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The auction results make absolutely no sense under "conventional wisdom."
Median yield down, primary dealers took about half and indirect bidders took the other half, basically.
What? 50% take for foreign central banks on 30y debt at a 4.6ish coupon?
That makes no sense given what we're being told is coming: massive inflation, maybe even hyperinflation, commodities ramping to the moon, the stock market going to the moon in a hyper-inflationary printing explosion.
The stock market rocketed on the release. I couldn't make sense out of the initial FX moves, especially in the DX and Yen. Someone was front-running in the financials bigtime as well, with a big ramp for an hour or so prior to the results.
Folks, if you think hyperinflation is coming, or even serious inflation, you're going to get your head cut off on a 4.6% 30y bond. In fact you could easily lose half or more of your investment, should you need to sell, and your coupon will be half or less of what it should be.
So how does this make any sense?
There is only one reason for the FCBs to want this sort of exposure:
They expect a ramp in the dollar and crushing DEFLATION, as this is the only way that bet will pay off.
If you're on the other side of this trade in any way, I hope you are putting on some sort of hedge.
Remember, foreign central banks can FORCE a pull in liquidity and make their desires a self-fulfilling prophecy.
Care to bet against someone who can make their bet pay off?
That's what I thought.....
PS: If this analysis is correct then we're in for some really NASTY trouble, quite soon.
Ever since the 30 year auction closed earlier, the market has been acting about as rationally as the Stalingrad Bourse back in 1939. Nowhere can this be seen better than the volatility in the 15 Year mortgage. Vol has moved from stocks, to CDS, to treasuries and is now roosting in mortgages. Rinse. Repeat?
An even more vivid representation is the spread between the 30 year mortgage and the 10 year UST. Holding our breath for the SEC to release the 8-K saying this is normal and expected market gyrations.
U.S. household wealth fell in the first quarter by $1.3 trillion as home and stock prices dropped, extending the biggest slump on record.
Net worth for households and non-profit groups decreased to $50.4 trillion from $51.7 trillion in the fourth quarter, according to the Federal Reserve’s Flow of Funds report today. The government began keeping quarterly records in 1952.
One positive aspect of today’s Fed report is that the decreases in net worth are starting to ease. Wealth dropped by a record $4.9 trillion in the last three months of 2008.
If you look inside the Flow of Funds report you will see that total liabilities have decreased by only $178 billion.
That is, asset values have declined at a rate nearly ten times that of the debt in the system against those assets.
This is the definition of the problem:
The so-called "asset gains" were fraudulent and have evaporated into the wind, but the debt taken on to acquire them remains as a millstone around the consumer's NECK!
I keep coming back to this same point, and the data continues to say the same thing:
There is no possible durable economic recovery so long as value is destroyed but debt is not, because as debt-to-equity ratios rise debt service becomes more difficult, credit quality declines, and both of those facts force diversion of income to paying down debt and contracting the consumer balance sheet.
You can keep trying to blow bubbles and you might even "succeed", as we did in 2003 - but you see what it got us. A jobless "recovery" and then a ruinous crash. If we allow this to be attempted again the duration of the 'recovery' will be shorter, shallower, and the resulting crash even worse!
WE MUST STOP BEING STUPID IF WE WANT A DURABLE ECONOMIC RECOVERY FOR OURSELVES, OUR CHILDREN AND GRANDCHILDREN.
NEW YORK (MarketWatch) -- The dollar is likely to remain an unpredictable factor in the market this year, with fear that huge issuance of government debt could send it sharply lower and fuel inflation, while further strength could curb a recent rally in commodities-related sectors and hit multinationals' overseas profits.
Look the US has for sometime been like a patient with an incurable disease, compulsive borrowing from everyone including the future generations to pay for its seemingly incurable spending habit. Now the masive injections of liquidity are by some miracle supposed to save the patient, or they're gonna' kill it!
Originally posted by ThirdJohnAdams
reply to post by Tentickles
I must say your simplified explanation worked perfectly well. I'll meddle my nose in areas I'm suited for. You market guys seem to really be on it.
And what you said seems to be the best way to describe everything as of late.
June 11 (Bloomberg) -- Treasuries surged as an $11 billion sale of 30-year bonds drew the highest yield in almost two years, luring investors concerned that record government spending and debt sales will lead to inflation.
The bonds sold today drew a yield of 4.72 percent, the highest since August 2007, and above the 4.80 percent average forecast by eight bond-trading firms surveyed by Bloomberg News. The sale is a reopening of the $14 billion 30-year bond auction on May 7, which drew a yield of 4.288 percent.
That crashing noise you’ve heard was not the volume on the NYSE and DJIA as it did not exactly reflect commitment to the short, intermediate or long term. No, the crashing noise and focuse of tonight’s column was the United States Treasury Market and now that the 2 year note has continued its move from Friday the panic you are hearing is that of one Mr. Ben Bernanke going “oh #” if the yield curve starts to narrow from the 2 to 30 year range.
If this spread narrows too fass with a 2.5-3% 2 year and a 5% 10 year, we will see some major market distortions. But what I fear worse is that the laws of supply and demand kick back into gear and the auctions this weak only go “fair” causing a huge amount of doubt and a further accelerated price decline thus a higher yield. That would be the trigger event for an equity sell off at some point as the foreign participation will speak volumes about their perception of the U.S.
Thus with that said, here are the bond charts with my opinions on them and note rapid rise of the 2 year yield of over 40 bps in 3 days.
Has Back Door Debt Monetization Already Begun?
by John Galt
February 26, 2009
....holdings of the apparent hedge funds in the Caribbean, most of which are subsidiaries of companies that did in fact receive TARP and other government handouts, have more than quadrupled their total holdings but why and under who’s direction? It would make sense to launder the money via the Caribbean to insure that the Fed can still proclaim to world markets and uphold confidence in our markets that direct monetization of our debt has not begun. Using Treasury alternatives via Primary Dealers and their Caribbean subsidiaries along with other handout recipients does provide an almost bulletproof deflection of what appears to be the obvious. It is also a logical method to insure that mortgage rates remain artificially low and calm the markets down to prevent drastic resets of Option ARM mortgages and other adjustable rate instruments which are not just impacting the residential markets but the commercial real estate arena now also.....
....Just maybe this was to protect the long end of the curve just in case the foreigners elected to dump their 10’s and 30’s and buy the short term Treasuries only. We may never know until a historian digs through the archives and reveals just what the meetings with the Federal Reserve and Treasury were really all about.
There was a ton of consternation and amazement as the 30 year Treasury yield dropped today after an “unusual” and “miraculous” auction where “suddenly” there was lots of words like deflation, stability, ‘green shoots’, recovery and of course, my favorite phrase “start of a bull market” were tossed around like a Bison Frise at a Michael Vick pit bull practice session. If you believe any of those phrases hold validity, you can stop reading now and download a porno or replay the latest MSNBC program because you’re probably too stupid to live. The auction was a rousing success because “DUH” the Fed had to have a rousing success. But how dare I accuse our beloved favorite private corporation of rigging a market without a pretty picture to illustrate it. I refer back to my old posting from February where I dared to ask the question “Has Back Door Monetization Already Begun?”
Originally posted by Rockpuck
reply to post by Tentickles
We will continue in a Deflationary Spiral.. as the Currency and Purchasing Power deflates, the cost of commodities will increase.. The ONLY reason we are seeing inflation is the devaluing of our currency -- please see 2001-2008.... we are making this economic crisis into a cycle within a cycle.