While working on the Professional Edition Treasury update, I was reminiscing fondly over some past snippets from those reports, like the quote in the headline. Below is a trip down memory lane for me and hopefully some entertainment for you–at least as long as you have not been long Treasuries or any fixed income for the past year or so. I run a risk of egging my face by posting this now since a rally is probably due in bonds. But so far so good.
The period during which I made these observations was from March of 2012 through May of this year.
From the Executive Summaries-
3/22/12 Bond bears will be thwarted and frustrated one more time, but their time is coming. The forces of “as good as it gets” are beginning to wane, but it will take months for this to play out and ultimately result in a breakout in Treasury yields.
5/5/12 By holding short term rates at zero, Bernanke is forcing old people to take ever increasing duration and credit risk. The first wave of Bernankecide through the forced drawdown of savings accounts and money market funds will be followed by a second wave when the elderly face massive capital losses in their bond mutual funds. This massive ongoing loss of purchasing power is a drag on the economy. Bernanke has never addressed the issue because reporters who have access to him have not asked the question in those terms. This is the Gentle on Ben journalistic approach. It shows the near total abdication of responsibility of modern “journalists.”
10/5/12 This period is beginning to look a great deal like the mid 1970s when small investors stampeded out of stocks into bonds, only to see their holdings destroyed by inflation and rising bond yields through 1982.
Primary Dealers –
6/17/12 If Treasury yields were driven down by panic in May, Primary Dealers led the way. They furiously bought longer term Treasuries again in the week ended June 6 breaking another new record level set the week before. Based on the long term chart of the 10 year yield, Treasuries remain at an extreme level of extension from the trend. In fact, every move of 15 to 17 points in 10 Year Treasury prices over the course of a year or so has led to a severe correction. This move just reached 17 points. That suggests that this is the end of the blowoff.
7/27/12 The panic buying of Treasuries has taken on the kind of shape often seen in the final stages of a parabolic bubble blowoff. Throughout history, a 5 year time frame from liftoff to blowoff has been typical of many bubbles. Momentum has started to weaken from the extreme overbought parameter indicated by the 12 month rate of change, which had been consistent with past major highs in bond prices.
9/29/12 The downtrend in their holdings since June 13, which decisively broke the long term trendline from April 2011, reached a new low last week. I said last week that a resumption of the downtrend “would be a vote of no confidence in the Fed and a sign that the Treasury bull market is, if not ending, at least in for a steep correction.” I find it hard to believe that the Treasury market could continue to rally for much longer with the dealers being persistent sellers, but crazier things have happened. Just look at the last 5 years in this market. Meanwhile, if the dealers are simply flipping the Treasuries as they acquire them it means that they have plenty of cash to play with in other markets, particularly stocks, commodities, and their derivatives. [I was wrong about commodities–so far.]
10/27/12 It seems there are plenty of anxious buyers waiting for the supply. That is likely to not end well. It looks like a classic case of distribution, which, after all, is what dealers do. The last two instances of sustained dealer selling actually lagged the market down. This time that’s not the case. They are selling in the absence of a Treasury market decline so far.
12/7/12 Looking at the chart, you have to ask yourself, are these guys just trend followers? If they’re the smart money, then who’s the dumb money? My conclusion would be that if they are the smart money, none of us will escape this mess alive.
Foreign Central Banks-
6/22/12 The Fed has picked up where the FCBs have left off by purchasing MBS from the Primary Dealers. That cashes out the dealers so that they can buy more Treasuries each month. Other buyers, including presumably many foreign accounts fleeing Europe and China, possibly acting through US straw parties and investment funds, have picked up the slack. The FCBs have not been missed. But panics burn out, and once this one does, the market will need to face the absence of the FCB subsidy which had played such a huge role in suppressing long term yields for so long.
2/3/13 If FCBs should become net sellers for more than a few weeks, that would be a serious problem, especially on top of Primary Dealer and bank selling if they should continue in that mode as well. If all these forces come together [they have], there will be some terrible days ahead for the Treasury market.
Bond Mutual Funds-
4/7/12 These huge inflows followed on the heels of Bernanke’s pledge to keep short term rates at zero until hell freezes over. The unbroken string of inflows is now up to 25 weeks. The buying panic by fund investors has been intensifying. The March 7 [2012] data may represent the final blowoff of that panic. But for as long as it lasts it will help to keep a bid under Treasuries.
11/10/12 Manipulated by the Fed, the public has been enamored with (or being unwillingly forced into) bonds. The trend of this indicator is still bullish for bonds, but no doubt ultimately current buyers will be destroyed. The constant flows out of stock funds and into bond funds are reminiscent of the mid 1970s, which ultimately led to the destruction of bond fund holders in the late 1970s through 1982.
US Banks-
5/11/13 The banks have been sellers in all but 5 weeks since the beginning of the year. Being reluctant buyers is one thing. The market can handle that given all the buying by the Fed. But if the banks are aggressively dumping, and dealers and FCBs are also sellers, that would remove liquidity from the Treasury market, with some likely shifting into stocks. A continued pattern of selling by banks is a negative, and the increased level of selling of the past two weeks had an impact on the market. If this is sustained, the bond market could crash. That might not be negative for stocks initially, but keep in mind that in 1987 the bond market crashed about 5 months before the stock market.
I’ve been watching the Fed’s operations every day ever since it started publishing them daily in 2002 along with its balance sheet and the commercial banking system balance sheet, and Treasury operations, revenues, and outlays weekly. As the famous financial philosopher L. Berra wisely said, “You can observe a lot by watching.” I invite you to watch along with me, and observe a lot.
This week’s Treasury Update is posted. As Treasuries Swoon, Fed Governors and District Presidents Pee Their Pants and Cry To Mommy – Professional Edition
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Lee,
I would hope that you would comment soon, about the Danger the Big LBO’s; and M & A, that have been formed during the past 8 – 10 years; and, their potential for Bankruptcy, these Big Companies might face; should Interest Rates rise. My understanding is that several are carrying, unimaginable Debt; violating all of the Rules of a Free Market Capitalistic System at the time of Formation; simply because the New Acquisiton’ers paid two or three times what the Companies and their Stocks were worth. Further, it is my understanding that Wall Street had to engage is some, “Finesse,” Financing; for some of the Deals to even take Place. On top of grossly over paying for these buyouts; the new Owners (with assistance from the Old), Cooked the Books so the new Owners could make huge Equity Withdraws, from these Buyouts, look Legitimate. Is it true, also; that this is one of the Reasons Bernanke can’t quit the Q’s; because these Companies would go, “tits up,” if interests rates rose too high? Last question: If the huge LBO’s; and, the M & A’s, should crash into Bankruptcy; what are the chances of these events serving as a catalyst for bringing down the Hedge Funds as well? The Term that Stockman uses to describe the frequent refinancing that is needed when obligations come due is, “Extend & Pretend!” Is that what the Fed is doing in these instances – – and so many others?
Thank You.
don (subscriber)
I don’t cover M&A and LBOs. You’ve covered it well. There’s a wide spectrum of possible catastrophic outcomes from rising rates. The Fed has managed to keep the lid on short rates, and that should allow extend and pretend to continue.