8.4.03    Interesting how I rarely see posts on the topic of the US Bond Market in the forums!

Is the Bond market not an arena that affects us all?

- Have YOU ever seen bond yields increase so dramatically in so short a time span?

-Will the yields continue up, or is the bond scheduled for another strong showing before turning lower?

- The interest rate on the 30-yr-bond has increased @20% in a month and a half; how will that affect your real estate works?

- Is the lowering of California's credit rating to blame?

- What does the exposure of Fannie Mae and Freddie Mac derivatives mean to you?

- Did Fannie Mae actually see Its Business Book (mortgages both retained and guaranteed ) increase by a record 26% annualized in the second quarter fiscal year 03? Did their reported (ahem) business volume (Book) for the month of June ALMOST DOUBLE the month of May, the previous record?

-If so, why are these Stocks (FNM and FRE) both (recently) within 10% of their 52-week lows?

- Did Mr. Alan Greenspan's deflation bluff about 6 weeks ago spook the paper holders? Why would he do this?
Did Mr. Bernanke's comments in the last 6 weeks ameliorate or exacerbate the situation?

- Will Mr. Greenspan and his friends at the federal reserve be forced to buy the 30-year?

- Will the fed be forced to offer life support to others who bet the dark side and lost similar to Long-Term Capital Management fiasco of 1998?

- Why were the Treasury Inflation Protected Series and Series-I made so attractive two years ago? Was a bond market bubble designed by intention?

- Did the 10-year (measure weekly) Treasury Note not hit a decades new low last month, with one of the worst consecutive-day actions in US Bond history?

- Why is The United States Treasury department scheduled to offer almost 100 Billion US Dollars worth of Notes for sale within the week?

- Are these T-note sales designed for foreign or domestic consumption?

- Is not the rate of foreign consumption of US bond paper at an all time high? Is this rate sustainable?

- Are the ?bond cowboys? intentionally driving up the long term rates? If so, why?

- Will real estate prices remain a local phenomenon (location, location, location) if the bond bear emerges?
If the 30-yr yields rise, as the interest rates spike, driving up the mortgage rates, drying up the re-finance market (and drying up the commensurate equity money that had been flowing through the economy), and the resultant staving off potential buyers of increasingly expensive properties (higher interest paid); does this impact you?

- What does recent bond action portend for your currency?

How come a topic of this importance to all of our lives is receiving no comment; is it the proverbial pink elephant in the living room that has keeled over and died and now stinks to high Heaven; everyone sees, hears, and smells - but nobody feels empowered to say, much less do, anything?

Most importantly, what do YOU think about the situation?

8/6/03 3yr T-Note auction: weak action.

Creation of Treasury Notes-

Like all fiat, creation starts with designation; in this case an auction or subscription.

On August 5, 03 the US Treasury held an auction for 3-year Treasury Notes to the tune of $24 USBillion. The bid/ratio was reported at 1.32. The previous T-bill action just 3 short months ago was 1.96. Would have to check, but I believe yesterdays bid/ratio, also known as 'coverage', was the worst since 1973.

Today's auction for 5-yr notes was a much more respectable 2.48 coverage. Obviously, some calls were made last night.

The one to watch is tomorrows 10-yr note auction.

The subscription rate , or coverage, is a demand indicator; in this case the demand is for USDebt, and the demand is weakening.



Auction on 8/7 for the 10 year Treasury Note was subscribed at 2.0, which is almost exactly at the usual and average coverage rate.

(repost to proper thread location)

After the dismal 3yr, auction on 8/5, I found the subsequent two auctions a little too perfect for my taste; i.e. someone made 'the call' Monday evening.

Who buys these notes?

The largest buyers are the central banks. The Bank of Japan has historically been one of the largest purchasers. As of late the reason has been to keep the dollar propped up, against the current reversion to the mean trajectory - which is down.

The Fed, of course, buys up oodles and oodles, as this is how they make money on top of money.

As notes mature, the Fed buys new notes on open market conditions, such as this weeks auction, profiting from the interest bearing notes. Hence, the long term holders are much more concerned with coupon versus yield since the asset price fluctuation is not nearly as important for the long-term holder as the return on the asset.

Last year, the Fed sold over $24Billion in T-Notes.
Who does the fed sell to? Why, the US Treasury of course!

8/13/03: very poor day for US Bonds
starting to look like 1987 rather than 1998 as I earlier postulated, even a more bearish scenario.

everything plays out in its own way with the fullness of time.
metals spook paper as derivatives unwind.


Start of Fall; Fall in bonds?

Bond response to currency woes

Sept. 19 the US Dollar drops significantly, forecasting actions and decisions that would be made by the G8 conference. Early am Sept. 22 the dollar drops significantly again, as the Yen jumps like it has been goosed, with a correlating and significant sell-off of the Nikkei and a spike in the price of gold. The G8 meeting was prefaced by the hollow US threat of trade tariffs or other barriers against China should she not promise to float the Renminbi at some future date.

Would love to have been a fly on the wall at that G8 meeting. Despite official pronouncements about the 'strong dollar policy', the reality is that US politicos desperately need a further substantial drop in the value of the US dollar above and beyond the @22% drop experienced so far in the previous year.

Will the Bank of Japan, and other central banks comply, and not buy US Treasuries? Or will more friction foment? Was the very recent bond rally another fake-out? How can US insistence that its major trading partners NOT buy US Treasuries be supportive of bonds at this juncture? What is the argument for a strong bond market at this point?


Biggest drop in 22 months for the 10-year Treasury Note Index

This means that although at Tuesday’s Federal Open Market Committee meeting the Fed will likely maneuver for a more immediate opportunity for raising the Funds Rate, the reality is that the market does not see an opportunity for raising rates until at least Dec. 04 (post election).
10-yr Yield Note Yield Friday Dec 5th: 4.215; Opened the week at 4.34.
Declining dollar, drop in 10yr yield, and election cycle paints Fed into corner by reducing tool use options. Furthermore, a miraculous productivity increase of 8% eats a fair chunk of excess capacity restraining the Fed from raising rates.


Last week's new issue coverage again below 2. The Bank of Japan bought over another 20Billion Yen worth. Wtih all yields currently under 5%, how long can BOJ keep buying US Treasuries, while the dollar still plummets? Should the BOJ throw in the towel, would European Central Banks step up to the plate to stem a bloated euro value? If not the European CBs, than who? Should a technical bounce in the USD at 80 stem the tide? How do Bonds affect YOUR life? They most assuredly do.


Interest rates that the banks pay are affected by supply and demand, less Keynsian intervention.

Supply and demand for money.
Money supply is measured, in the US, as M1, M2, and M3. (Actions of the M3 has been very interesting as of late; perhaps forecasting fall of yield rates below 5%?).
On the supply side, there has been too much supply of the USDollar (USD). The only entity publicly voicing a demand is the Band of Japan (BOJ). Recent comments by the European Central Bank (ECB) head – see recent stories at Forex for example, suggest that the ECB may start buying USD to support the Euro. That is, the ECB does not want the euro to strengthen anymore, for mostly the same reasons that neither the BOJ nor the US, nor practically anybody else, want their currencies to strengthen. Currently, it is a race to the bottom for fiat devaluation.

Some countries can be characterized as having taken an intriguingly shrewd move by tying their currency to the USD (see Renminbi etc.). So, they do not need to set a central bank fiscal policy (for that matter, why should a government have a fiscal policy?) to buy the USD (via the offereing of US Treasuries).

On the demand side, what little demand there is for short-term and low-interest paying securities (Certificate of Deposits, Money Markets) is offset somewhat by a public reluctant to put more monies into equity markets that have 1) Entered a secular bear [although the US equity markets made 2003 gains of approximately 25%, this amount was entirely offset by depreciation of the USD, for a net negative loss (less CPI and opportunity costs) for the fourth year running] and 2) been shaken by increasing string of mis-management stories in corporations and mutual funds.

Furthermore, on the supply side – short term interest rates in the US are affected by both the Federal Funds rate set every quarter by the Federal Open Market Committee (US Federal Reserve) and the long term bond rates. The long term bond rates are a more accurate indicator of market forces, since the Fed Funds rate has less impact on long rates vs. short rates.

Long term rates and short term rates can move independently. Long term and short term interest rates should be different; after all – you want more interest paid for a longer commitment, right? The flattening of the yield curve is a sign of troubled bond markets, with approaches toward backwardation especially troubling (where short term rates are larger than long term rates).

Bond yields fall when bond price rises. Price rises when buyers believe that future issues will have lower coupon rates, thus making previous issues with higher rates a more attractive offering. Rising prices lower yields. Falling yields suggest that longer term rates will continue to remain steady or even fall as bond buyers grab at shorter term securities, perhaps with the belief that the Fed is not able to raise fund rates – politically - until after the US elections in Nov. nor fiscally – because of a weak US economic picture, despite some glamorous predictions to the contrary and humorous suggestions of current ‘re-inflation’, supposedly evidenced by ‘increasing’ equity and housing prices (values) against the telling performance of the M3. Yes, Fed fund rates can maintain at 45 year lows for a long time, or drag even lower. See the story of Japan

1.20.04 - The US Treasury gives notice that 1979 bonds are called. Yes, pre-1985 US bonds are callable. That is, the UST can recall the notes which means that interest payments stop. In this case the five years from 2004 to 2009 do not receive interest payments on the 30 year 1979 bonds (terms less than 30 years are known as Bills and Notes).

Did your friendly UST representative apprise you of the situation? No? Well I bet the well dressed currency traders got the hint.

Calling bonds allows the Treasury some room, against the current backdrop of a rock and a hard place, to forecast higher interest rates.

1.21.04    Perhaps a fall in FNM and FRE stock value (outstanding typical and natural e-wave and fibonacci ebbs and flows in the technical side of the house) would be simply a product (fundamental house) of their derivative book failure. However, this in itself may simply prove a symptom of systematic and systemic illness amongst the disease which is the inherent instability in and of the derivative markets.

Should we allow the premise that one has two main methods of asset protection – the hedge and the diversified portfolio, then why an initial focus on the hedge? Would not the diversified portfolio precede the hedge? Should the diversified portfolio already exist, should each slice of that pie have an independent hedge, or should the whole pie have an insurance policy first?

That is, does the current desire to hedge derive from an observation of the symptoms; or does the desire emanate from a proper diagnosis of the disease?

IOW, before your place hedge bets against every asset class you currently own, why not hedge the whole basket first? This can be done by hedging against the currency in which the assets are denominated. So, if your RE holdings – amongst the other assets, are held in USdollars, the first hedge should be established against the UDdollar. For example, this could be done by USD short positions, long positions in foreign debt instruments or currencies (such as the first ever foray by Warren Buffet in the previous few months), and of course – the shining shield of precious metals.

After the basket is hedged, then the goodies within the basket are hedged, no?

Hence, FNM and FRE shorts might be placed sooner on a technical basis, than would naturally be developed via a fundamental basis.

Long term, the RE hedge should be considered a play against holding commodities in suspense that a reflation in equities is nigh. The current situation suggests to me the rise in global equity values (all time highs in Argentina for example compared to currency panic just 2 years ago) results from direct fiscal policy intervention vs. a natural and structural money flow. Thoughts?

4/20/04 – Bond Action
The 30 year bond approaches the top trendline that has marked its channel down for the past 4 years. FED’s ‘Easy Al’ Greenspan aims to lose his moniker by noting that the banking community is sound enough to accept the footing of rising interest rates – as his fear of deflation is removed - and the markets react. Of course, just a short while ago he recommended ARMs!

The FED is late again as their recent 5-yr history has shown, and their hand at this recent spate has been pushed by the short terms rates, which are not of their making. Moreover, the massive commodity inflationary pressures are now so large that even the biggest stories to the contrary (“CPI shows no inflation”) pale in side-by-side comparison.

Will the bond cowboys who are arbitraging these rates in the carry trade summon the emotive fear that tore at them so mercilessly in the February, 1994 fracas? Or is the current action of the US dollar still reminiscent of the 1987 scenario?

In the main, how do you recognize a flight to safety versus a flight to liquidity…

September 22, 2004 - Start of Fall = Start of New Fall in Bonds?


1. US govt. review board charges Fannie Mae, the largest U.S. mortgage co. with ‘cookie jar’ accounting to smooth reporting. Stock share price plummets. How many cookies have been pilfered from that jar?

2. Federal Reserve announces purchase of Treasury Inflation-Protected Securities!!!

3. 10-year USTreasuries drop below 4.0 yield, a 5-month low.

If Fed busy TIPS expecting inflation, then why does the UST yield drop?

(hint: How about large drop in value of US dollar yesterday.)

Perhaps the bond market fears that yesterday’s ¼ point raise in the fed-funds rate will be the last for a while. Is the fed rate exactly where it should be, or is the fed painted into a corner vis a vis rate policy?

Or, more likely, another head-fake by the fed; trying to con money movement into TIPS (obviously, based on previous sales, nobody else wants it).

In other words, how in the world did the 30-year get replaced by the 10-yr? Why don’t we just get is over and ASSume the %1.08 intraday rate…
(“Yes sir, that rate is GUARANTEED for the next three hours!”)

2.8.05    Fannie Mae hits 52 week low

The 30 year UST bond yield breaks the trendline into new 2-year lows.
Major Treasury auction of 5 and 10 year notes coming up later this week.
(if problem loading, compare charts of ^TYX and ^TNX)

answer this riddle…
If the FED is raising rates, why are the yields falling?

The Bank of South Korea announces it will begin to divest itself from the US Dollar. The USD and US equity markets tank while commodities (metals, grains, and oils rise).

Have you taken the time and effort to diversify the unit of denomination underlying your basket of asset goodies?

Is the lack of buying new US Treasury issues the same as turning the money already in Treasuries (bills, notes and bonds) back in to the treasury?

What if Korea isn’t the only nation that begins to divest itself of dollars?
What if other countries already have, but you haven’t been privy to the news release yet?
What if individuals other than Soros, Buffet and Gates begin to publicly announce their strategy to foist the greenbuck on somebody else?

What if ‘What ifs’ are just place-marks along a timeline?


4.6.05 Rearranging the deck chairs on FNM Titanic?
Mr. Greenspan in a tizzy begging congress to enact structural reforms at Government Sponsored Enterprises Fannie Mae and Freddie Mac as he sees various positions begin to unravel into a building derivative typhoon.

Times nicely with the planted story (though probably just as true) that FNM has been making up numbers for years.

Of course, the big houses know that congress has no choice but to add more juice to the punchbowl (print more treasury debt), rather than enact anything resembling fiduciary responsibility. (Voila! 50-year mortgages). Thy boys bid up FNM from near 52-week lows after watching the share price plummet 30% and shave over 22Billion off the market cap in the past 6 months.

Meanwhile, at the Bureau of Public Debt, for the first time in US history, the President ridicules the value of treasury bills and the ability of the government to pay off its IOUs.

And yet, after reading the boards here for two years, I have yet to see a mention of the largest real estate scheme in the US: the flipping of properties into trusts at FNM, known as ‘securitization’. Thoughts?

10.24.05 The new Head Fed

Paging ben ‘helicopter money’ bernanke on line one.

Only two gents mentioned in my 2+ year blog on the bonds. The current headfed, and the next one.

Lucky guess?

What will benny baby do for you?
Any ideas?
The bonds won’t like it much.
But, you still have three days to lock in the I-bonds at this level of tastiness…

1.2.06    Why The Federal Reserve Must Stop Reporting M3

From Wiki gold;

"By August 2005, the US M3 money supply had risen to $9'873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8'133.5 Tonnes, or about 261 million Troy Ounces. This means that today, in 2005, there are $37'831 in circulation for every ounce of gold held by the United States."

So, if they stop reporting the M3, does that mean that gold is now only worth what they say its worth.
Or, is it worth a dollar.
or, worth whatever you are willing to do to keep it from them?

1.10.06    The highest level of Treasury Auctions in 10 years, about $100 US Billion, scheduled for the next month.

Prime the pump...

1.22.06    The greenspan Legacy

As he signs off, let us reflect on his management of the fiscal policy that backs the bond, and hence all other, markets:

Home-mortgage debt quadrupled;
Consumer debt quadrupled;
Household debt has quadrupled; and
Government debt quadrupled.

And no longer will they report the money supply (M3).

In a nutshell,
he rides off on his sleigh…
-an inverted yield curve –
throwing fiat to all the children lined along the boulevard,
their helocs cupped in their hand,
…al shouting –‘good luck kiddies’,

and we stand mesmerized by the paper blizzard.

Thanks for the memories al…

4.11.06    The US Government decides to bring back the 30 year bond!

Anybody care to venture a guess why?

Because they need a metric for the 50 year mortgage, and the market isn't quite yet ready for the 50 year bond!

The Fed had spoken on their policy desire to achieve the high end of neutrality, presumably around here at the 5% Fed discount level. However, both the 10 and 30 year bonds don't believe fed is done raising rates (one quarter pause doesn't count). Looking here for an impulsive first I up (higher yields) in the 30 year into 2009. Perhaps consider shorting bonds via futures market or bond funds (TLT ETF) b.c. the higher yields and higher metal and commodity prices do no reflect higher inflationary pressures (as the talking heads are now squawking on about) but instead, the high likelihood that the USD will now penetrate multi-year support and explore new lows for another penultimate search on the way to its actual and intrinsic value - zero.

7.13.06 Bonds get a shot in the arm(s).

Today: as the paper markets panic and folks flee to the existing exits, some fly straight into the bond market. The yield has a tradeable drop even as the 10year TIPS results come out today. Results: bid coverage down the porcelain throne and a drop in almost 30 basis points. Nobody wanted the gruel served today.

So, where exactly are those dealers afraid of the 'wage inflation' the Fed keeps rambling on (dramatizing) about!

Short term (since May), bonds and dollar rose off a double bottom, and have jut recently filled the upside gap.
What portends for the short term future? Does the TIPS action today provide any indication of tomorrow, or just 2016?

Look at that ugly yield curve. Get the automatic external defibrillator out boys...

30-yr tails off, despite their earlier efforts to prop up the newborn as the next contender (har)!
Although, as posted in May, all yields are up with the curious exceptions of both the 1 month and the 30 year. How can they simultaneously be going down? The shadow knows.

(hint, the 30 yr really just turned; re-introduced this year after many years absent, it found external support, but hasn't lasted..

11.23.06 Decline in the USdollar begins new impulsive leg down

The factor that determines gains in all other US markets is the value of the US dollar. Today the USD broke technical support levels. Those less educated than you don't realize that the carnies and barkers spouting on about the new highs in the DOW refuse to note that in dollar terms, the Dow has actually returned less than 5% this year to date when valued in Euro, and is actually still down over 25% from the 2000 peak, again when valued in Euro. The Dow has performed similarly poor when priced in Swiss franc or Japanese Yen. Of course, the dramatic fall in 10-year TBill notes over the last several weeks (commensurate with the inverted yield curve) preceded and predicted this dollar weakness.

When valued in gold and/or silver (actual money), the Dow is down over 6% this year. Why is this? Interest rates, economic production, politics, and all the other canards are cover for the real story: 'Tis all a confidence game. Interest rates had plateaud in the US, and may need to come down to stifle a nasty correction in the real estate market in many US locales (amongst other developing problems). On the other hand, some countries (Australia, Britain) are able to raise their rates. An environment of rising interest rates generally strengthens the underlying currency. However, the full basket of Bank of International Settlement Standard Drawing Rates is going down against both monetary metals, suggesting systemic risk has not abated; yet actually increasing.


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