Bonds & Interest Rates

Victor Adair: 6 Key Market Observations & 2 Conclusions

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Posted by Victor Adair via VictorAdair.com

on Monday, 23 July 2012 00:00

The Age of Deflation is Intensifying:

Last week I wrote about how interest rates on some European government debt was trading at a negative yield...that is...you buy short term German or Swiss bonds and you get your money back...minus a safekeeping charge. This week the number of European countries with government securities trading at negative yields grew to include Germany, Switzerland, Holland, Finland, Denmark and Austria....while the yield on Spanish 10 year government bonds rose to 7.3%...their highest level since the introduction of the Euro.

This week the value of the Euro fell to a 2 year low against the US Dollar, a 12 year low against the Yen, a 21 year low against the CAD and a 23 year low against the AUD.

Credit Quality Spreads Widen:

The market is focused on Spain...where the debt problems only seem to be getting worse...while at the same time citizens of countries that might provide financial help, particularly Germany, seem to be increasingly unwilling to do so....this is making the "Euro debt crisis" an even tougher problem to solve...fear is driving capital from the periphery to the center in an attempt to find relative safety...the yield spreads between problem countries and perceived safe havens continues to widen.

The Crisis Could Get Much Worse - Quickly:

Despite the fact that several European financial crisis have come and gone over the past couple of years it now feels as though the crisis could suddenly take a dramatic turn for the worse...the debt  problems seem to be getting much bigger and the solutions seem to be getting much harder to find. A dramatic turn for the worse would have a contagion effect on global markets...which would inspire central bankers to take dramatic action...have no doubt, when push comes to shove central bankers will fight deflation with stimulus.

A Real Crisis Could Produce a Real Solution:

Perhaps a really dramatic crisis will force the politically unpalatable action necessary for a lasting solution to the European debt crisis...such a solution would certainly include default/bankruptcy in some form...either a debt write-off or a dilution of liabilities through the adoption a new currency.

If The Stock Markets Aren't Much Worried - The Credit Markets Certainly Are: 

Until Friday the major European and North American stock markets had made good gains for the week...they appeared oblivious to the European credit market stresses, and to the growing evidence of a global economic slow down. Perhaps the markets sensed more central bank stimulus was coming soon, although Fed Chairman Bernanke seemed to rule that out during his Congressional presentations...or perhaps the stock markets were benefiting from capital flows seeking safety....however they turned sharply lower Friday as the Spanish debt crisis intensified.

Despite the European stresses and the evidence of a global economic slowdown the DJI has rallied nearly 1,000 pts from its June 4 lows to this week's highs...the British, German and French stock markets have also made good gains while the AUD has rallied over 8 cents, and the CAD is up 3.5 cents. However, if the stock markets aren't worried the credit markets certainly are...witness the negative yields in perceived European safe haven countries and note that the yields on all US Government debt are at or near all time record lows...even while the US Treasury issues new debt at a record pace.

Two Big Risks Ahead For Investors As The Macro-Economic Deflation Intensifies:

1) Asset prices decline, and

2) Taxes on "rich" people will go up. This will make it harder to preserve capital...and it won't much matter which political party is in charge...the "math" of the debt problems supersedes political dogma...way more money has been borrowed than will ever be repaid...and somebody...maybe everybody...is going to get stuck with the "bill." As veteran analyst Richard Russell says of a bear market, "He who loses the least wins." My long term savings remain very conservative and liquid and I've also been very cautious lately with my short term trading accounts.

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Bonds & Interest Rates

U.S. Treasuries a Buy or a Short?

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Posted by Mike Shedlock - Mish's Global Economic Trend Analysis

on Thursday, 19 July 2012 09:51


First, let me state that if you are looking for someone who has called the US treasury market correct this past decade, look no further than Lacy Hunt. 

I had a nice conversation the other day with Lacy Hunt at Hoisington Investments. We agree on many aspects of the global economy and I have a few excerpts of Hoisington's latest forecast below.

While I have been US treasury bullish (on-and-off ) for years (more on than off), and I can also claim to have never advocated shorting them (in contrast to inflationistas running rampant nearly everywhere), Lacy has correctly been a steadfast unwavering treasury bull throughout.

Will Hoisington catch the turn? 

That I cannot answer. However, one look at Japan suggests the actual turn may be a lot further away than people think. 

For a viewpoint remarkably different than you will find anywhere else, please consider a few snips from the Hoisington Quarterly Review and Outlook, for the Second Quarter 2012 (not yet publicly posted but may be at any time).

....read this report and more beginning at  Abysmal Times Confirm the Research HERE


Bonds & Interest Rates

A Crisis Veiled: Here’s what really happened...

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Posted by Bill Bonner - The Daily Reckoning

on Thursday, 19 July 2012 06:30

07/18/12 Madrid, Spain – You can’t help but feel sorry for the bankers. Yesterday, one of them was so upset and humiliated he tended his resignation — at a Senate hearing.

One after another the bankers mount the scaffold. Goldman, JP Morgan, Barclays…and now HSBC. One loses money. Another rigs LIBOR rates.

One fiddles an entire nation’s books. And another helps terrorists, drug dealers and money launderers with their banking needs.

That last charge is the one leveled against HSBC yesterday, causing the bank’s chief of compliance to quit, on the spot. Here’s the accusation:

…using a global network of branches and a US affiliate to create a gateway into the American financial system that led to more than $30bn in suspect transactions linked to drugs, terrorism and business for sanctioned companies in Iran, North Korea and Burma.

This spectacle may be entertaining, but in our view, it is fundamentally meaningless.

Here’s what really happened:

The feds created a funny money, back in the early ’70s. Unlike the gold-backed dollar, this one was almost infinitely flexible. It would allow the financial system to create trillions-worth of new cash and credit, vastly expanding the amount of debt in the system…and greatly increasing the profits of the banking sector.

The financial industry — the dispenser of the need money — set to work, creating fancy new ways to move the new money around. Each time it closed a deal, it made a profit. Naturally, it was encouraged to find all manner of clever ways to make deals.

Then, when the credit bubble blew up in ’08-’09 many of these tricks of the trade didn’t look so clever. They looked sinister. Stupid. Or crooked.

“When the tide goes out,” says Warren Buffett, “you see who’s been swimming naked.”

It is not a pretty sight.

Billions of dollars were lent to people who shouldn’t have been allowed to borrow lunch money. And now, there are losses — trillions worth.

The real question — the only question of great significance since the blow-up — is: who will take the losses? Or, to put it another way: How will the system be cleaned up? Who will decide who wins and who loses?

Mr. Market or Mr. Politician?

Let investors and speculators take the losses…or put them on savers and taxpayers?

Who will lose? The rich? Or the rest?

We’ve given you our answer many times: let Mr. Market sort it out. He’s completely impartial. He’s honest. He’s fast. And he works cheap.

In a flash, back in September-December of ’08, he probably would have wiped up the floor with the bankers. In a real crash, few of the big banks would have remained standing. Investors and lenders who had put their money in them…and who had invested in the things their phony credits supported…would have lost trillions. The rich wouldn’t be so rich anymore. And we’d now be in some phase of real recovery with many new financial institutions.

But we’re not in a position to impose our will on the world. And the politicians are. So, they’ve decided to do it another way. Instead of allowing Mr. Market to do his work they make their own choices…generally trying to direct the losses towards groups of people who don’t make campaign contributions…and don’t know what is going on. That is, towards the masses…and the unborn…

The idea has been to kick the can as far down the road as possible…borrowing and printing trillions more dollars to prop up the financial system…while also parading a few bankers through the streets with nooses around their necks. The press insults them. The mob spits upon them. The public spectacle continues…

…and nothing really changes.


Bill Bonner,
for The Daily Reckoning


Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books,Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily ReckoningDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. 

Special Video Presentation: Urgent Message About Your Net Worth The single, solution-packed book that could... literally... mean the difference between growing wealthy or suffering an ugly, vicious decline in your net worth. Discover how to claim a FREE copy of this book, right here.

Read more: A Crisis Veiled in Public Spectacle http://dailyreckoning.com/a-crisis-veiled-in-public-spectacle/#ixzz214kPGzyg


Bonds & Interest Rates

Ignore the Libor scandal at your own risk

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Posted by MarketWatch via Peter Grandich

on Wednesday, 18 July 2012 00:00

Maybe you’ve seen the headlines mentioning “Libor” or Bob Diamond or the fixing of interest rates. Perhaps you vaguely know that banks were tinkering with the rates for their own advantage.

Big deal, you say. So what?

So, basically investors, including your mutual fund, were hosed. So, the banks essentially stacked the deck so they would be guaranteed to win. So, it was an organized effort that included more than a dozen participants. And who orchestrated it all? The cops who were supposed to regulate them.

You should care because of all the missteps of the financial crisis, this one can’t be explained away by Wall Street’s excuses: “We were just stupid.” “It was the borrowers’ fault.” “We misjudged the risk.” “We didn’t see it coming.”

....read more HERE



Bonds & Interest Rates

Dare Defy the Bond Bubble? Here's the Action to Take

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Posted by Jack & JR Crooks - Black Swan Capital

on Tuesday, 17 July 2012 09:50

chart ws_bond_10yearyield_201271611932-09
Does one dare defy the bond bubble? Many analysts, including us, often explain the move into US Treasuries as a flight to safety when investors are faced with global economic risk. Indeed, there is a long list of serious risks out there. And the US has the deepest and most efficient capital markets. But we read today another perspective – that the surge in bond prices is actually a result of risk taking (not risk aversion.) More specifically, since the onset of QE and the rollercoaster of expectations for more, bond traders buy up bonds ahead of Federal Reserve bond manipulation (i.e. QE.) And then they sell once more QE is actually announced – a “sell the news” sort of thing. Perhaps this makes sense – it’s a slightly different phase during the risk-taking cycles we’ve seen develop since policymakers took direct responsibility for keeping markets stable. 
The Federal Reserve has suggested their unofficial third mandate is to support the wealth effect of a rising stock market. Naturally, QE has very much been positively correlated with share prices. But while buying bonds ahead of QE can be considered a risk-taking trade, it is negatively correlated with QE announcements. But ... Morgan Stanley noted back in early June (link above) that a rally in the markets was correlated both with QE announcements and also with improvement in macroeconomic data. Thus, a sell-off in bonds makes sense if macro data was improving (i.e. risks declining.) We don’t expect a QE announcement anytime soon. But even still, this time around we tend to think simultaneous improvements in macro data will be MIA if the Fed does announce QE3. This is when we’ll find out if the bond bubble is a risk-taking trade or a flight to safety. 
Headlines suggest the market is anxiously awaiting Ben Bernanke’s semiannual testomony this afternoon and then again tomorrow. Not us. It will be business as usual – admission of economic softness, recognition of future growth headwinds, a nod to the employment situation, and the normal reassurances of QE-if-needed. Based on the current state of the US economy and markets, we think it is too early for Ben to unleash QE3. But if Ben has received a few phone calls from his counterparts overseas, then maybe peer pressure will get him to pull some unexpected doves out of his hat. Leading up to this testimony at 10 am Eastern, we think the risk for markets is to the downside. 


“The true evil of inflation is that newly created money benefits politically favored financial interests, especially banks, on the front end. Over time, however, the net result of monetary inflation is always the devaluation of savings and purchasing power. This devaluation discourages saving, which is the key to capital accumulation and investment in a healthy economy.” –Ron Paul 

Of Interest 

Merkel Gives No Ground on Bank Oversight (Businessweek) 

Europe’s banks face tougher demands (FT Adviser) 

coft july16

Morgan Stanley Sees QE3 Rally Lasting Hours Not Week (ZeroHedge, June 6


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