Bonds 01 (May 08 - Aug 10)

[winston]

Your Portfolio Is Loaded with Junk By Jeff Clark

That's right... JUNK.

And it's not just your portfolio. Your neighbors' portfolios are loaded with junk, too. So are your parents', and your kids', and your grandkids'. Heck, if you've got 'em, even your great great grandkids own a big old pile-o-junk.

No. You didn't put it there. You spend a great deal of time researching your investments. You know how to separate the good ideas from the bad, and there is no way you would ever, EVER, buy a bunch of garbage.

But the U.S. government would. And it's used your tax money to do it.

Actually, that's not quite right. The government spent your tax money a long time ago. It's now using your great great grandkids' future tax money to buy the junk.

I'm referring, of course, to the Treasury's purchase of Mortgage Backed Securities (MBS) – those same securities that threatened to topple the nation's financial system a few short months ago.

The government has been buying up huge amounts of MBS for several months now. And if the recent Federal Open Market Committee statement is to be believed, it'll continue to buy this junk through March of next year – an additional $150 billion worth.

As a result of this quasi-permanent bid beneath the market, Fannie Mae MBS – that is, debt issued by a technically bankrupt company – now trades with roughly the same yield as U.S. Treasury securities of similar maturities.

In other words, you can buy a 10-year Treasury note – backed by the full faith and credit of the United States Treasury – for a 3.5% yield. Or you can buy a 10-year Fannie Mae MBS – backed by a pool of mortgages on homes that may be worth only a fraction of their original value – for a 3.5% yield.

Whether you know it or not, you're buying the Fannie Mae notes – or rather, the government is buying them for you. This is utter insanity. Surely, the Fannie Mae notes are not of the same high credit quality of U.S. Treasury obligations. So they certainly ought not be priced for the same yield.

Then again, maybe that's the wrong way to look at it. Maybe the U.S. Treasury notes have declined to the same low-quality rating of Fannie Mae MBS.

Ah, yes. Now it's beginning to make sense.

For quite some time now, I've been toying with the idea of short selling U.S. government bonds. I haven't pulled the trigger on the trade because of the Fed's commitment to keep interest rates as low as possible for as long as possible. Now, though, with the Treasury paying premium prices to buy up pieces of junk, the day of reckoning is drawing near.

The easiest way to short Treasury bonds is by buying the ProShares UltraShort 20+ year Treasury ETF (TBT). This fund trades inverse to the Treasury bond market. So when Treasury prices rally, TBT falls. When Treasury prices fall, TBT rises.

It's still a bit too early to put this trade on. But we're getting close.

I'll let you know when the time is right.

http://www.growthstockwire.com/

[winston]

U.S. Treasuries’ Biggest Overseas Buyer May Sell: Chart of Day By David Wilson

Dec. 4 (Bloomberg) -- Speculation that the Japanese government plans to sell $100 billion of U.S. Treasury debt to pay for domestic spending may impede the Obama administration’s borrowing plans.

Japan has been this year’s biggest buyer of Treasuries, which means it has done more to help finance the widening U.S. budget deficit than any other country. Its holdings have risen by $125.5 billion, according to data compiled by the Treasury. The comparable figure for China, which surpassed Japan last year as the largest international investor in the securities, is $71.5 billion -- 43 percent lower.

Japan will inform the U.S. about the possible $100 billion sale, according to a Market News International report yesterday that cited “rumors” from unnamed sources.

“There’s absolutely no such proposal right now,” Chief Cabinet Secretary Hirofumi Hirano told reporters today in Tokyo. “That kind of talk often surfaces at this season.”

The Treasury is selling $74 billion of notes and bonds next week, along with $61 billion in three- and six-month bills, to help finance the deficit. Karthik Ramanathan, the department’s director of debt management, said a month ago that bond-market participants ought to expect $1.5 trillion to $2 trillion of sales in the fiscal year ending Sept. 30, 2010.

http://www.bloomberg.com/apps/news?pid= ... KGmT4oRCOs

[winston]

Could a Spike in Bond Yields Cause the Economy to Stumble in the New Year?
By Larry D. Spears, Money Morning

In normal times, at their most basic level, bond prices follow some very simple laws of financial physics: When interest rates rise, bond prices fall and bond yields rise; when rates fall, bond prices rise, and bond yields drop.

However, bonds could break those laws of financial physics in the New Year - and in a big way. That could inflict some real financial pain on the U.S. recovery, the dollar, the shuddering housing market - and could even ignite a major stock-market reversal.

"We're seeing a steady rise in the cost of capital because of the excess of supply over demand and increasing concern about risk," Hutchinson said. There's also "the intensifying worry about inflation. Because of the inflation fears, I would expect the Fed to start shifting the yield curve higher by the second half of 2010 - but the process will be a slow one because the CPI (Consumer Price Index) is only drifting up slowly at present."

http://moneymorning.com/2009/12/11/bond-yield-spike/

[winston]

End of the Bond Secular Bull Market? By Barry Ritholtz - February 8th, 2010, 11:30AM

Last week, we discussed the issue of where there was a greater chance of a bubble: Stocks or Bonds?

This week, we look at a possible end to the Secular Bull Market in bonds:

http://www.ritholtz.com/blog/2010/02/en ... ll-market/

[winston]

CHART OF THE DAY: BONDS LOOK LIKE A GOOD BET

According to data compiled by Bloomberg, bonds haven’t declined in consecutive years since the 1950’s. On the back of last year’s 11% decline and the continuing low inflation environment bonds just might have history on their side:

“Last year’s return, based on the note’s price change and interest payments, was negative 11 percent. This was the worst performance ever recorded by the St. Louis Fed, whose data goes back to 1928.

The previous mark was set in 1999, when the 10-year security posted a negative 8.3 percent return. In the following year, the note returned 17 percent. Similarly, the total return swung from negative 8 percent in 1994 to 23 percent in 1995.”

http://pragcap.com/chart-of-the-day-bon ... a-good-bet

[winston]

US Bonds.

Bonds sold off despite the economic uncertainty coming out of Europe and the turmoil with bank regulation in China. On Friday, the 10 year bond closed down (3.69% versus 3.72% Thursday) as bonds rallied back given some of the uncertainty over in Europe. There was some of that factored in, but bonds were selling off overall. That is typically an indication that investors do not see much trouble down the road.

The US sold many treasury notes, as it has been doing, but they were not well-received auctions. They were not complete busts, as with some Greek auctions, but the US had to offer significantly higher interest rates than anticipated to lure buyers into the market.

We raised the money we wanted to raise, but it will cost us more. That adds to the debt burden that every man, woman, and child in the US bears right now (roughly $125K by conservative GAO estimates). We are bringing in the money, but it is costing more, so our debt service goes up as well.

We are engaged in a vicious cycle, and the bond market is showing the wear and tear since fewer people want our paper. We are not nearly as bad as some of the other countries. Some are already above 100% with respect to their debt-to-GDP ratio. We are not near that, so I suppose we are a bastion of economic sanity over here. Although, when you look at the rest of the western economies, that seems to be the case.

Source: MarketFN.com

[winston]

US Bonds.

The 10 year bond yield actually fell as bonds rallied even as the Fed took the first step in the tightening show.

Typically bonds would sell as investors figure the Fed is going to raise rates and take the value out of their bonds.

Wasn't the case Friday, similar to stocks, as bond investors figured it was still quite a ways off.

Source: MarketFN.com

[millionairemind]

Concerns grow over China's sale of US bonds
Evidence is mounting that Chinese sales of US Treasury bonds over recent months are intended as a warning shot to Washington over escalating political disputes rather than being part of a routine portfolio shift as thought at first.

By Ambrose Evans-Pritchard, International Business Editor
Published: 5:42PM GMT 23 Feb 2010

A front-page story in the state’s China Information News said the record $34bn sale of US bonds in December was a "commendable" move. The article was republished by the National Bureau of Statistics, giving it a stronger imprimatur.

It follows a piece last week in China Daily, the Politburo’s voice, citing an official from the Chinese Academy of Sciences praising the move to "slash" holdings of US debt. This was published on the same day that US President Barack Obama received the Dalai Lama at the White House, defying protests from Beijing.
http://www.telegraph.co.uk/finance/curr ... bonds.html

[winston]

US Bonds

Bonds were rallying to end the week. The 10 year closed up (3.62% versus 3.64% Thursday). It was over 3.7% earlier in the week. It was a dramatic drop in bond yields as bond rallied. Why are bonds rallying? Ben Bernanke has said The Fed is going to have to raise rates and that is always the first step. They start talking about it before they can do it.

Moreover, they made their first test run of a rate hike, raising the discount rate by 25BP two weeks ago. That tells everyone that The Fed is starting to take the necessary steps to move us back into a tightening mode. He is telling bondholders to get out of bonds over the next several months, yet they were not doing that last week. Worries about the economies and Europe are still pushing investors into US bonds. It is still a safety move despite our debt.

Bond investors, despite the Bernanke warnings, are not that sanguine about the economic future for the US. Much of that has to do with what is going on in the EU. Even though credit default swaps on US corporate debt are coming down faster than they are on European debt, there is still concern that the US is potentially facing a double dip, similar to what Europe is heading toward right now.

We do not have the pull out of the recession we wanted. GDP was up at 5.9%, but this is not that strong of a recovery. It is not the recovery of Q3 in 2003 when the economy surged 7.4% and there was a massive explosion of new businesses in the United States. There are not that many new businesses being created when you look at the state rolls and filings with respect to LLCs, sole proprietorships and limited partnerships.

They are not expanding the way they were in 2003 not even close. Small business continues to struggle, and it is not getting any relief despite the President's claims that he is a fierce advocate of small business. He is not. His policies are not benefiting small businesses, and it will get worse with healthcare and other issues that the Obama administration will continue to push (cap and trade, etc).

There are problems out there and the bond market is acknowledging that. It is not ready to sign off on the 5.9% GDP gain as the indication that the recession is over.

Source: MarketFN.com

[winston]

US Bonds

Bonds have been trading strangely, but they were trading on Friday as one would anticipate if we assume the economy will recover. If the economy recovers and the Fed raises rates, then you would anticipate bond yields to rise and bond prices to fall. That is exactly what happened.

The 10 year bond closed with a yield of 3.60% on Thursday. On Friday, bonds sold off sharply as stocks rallied, closing the 10 year at 3.68%. That is a significant one-day rise that shows there was finally some selling in bonds.

Bond investors bit the bullet and fell in line with the fact that the Fed must raise rates if the economy will continue the recovery. It may be a slow recovery in process, but it is a recovery nonetheless. Bonds are in jeopardy of peaking out.

After rallying back the past two weeks, they have come up to a resistance point and are in a position where they could turn over and fall back down looking at the TIPS where the next support is at the 103 level.

Source: MarketFN.com