Bonds 01 (May 08 - Aug 10)

[millionairemind]

‘Time to Sell’ Treasuries, Biggest Korean Fund Says (Update1)
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By Wes Goodman

Jan. 19 (Bloomberg) -- A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said.

U.S. government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok, who oversees $160 billion as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14 percent last year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as investors sought the relative safety of debt.

“It’s time to sell U.S. Treasuries,” said Kim, who took over as head of investments at the start of the year. “The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.”

U.S. government securities headed for their first monthly loss since October after President-elect Barack Obama, who takes office tomorrow, said he will do “whatever it takes” to battle what he called the biggest economic crisis since the Great Depression. Obama is planning an $850 billion stimulus plan, on top of $700 billion approved by President George W. Bush.

Ten-year Treasury yields, used as benchmarks for corporate and government borrowing costs, will rise to 3.08 percent by year-end from 2.32 percent now, a Bloomberg survey of banks and securities companies shows. An investor who bought today would lose 3.3 percent including reinvested interest if the forecast proves accurate, according to data compiled by Bloomberg.

Two-year rates will climb to 1.43 percent from 0.73 percent, according to the survey, which gives heavier weightings to the most recent forecasts.

Higher Rates

The Fed will increase its target rate for overnight loans between banks to 0.75 percent by March 31, 2010, the poll shows. The U.S. central bank last month cut the target to a range of zero percent to 0.25 percent.

U.S. yields indicate traders are becoming more concerned about inflation.

The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, widened to 53 basis points from minus 8 basis points two months ago.

The spread has averaged 1.19 percentage points during the past six months.

Cutting Holdings

Investors in South Korea cut their holdings of U.S. debt to $28.6 billion in November, less than half of what they owned in 2006, based on Treasury Department data.

China, the largest foreign owner of Treasuries, increased its stake to a record $681.9 billion in November.

It may take a few months for the U.S. economy to start growing and Treasuries to fall, Kim said. Government debt has handed investors a 0.4 percent loss so far in January, according to the Merrill index.

The economy will shrink in the first half of 2009 and expand in the second, a Bloomberg survey of banks and securities companies shows.

“At the end of this year, Treasury prices will depreciate,” he said. “We are considering” selling.

[winston]

Those Oblivious Fools... How to Make Money Off 'em By Dr. Steve Sjuggerud

Greetings from Southern California... Ground zero of denial.

Here in California, home prices have dropped more than in any other state. They're down 27% in the past year... and as much as 44% in the "hottest" bubble markets like San Francisco. Unemployment here has jumped from 5.9% in late 2007 to 9.3% (as of December).

But as I drove up the coast this past weekend, I passed Bentley and Ferrari dealerships from Newport to Laguna Beach. It seemed every other car was a Mercedes... driven by teenagers and twentysomethings.

Friday night, I was in the Gaslamp district of San Diego. The streets were packed with kids... fashionably dressed kids, everywhere, partying away, blowing their money (or their parents' money).

The Gaslamp Strip steakhouse doesn't take reservations. But I walked up with a few colleagues at 7 p.m., and the wait was nearly three hours. Doesn't sound like times are bad in San Diego.

California's government has been as deep in denial as these kids. It's increased its budget by 40% over the last five years. A big chunk of its money comes from property taxes... Apparently, it expected house prices would actually make it to the moon. California has behaved so foolishly, it has the lowest credit rating of any state.

It's a terrible situation, but today, we have the chance to make some money off it...

You see, finally, Governor Arnold Schwarzenegger is facing the problem.

Schwarzenegger says the state is over budget by more than $40 billion and has to make cuts now. He suggests things like cutting the school year short by a week and cutting two Fridays out of the work month (essentially reducing pay for state workers by about 10%). And California might not send out tax refunds or welfare checks next month to conserve cash.

But that's not enough for investors in California government bonds (municipal bonds). They've panicked and run away.

For example, the PIMCO California Intermediate-Term Municipal Bond Fund had hovered around $10 a share for most of its decade in existence. Then last month, it dove down to a low of $8.21 a share.

But PIMCO's bond managers have done their homework. One study they often cite (from Moody's) shows that, going back to 1970, the cumulative default rate on municipal bonds was 0.04%.

PIMCO looked back even further... and found compelling evidence in favor of municipal bonds. Apparently, only Mississippi really defaulted – and that was long before the Civil War. According to the Wall Street Journal: "PIMCO says that from 1929 to 1937, the annual default rate across all municipal bonds, including those issued by cities and towns, was 1.8%. Bad, but not cataclysmic."

The Wall Street Journal concluded: "If the federal government stepped in to save GM and Fannie Mae, what are the odds it would allow California to file for bankruptcy? They seem pretty slim..." While Californians seem in denial about their current situation, Governor Schwarzenegger gets it. And California won't be allowed to file for bankruptcy.

Today, for the first time in decades... even a century... municipal bonds in general are a bit of a gamble. Because the state was in denial for so long, California bonds are the biggest gamble of the bunch.

But the PIMCO fund I mentioned currently pays 4.5% interest – tax free. You'd have to earn close to 7% interest in a taxable account to match the interest you can earn in California state bonds now. Plus, you could make a nice capital gain as investor panic subsides and the PIMCO fund heads back toward $10 per share.

[winston]

On CNBC now:-

Ray expects interest rates to go up in the next 3 months.

[kennynah]

wow...let's see if that will happen...

imo, logically, i see this as being a very remote chance of happening

[winston]

Who's buying all these bonds and why ??

=====================================

The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.

The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.

The Treasury said it would sell $67bn (£46bn) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities.

The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year.

– Financial Times

[millionairemind]

Bond market calls Fed's bluff as global economy falls apart
Global bond markets are calling the bluff of the US Federal Reserve.
By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009

The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.

This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.

The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.

Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.

Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.

Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.

The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.

As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno.

The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.

This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.

The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.

Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.

Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.

The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.

Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.

Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.

[-dol-]

This pretty sums up the notion that all of the world is in this giant Ponzi scheme together. We swim and sink together. Nobody can be "decoupled" from this mess.

This Luo Ping is a funny guy (read his comments below) ... although it is no joke.

It is a ticking time bomb...

P.s.

Note what he says about US financial institutions. Thanks to some "innocent money" as Buffett calls them, others can learn from their painful and ultimately disastrous mistakes. Those are not paper losses (just because one chooses not to realise them with their fantasy accounting)... they are real losses... the market is right.

==========================================================================================

China to stick with US bonds
Financial Times ^ | 2/11/2009 | Henny Sender


China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday.

China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.

However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt.

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances.

“Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn]......we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books.”

[winston]

Fidelity buys Argentine bonds yielding 25%

Fidelity Investments, the world's largest mutual-fund company, believes Argentine bonds will outperform as default concerns ease. Fidelity increased its holdings of Argentina's benchmark 8.23% bonds due in 2033 in the second half of last year.

[winston]

IS THE BOND MARKET TRYING TO TELL US SOMETHING?

In absolute numbers it's easy to shrug off, but the trend appears to have gained new momentum over the past week or so.

We're talking here of the spread between the nominal 10-year Treasury Note and its inflation-indexed counterpart, a.k.a., the 10-year TIPS. The yield difference between these two securities is one of the more widely watched market-based forecasts of inflation. It's not infallible, but neither is it irrelevant. It does, however, offer a real-time measure of the crowd's outlook for inflation and as our chart below suggests, the market seems to be growing increasingly anxious.

http://www.capitalspectator.com/archive ... mar_1.html

[LenaHuat]

IMHO, the severe steepening of the yield curve is the result of :-
(a) foreign sovereign investors, like the Chinese govt, abandoning the long end for the short end. No1 really wants to hold long-term bonds with this barrel of doubts abt the US economy
(b) inflationary pressures are round the corner, very likely by next year
(c) large institutional investors are making strategic decisions to re-balance their asset allocation. More funds are being moved away from bonds.
(d) since it is not inverted, depression is not going to occur.

Aiyah, in short, I'm still optimistic abt equities (caveat : natural or man-made frustrations).