Bond Market Defies Fed

[cpwill]

maybe we're not printing enough?


Bucking the Federal Reserve's efforts to push interest rates lower, investors are selling off U.S. government debt, driving rates in many cases to their highest levels in more than three months.

The Fed's $600 billion program to buy Treasury bonds began late last week and is kicking into high gear this week, with the central bank buying up tens of billions of dollars of debt.

That should have driven prices up on those bonds and lowered their interest rates, or yields, which move opposite to the price. Instead, yields on almost every Treasury have been rising.

The trend is a potential problem for the economy and the Fed. Rates had fallen sharply for months in anticipation of a Fed buying program, and in a short time much of that effect has been lost, spelling an unwelcome rise in borrowing costs throughout the economy.

That could throw a wrench in what the Fed is trying to accomplish: to use low rates to encourage more borrowing and risk-taking by consumers, businesses and investors, thereby reviving growth...

Many observers still believe that the power of the Fed's printing press will prove overwhelming and economic growth disappointing. Both forces would eventually drive rates lower. Still, the recent move in rates has been jarring, raising some market worries that the Fed's program might be ineffective or backfiring...

 

[Lord Tammerlain]

maybe we're not printing enough?


Bucking the Federal Reserve's efforts to push interest rates lower, investors are selling off U.S. government debt, driving rates in many cases to their highest levels in more than three months.

The Fed's $600 billion program to buy Treasury bonds began late last week and is kicking into high gear this week, with the central bank buying up tens of billions of dollars of debt.

That should have driven prices up on those bonds and lowered their interest rates, or yields, which move opposite to the price. Instead, yields on almost every Treasury have been rising.

The trend is a potential problem for the economy and the Fed. Rates had fallen sharply for months in anticipation of a Fed buying program, and in a short time much of that effect has been lost, spelling an unwelcome rise in borrowing costs throughout the economy.

That could throw a wrench in what the Fed is trying to accomplish: to use low rates to encourage more borrowing and risk-taking by consumers, businesses and investors, thereby reviving growth...

Many observers still believe that the power of the Fed's printing press will prove overwhelming and economic growth disappointing. Both forces would eventually drive rates lower. Still, the recent move in rates has been jarring, raising some market worries that the Fed's program might be ineffective or backfiring...

Realistically you arent

Given the amount of debt in the US (around 35 trillion private and public, excluding unfunded future liabilities), and how much debt destruction is taking place $600 billion is a drop in the bucket.

Many were stating a few weeks before the announced QE 2 that it was going to have to around $1.2-1.5 trillion to have any real effect on market perceptions

 

[washunut]

Realistically you arent

Given the amount of debt in the US (around 35 trillion private and public, excluding unfunded future liabilities), and how much debt destruction is taking place $600 billion is a drop in the bucket.

Many were stating a few weeks before the announced QE 2 that it was going to have to around $1.2-1.5 trillion to have any real effect on market perceptions

Real effect on what? There is already plenty of liquidity in the system. The one asset the Fed is trying to inflate is housing. Printing more money probably will not do the trick. The cruel thing of what the Fed is doing is that it is inflating assets that the poorest American have to consume, food and gas for their cars to get to work. Clothing prices will be next due to the hike in cotton costs.

 

[Ahlevah]

The cruel thing of what the Fed is doing is that it is inflating assets that the poorest American have to consume, food and gas for their cars to get to work. Clothing prices will be next due to the hike in cotton costs.

Americans will adjust their spending habits, and producers will see margins contract. They simply won't be able to pass increased raw materials' prices through to consumers to the degree they desire. Outgo for households cannot exceed income indefinitely.

 

[PeteEU]

Speculators imo. Bond markets have been acting strangely for 2 years.. going for short term profit rather than long term stability. That can only be speculators betting on a negative.

 

[oldreliable67]

The trend is a potential problem for the economy and the Fed.

It's too soon, IMO, to call the move higher in rates a 'trend.' Note Boston Fed president Eric Rosengren's comments in this mornings WSJ:

Mr. Rosengren counters that long-term interest rates rose a bit a few months after the Fed announced its last round of bond purchases in March 2009, then settled down. That program, he said, helped to hold mortgage rates down in the longer-run and helped to stabilize the housing market. “The program’s success is not based on temporary fluctuations,” he said. “Over time you would expect rates to continue to be lower as long as you’re holding a large stock of that asset.” He added that financial markets had been anticipating the Fed’s program since August, so recent movements in bond yields shouldn’t be seen as the market’s verdict on the program. Bond yields fell substantially when Fed Chairman Ben Bernanke started speaking more openly about the program in August.

What one should expect from the bond market, especially the longer end, is increased volatility due to the uncertainty surrounding the questions of whether QE2 will be successful. To wit, as of a few minutes ago, about 7:20 am eastern time, the ten year was up about 28/32nds (yield down almost 10 bps) and the long bond was up over 2 full points (yield down over 13 bps) from yesterday's close. I haven't looked in the last couple of days, but the last time I did so, options on the ten year and bonds were trading at higher vols, as well.

 

[washunut]

Speculators imo. Bond markets have been acting strangely for 2 years.. going for short term profit rather than long term stability. That can only be speculators betting on a negative.

Not sure why or what basis you make this statement. Bonds are bought from a variety of people and governments. Countries take our debt as they sell us stuff, retirees buy bonds to be safe, not speculate, pension funds the same.

Maybe what you are saying is true whereever you come from.

 

[washunut]

Americans will adjust their spending habits, and producers will see margins contract. They simply won't be able to pass increased raw materials' prices through to consumers to the degree they desire. Outgo for households cannot exceed income indefinitely.

You are wrong that none of the cost increases will find their way to the consumer. Food and gas prices are already higher. The poor will make choices because they to. But the choices will not always be to change brand name. People are much to cavilier about the pain of the poor.

 

[Missed AB]

Speculators imo. Bond markets have been acting strangely for 2 years.. going for short term profit rather than long term stability. That can only be speculators betting on a negative.

Generally speaking you are correct. I would not agree that the bond market has been acting strangely, as there are plenty of reasons for the market to have done what it has done. For example the inverted yield curve a couple years ago signaled this current recession. Near 0% while the market was in free fall was a flight to safety...

The banks who bought the bonds for the purpose of the auction just dumped them back in the laps of the Fed for a quick profit.

 

[Ahlevah]

You are wrong that none of the cost increases will find their way to the consumer. Food and gas prices are already higher. The poor will make choices because they to. But the choices will not always be to change brand name. People are much to cavilier about the pain of the poor.

I didn't say "none." I said they wouldn't be able to pass the costs on "to the degree they desire." It's not just the poor who are hurting. It's the American consumer in general. He's tapped out. His real median income has been stagnant for thirty years. He hasn't saved money in more than two decades. He relied on the equity in his home as a piggy bank to fuel his consumption. Now he finds 23% of him and rising owes more on his home than it's worth. There is simply too much shadow inventory in the housing market, and we have millions of homes still in various stages of foreclosure. Who can/wants to buy an asset that's still deflating? A million Bernankes wouldn't be able to bail him out. No, sir, the consumer's tank is dry, done, kaputt. This is not complex math, my friend. Outgo can not exceed income indefinitely. He can't spend more than he earns any longer, even if he wants to (which he doesn't).

 

[PeteEU]

Not sure why or what basis you make this statement. Bonds are bought from a variety of people and governments. Countries take our debt as they sell us stuff, retirees buy bonds to be safe, not speculate, pension funds the same.

Maybe what you are saying is true whereever you come from.

It is more than often not the bonds themselves that are the problems, but the insurance and other financial instruments that are connected with them. When a person can make "bets" on a negative, which you can in the financial markets these days, and make a huge profit in doing so, then there is a huge incentive for making that negative happen in any way possible.

My problem with the system is that as it stands now, making sure that certain countries fail is more profitable than helping them out of the crisis. We are talking about the lives of 10s of millions of people here... it should simply not be possible to make a profit from misery like that. And that is where the present bond markets come into the picture.. they are driven more by rumour and speculators words, than actual fact. Ireland for example, does not need any funding before mid next year, and yet its rates are through the roof and that has spread to Portugal and even Spain and Italy some what. There is no doubt that the economy in Ireland is in the toilet, and they are in trouble, but what is happening now is like killing off the wounded because it is more profitable to do so than save them. And when that is done, the same people will move on to the next target, which looks to be Portugal. These are the same people that drove oil prices up to 150 dollars btw.. and even created in many ways the financial crisis we are all in today including the subprime crash in the US.

 

[washunut]

I didn't say "none." I said they wouldn't be able to pass the costs on "to the degree they desire." It's not just the poor who are hurting. It's the American consumer in general. He's tapped out. His real median income has been stagnant for thirty years. He hasn't saved money in more than two decades. He relied on the equity in his home as a piggy bank to fuel his consumption. Now he finds 23% of him and rising owes more on his home than it's worth. There is simply too much shadow inventory in the housing market, and we have millions of homes still in various stages of foreclosure. Who can/wants to buy an asset that's still deflating? A million Bernankes wouldn't be able to bail him out. No, sir, the consumer's tank is dry, done, kaputt. This is not complex math, my friend. Outgo can not exceed income indefinitely. He can't spend more than he earns any longer, even if he wants to (which he doesn't).

I agree with the above. I am of the view that the U.S. has lived beyond it's means for at least 20 years. So it will take time for the economy to rebalance. The Fed's attempts to spped up the process will not be helpful.

 

[washunut]

It is more than often not the bonds themselves that are the problems, but the insurance and other financial instruments that are connected with them. When a person can make "bets" on a negative, which you can in the financial markets these days, and make a huge profit in doing so, then there is a huge incentive for making that negative happen in any way possible.

My problem with the system is that as it stands now, making sure that certain countries fail is more profitable than helping them out of the crisis. We are talking about the lives of 10s of millions of people here... it should simply not be possible to make a profit from misery like that. And that is where the present bond markets come into the picture.. they are driven more by rumour and speculators words, than actual fact. Ireland for example, does not need any funding before mid next year, and yet its rates are through the roof and that has spread to Portugal and even Spain and Italy some what. There is no doubt that the economy in Ireland is in the toilet, and they are in trouble, but what is happening now is like killing off the wounded because it is more profitable to do so than save them. And when that is done, the same people will move on to the next target, which looks to be Portugal. These are the same people that drove oil prices up to 150 dollars btw.. and even created in many ways the financial crisis we are all in today including the subprime crash in the US.

I probably do not follow the problems of Ireland as closely as you do. That being said, a key reason that the interest rate is so high on Irish bonds is the concern that holders will not receive their full investment back. So the bonds sell at a discount to get to a level people are willing to risk capital and bet if you will on Irish bonds.

Remember that the bet could go either way. If the bonds get paid off in full, then people will complain that the "speculators" made money on the problems of Ireland. If they lose money because they get less than expected, no one will feel sorry for them, rightfully.

That is how capital markets work. Because of the risk with Ireland I am not willing to buy their bonds even though I can make more money than if I buy bonds of U.S. corporations.

 

[oldreliable67]

Ireland for example, does not need any funding before mid next year, and yet its rates are through the roof

Which is what one should expect: the markets (all markets, not just debt markets) are always forward looking, anticipating and evaluating all information available and continually formulating and revising expectations. Economists refer to this as the 'price discovery' function of markets.

It's funny how outraged some folks get (not referring to you, just in general) when money is made because something, anything, goes down in price. Short selling! How immoral! Making money when something goes up in price seems so much more socially acceptable, But, of course, markets go up and markets go down: that's the nature of markets. Being able to earn a profit from a decline in price is a necessary component of markets: without it, markets would not be able to fulfill their economic function of price discovery.

 

[Ahlevah]

Short selling! How immoral! Making money when something goes up in price seems so much more socially acceptable, But, of course, markets go up and markets go down: that's the nature of markets. Being able to earn a profit from a decline in price is a necessary component of markets: without it, markets would not be able to fulfill their economic function of price discovery.

I think some of what went on during the financial crisis bordered on evil. Look at what happened to Lehman Brothers. You had people who knew the bank was highly leveraged with illiquid derivatives, so they bought CDS contracts on Lehman bonds they didn't own, shorted the stock, and then hit the Street with rumors that the bank was going belly up. It might have gone under anyway, but these people didn't help it.

 

[PeteEU]

Which is what one should expect: the markets (all markets, not just debt markets) are always forward looking, anticipating and evaluating all information available and continually formulating and revising expectations. Economists refer to this as the 'price discovery' function of markets.

And that is broken at the moment.

It's funny how outraged some folks get (not referring to you, just in general) when money is made because something, anything, goes down in price. Short selling! How immoral! Making money when something goes up in price seems so much more socially acceptable, But, of course, markets go up and markets go down: that's the nature of markets. Being able to earn a profit from a decline in price is a necessary component of markets: without it, markets would not be able to fulfill their economic function of price discovery.

There is a difference in making money because you short a stock or commodity, but had no influence what so ever in getting it right. The problem is those people who use financial instruments to bet on a negative outcome and then do their damnest to make sure that negative outcome actually occurs. This is what speculators are doing in key markets... they are making the negative happen via the means they have, because the profit will be so much bigger.

 

[oldreliable67]

I think some of what went on during the financial crisis bordered on evil. Look at what happened to Lehman Brothers. You had people who knew the bank was highly leveraged with illiquid derivatives, so they bought CDS contracts on Lehman bonds they didn't own, shorted the stock, and then hit the Street with rumors that the bank was going belly up. It might have gone under anyway, but these people didn't help it.

"Evil?" Not by a long shot, IMO. That is, as long as the 'rumors' didn't contain insider information and remained legal. Opinions are shared everyday between market participants; drawing a distinction between 'rumor' and 'opinion' and 'assertion' is sometimes pretty difficult. There are a couple of major banks that I think are in dire straits; if I communicate my opinions and reasons for them, on these banks to you or someone else, is that a 'rumor?'

People buy puts/CDS/other financial instruments and contracts on entities that they don't own continually. It's a huge part of the market. Right now, I own puts on a those banks I mentioned above. I don't own the stock, and why should I? I also own calls on a couple of commodities (silver and copper). I don't own them, either. Why should I?

The periodic hue and cry about short-sellers has justification in only two instances: one, when the short-seller is not required to put up margin, that is, when he engages in what is referred to as 'naked short selling.' This is illegal but the regs are currently without teeth. Although this is currently being addressed, as of this moment, short-sellers who take the risk of naked short-selling seem reasonably sure to get away with it for a short while.

The second instance is when buyers or sellers (doesn't matter which) do indeed engage in disemmination of untruthful information held out to be insider information in order to influence prices in aid of their postions.

Now, from personal experience as an everyday market participant, I can tell you that in the case of Lehman, there were many, many short sellers for quite a long time (years, in fact) before Lehman finally went. As Lehmans' financial situation became evident to all who bothered to look at their numbers and listen to their rotating management stiffs. Lehman developed the smell of death a long, long time before the actual event. Lehman's excessive leverage (largely the huge amounts of short-term repo required to finance their business on a daily basis) and their lack of back-up lines of credit for that repo exposure, were the chief culprits in their inability to fund their business, and that information was right there in their financial statements and regulatory filings for all to see. All the crying about short-sellers victimizing them was mostly sour grapes. Thus far, I'm not aware of anyone, short-sellers or not, being charged with any illegal activities with respect to Lehman's demise.

 

[oldreliable67]

There is a difference in making money because you short a stock or commodity, but had no influence what so ever in getting it right. The problem is those people who use financial instruments to bet on a negative outcome and then do their damnest to make sure that negative outcome actually occurs. This is what speculators are doing in key markets... they are making the negative happen via the means they have, because the profit will be so much bigger.

As long as 'their damnest' remains legal, I see absolutely nothing wrong with it. Certainly, every time Warren Buffet lets it be known that he is an owner of a stock, many, many investors emulate him and jump in as well. Now, of course, Buffet is an owner, never a short-seller (except for his well-advertised ownership of long-term puts on the S&P 500), and he rarely if ever actively touts a stock that he owns, so he is admittedly probably not the best example. But the point is that longs are just as prone to do their damndest to promote their positions, but somehow thats ok? As long as the activities of both longs and shorts remain within legal bounds, then let them have at it.

 

[Ahlevah]

"Evil?" Not by a long shot, IMO.

If I bought an insurance policy on your antebellum home that had survived numerous wars, panics, and depressions, then sold your home to someone else even though I didn't own it, helped burn it down, bought the sticks from you, handed the title to the sticks to my buyer, and then collected on the insurance policy, some people would, at the least, have an ethical problem with that. I'm not saying that Lehman's demise wasn't, at its core, a product of its own making, but some of the circumstances surrounding the failure of the bank stink. I don't think some people gave it a second thought that they helped put a venerable investment bank and tens of thousands of people out of work by knowingly spreading false rumors in an attempt to make money. If that isn't evil, it's close.

Defiant Dick Fuld blames false rumours and the Fed for collapse of Lehma | Business | The Guardian

Lehman: Och-Ziff Helped Spread Rumors

Goldman Sachs (GS) Is Confronted By Lehman (LEH) And Bear Stearns About False Rumors

 

[justabubba]

If I bought an insurance policy on your antebellum home that had survived numerous wars, panics, and depressions, then sold your home to someone else even though I didn't own it, helped burn it down, bought the sticks from you, handed the title to the sticks to my buyer, and then collected on the insurance policy, some people would, at the least, have an ethical problem with that. I'm not saying that Lehman's demise wasn't, at its core, a product of its own making, but some of the circumstances surrounding the failure of the bank stink. I don't think some people gave it a second thought that they helped put a venerable investment bank and tens of thousands of people out of work by knowingly spreading false rumors in an attempt to make money. If that isn't evil, it's close.

Defiant Dick Fuld blames false rumours and the Fed for collapse of Lehma | Business | The Guardian

your comparison is broken
shame on any insurer who would sell a policy covering property in which the policy holder had no interest/control
the insurer would not pay the claim because such a disinterested party would be found unable to comply with the standard covenants of a homeowners insurance policy
you cannot sell what you do not own. if you identified someone to buy it, they would suffer the loss as you owned no home to transfer
your act of arson would place you in legal jeopardy
the homeowner would not sell you the sticks you had brought as his homeowners policy would have paid against his policy

what was presented is that the parties engaged in nothing illegal. almost everything you presented in that "comparative" scenario would be found illegal

 

[Ahlevah]

your comparison is broken

It wasn't meant to be a straightforward comparison. It was a limited analogy designed to illustrate a point.

 

[justabubba]

It wasm't meant to be a straightforward comparison. It was a limited analogy designed to illustrate a point.

ok. then i must confess that i missed it

 

[Ahlevah]

ok. then i must confess that i missed it

To make matters worse, many of the "insurance policies" the crooks collected on were guaranteed by housewives and truck drivers from Moline, otherwise known as the U.S. taxpayer.

 

[cpwill]

Realistically you arent

Given the amount of debt in the US (around 35 trillion private and public, excluding unfunded future liabilities), and how much debt destruction is taking place $600 billion is a drop in the bucket.

.... you are in favor of monetizing the debt...

... i will admit, i don't know how really to respond to this.

 

[cpwill]

I didn't say "none." I said they wouldn't be able to pass the costs on "to the degree they desire." It's not just the poor who are hurting. It's the American consumer in general. He's tapped out. His real median income has been stagnant for thirty years. He hasn't saved money in more than two decades. He relied on the equity in his home as a piggy bank to fuel his consumption. Now he finds 23% of him and rising owes more on his home than it's worth. There is simply too much shadow inventory in the housing market, and we have millions of homes still in various stages of foreclosure. Who can/wants to buy an asset that's still deflating? A million Bernankes wouldn't be able to bail him out. No, sir, the consumer's tank is dry, done, kaputt. This is not complex math, my friend. Outgo can not exceed income indefinitely. He can't spend more than he earns any longer, even if he wants to (which he doesn't).

wait.... are you saying that savings come before consumption???


but i thought all we had to do was boost aggregate demand and the animal spirits would give us indefinite wealth?