It didn’t take much for the contract to stumble to this foul smelling level. The last 50bp came thanks to Bernanke. At one PM the minutes of his speech came out. Essentially Ben commits himself to continuing QE. We take another step down in bond land. Maybe an important one.
The day chart:
Knee jerk reactions and hourly market trends don’t mean much in the scheme of things. What consequence Ben had today will be lost in the noise a few days from now. That said, it's interesting to watch the market’s reaction. When Ben said, “We’re going to continue with the QE” bonds traded cheaper.
Ben’s not going to quit. QE2 will run its full course. Long bond yields are going up as a result. It must kill Ben to see how the market now trades him and his policies. Ben is an academic, no market experience to speak of. Maybe he his clueless how the boys in the futures pits are pricing him these days. If so, he should ask his partner in QE crime, Brian Sack. He runs the NY Fed desk and does understand market sentiment. Brian would tell Ben the markets are fading him. And making money in the process.
I lived through this once before when William Miller was running the Fed. The markets beat this poor guy to death. He couldn’t say a word with out stocks, bonds or the dollar falling out of bed. I was one of many who would just short things ahead of any of his scheduled comments. Ducks in a barrel.
Miller came in March of 1978. He was out by August the following year. The markets crushed him. They did him in.
Posts
I'm aware it must be a very stupid question, but just WHY are bonds being dumped when Ben effectively says he's going to buy 'em all (=QE2)? Why isn't he being frontrun all over the place, driving bond prices higher? Obviously I'm missing something - perhaps you could explain what it is?
ReplyDeletebecause you are being paid back in dollars that are perceived will have less purchasing power so you need a higher return to compensate.
ReplyDeletePerhaps you're correct, since bonds are indeed being dumped.
ReplyDeleteBut it still doesn't make sense to me. When you sell your bonds, you're 100% in cash. That's even worse than getting payed more for your bonds by Ben! Consequently, you simply must invest the cash in another bond with higher return. But as long as QE continues to be in force, any other bond will be paid back in inflated dollars, i.e. it must be dumped as well. In short, if you are correct, one could't keep ANY bond whatsoever. In that case QE would have triggered a complete and utter bond sell-off. But since it didn't, I'd guess there must be something more to it than your explanation.
Default risk is a component of the higher yields.
ReplyDeleteThere is no default risk. Bonds bought at X with dollars valued at Y will be paid back in full at Y x .6.
ReplyDelete@Walter:
ReplyDeleteI suppose the answer could be that BB was front-run by the bond rally leading up to the QE II announcement, and that the buyers have been selling the bonds (notes, really) to him ever since--there are no real money buyers of Treasuries out there, only players.
Another point is that while the Fed has been buying $600 billion, the Treasury has been issuing close to that amount--so the net there is no change in the amount of paper. And after (this) QE is over, the flood of notes will continue. Who will buy then?
Walter W.
ReplyDeleteThe Fed is buying $600b in QE2. This will end on June 30. For the full year 2011 Treasury is expected to issue new debt totaling $1.5Trillion. So even with the Fed buys there is still $900b of new paper around. So supply is still growing at a very rapid pace. This keeps longer term rates rising.
The long end of the bond market is not about QE. It is about inflationary expectations and an assessment of how ell the US is going to deal with its problems over time. Right now the only solution to Americas problem is to print money on a biblical scale. Who in their right minds would want to own bonds from a country who was dead set on debasing the currency?
No me.....
@Bruce
ReplyDelete> So even with the Fed [QE2-]buys there is still $900b of new
> paper around. So supply is still growing at a very rapid pace.
Ok, so ultimately bond prices are going down because of more
supply than demand. That does indeed make sense. But that
would mean that without QE2 (since QE2 is demand, no matter
how artificial) bond prices would have gone down even more,
i.e. bond prices aren't falling because of QE2 but IN SPITE of it.
> The long end of the bond market is not about QE.
Why isn't it? Ben is buying all along the curve, isn't he? In fact,
what could or would keep him from ONLY buying the 30yr if
he considered it neccessary to keep long rates low? I'd say that
from his point of view (not mine, mind you) bond prices going
down isn't due to QE but due to not-even-close-to-enough QE.
(Which is of course why we will see QE3-QEx.)
> Who in their right minds would want to own bonds from a
> country who was dead set on debasing the currency?
Nodody of course - except for Ben. He and his QE already com-
pletely dominate the bond market. And with everybod else busy
dumping their bond holdings, he is right on track to become the
whole market all by himself. But as long as his presence as Being
The Market will keep up the official price of the bonds -never
mind that hardly anybody will be holding them anymore at that
point- why would he care? Wouldn't the whole financial circus
just keep functioning with everybody out of govt bonds? (Into
corporate ones perhaps, lowering their yields.) The point is:
the rest of the world simply isn't big enough both in terms of
GDP and of market size to be able to afford trashing&ignoring
the usd in disgust, like it would do with any other currency if
printed to oblivion.
Assumung that is Ben's game plan, I still don't understand why
in that case bond holders are dumping their bonds. Ben WILL
ultimately buy ALL their holdings at a better price than what
they are now dumping them for. And since at the current pace
that will happen within a few years at most, the majority of all
not-yet-bought-up bonds will never make it to maturity (un-
less once owned by the Fed). In that case why would their
holders worry about being paid back in debased dollars? (Eh, +significantly more+ debased than already priced in, that is.)
However, since bonds ARE being dumped, their current holders
apparently do not believe Ben's above plan is viable. My question:
why not? What's their endgame scenario which they consider more
likely than Ben's?