hit $0???

From the story itself:

"Now, a different breed of flipper is proliferating: one who seeks bargains at foreclosure auctions. Unlike the boom-time flippers, the latest generation needs cold cash, lots of local-market knowledge and strong nerves."

Ding ding ding. Just like the bottom of each and every downturn from the beginning of time, this is what you are supposed to see - bottom feeders coming in with CASH hoping to step into the breach and make a buck. If they judge correctly, they profit handsomely. If they go in to soon, they crash and burn losing THEIR OWN MONEY!!!

I have no idea if this is the bottom or not, but you should not in any way be discouraged or disgusted by this behavior. Even if this is not the bottom, lower prices will force them in with an even greater vengeance.

Bottom line - thank god for bottom feeders. Without them, no bottom would ever be found.

Some good points here:
-Cash buyers are scooping properties = no bailout for them (maybe)
-Buyers see value here and are setting up a bottom (maybe)
I agree with Talia's ideas in general, but where is the problem?

The problem is that a "flipper" by definition is someone looking to move a property fast. To whom will the flipper sell? Another all cash buyer? Maybe, and if so, wonderful.

But what if the home is flipped to a brand new first time buyer armed with a 0% down FHA backed loan using the home buyer tax credit as their downpayment? What happens when that new buyer at a higher price is undercut by all the foreclosure sales? I think you can see where I am going here. The initial flipper with cash is ok, but his "mark" becomes my problem. Thanks a bunch.

Certain to Generate Debate
Accrued Interest started a great debate about debt Thursday night. He explores consumer debt, corporate debt, Wall Street debt, and public debt and offers ideas if that debt is "good" or "bad". A well thought out essay that is well worth both a read and some serious thought. Oh, and he also titles all his posts with Star Wars quotes which makes the blog the coolest ever. Read:
Debt: How am I to Know the Good Side from the Bad?
Quote is from "The Empire Strikes Back"; Luke in training with Yoda. HA.

Did I Just Say That?
Hot on the heels of the idea I covered that maybe the oil rich nations will not be so hot to buy into US banks after prior massive losses (see the 2007 Citi (NYSE:C) piece in article) I saw the following out Thursday:

Citi faces snub from Kuwaitis
The Kuwait Investment Authority has held internal discussions about scaling back its banking relationship with Citigroup in a move that could include transferring funds currently deposited with the US bank, people familiar with the matter say.

A withdrawal of KIA funds from Citi would mark another setback for the bank as it seeks to recover from the financial crisis and pay back government bail-out funds.

Maybe nothing but posturing, but it may be another step in the rejection of US financial engineering that I have covered many times. Worth watching.

Maybe Loaning Money at Less Than 4% for 30 Years is Not a Good Idea
I am going to be very up front; bonds are not a strong suit for me (is anything but molecular biology or Star Wars trivia strong for me?) so writing about them for me is a stretch. Still, I know the loyal readers will correct me if I am off, so no worries.

Zero Hedge, known for their scoops as well as over the top headlines (which I love), had this:
$13 Billion 30 Year Auction Closes At 4.52%, Big Tail In Ugliest 30 Year Auction This Year
Now Economic Disconnect is usually a fan of "Big Tails" (Think J-Lo and Lil Kim) but in this arena that is not a good thing.

When you consider the overflowing love for the 1 and 3 year bond sales, and a good reception for the 10 year sale, the 30 year sale seems out of whack. Now what do I mean?

Most gauge "inflation expectations" buy bonds, and it seems that at the short end of the curve, buyers expect no inflation at all. Maybe a tiny bit at the 10 year range, but they are saying there could be quite a bit at 30 years out. Now the 30 year yield is not suggesting massive inflation, but higher than there has been.

The Housing Time Bomb had this to say:

Despite gold's recent plunge, today's auction tells you that the bond market remains extremely worried about inflation.

Today's 30 year bond auction was a complete disaster..

..The 30 year bond auction confirmed that the bond market sees nothing but further printing and dollar devaluation. The world's FCB's are basically telling you that they don't want to hold any long term investments in the US as long as our government continues to print. This eventually is going to force interest rates to move significantly higher in order to attract demand...

..It's pretty simple folks:

The bond market is scared to death of inflation. I mean who wants to hold a 30 year bond at 4.5% when inflation could rise 10% a year as we power up the printing presses?

Very interesting.

I posted this response in the comments section detailing my own confusion:

I think the 30 year sale was bad, but the short term sales (10yr or less) were excellent. While I cannot fathom why a buyer thinks a 10 year horizon of printing is a good buy, but a 30 year window is not so hot, but then I am not a higher thinker.

How do inflation expectations fall in here? I am not too sure. the 1-3 years sales say no inflation, the 10 year says maybe a little, and the 30 today said maybe plenty! I thought bond guys were smart? That is a weird progression.

For Christmas I want a secret decoder ring (think the orphan annie ring in "A Christmas Story") which will make some sense of all this.

That is my real take on all this.

None of the bond market action makes rational sense to me. I am a linear thinker, a real scientist, so the nuances of "sending messages" or "showing fears" are lost on me.

If debt buyers think the US is going to print its way to oblivion, then walk away. Not in 1 year, not in 3 years, today. Why wait?

Still, with a stealth debt ceiling raise by Congress, TARP now converted to a permanent (I guarantee it) source of fast cash, expanded benefits of all sorts, "cash for caulkers", extension of home buyer tax credits, upcoming expansion of MBS buys (sorry CR you lose again), Jobs programs, ....add money spent here, should make any investor in US debt a bit nervous.

The ringing group think is that the rest of the world is so much worse off that the US is all set. Say Greece defaults, their economy is a 357 Billion pie. Now, not all of that goes poof, but I want some scale. Say California goes poof, their GSP (for states) is 1.8 TRILLION. You seeing what I am saying? Scale matters folks.

Some more?
We know Spain is in trouble, and their 1.6 Trillion GDP is huge, but so is the also troubled New York, with a 1.1 Trillion pie.

When I hear the Europeans are doomed I try to pull up scales to think about things in a relative way. Being US-centric is natural to an American, but the rest of the world has made gains as well.

I understand the reasoning behind a "stronger dollar" going forward in a "flight to quality". What I do not understand is how some symbol (the dollar) can be a quality asset no matter what, no matter how. That is a license to do whatever you want and we have been using it for a long time. Someone may just figure this all out.

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