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The Wheels Have Come Off Barack’s Bond Bus

Posted by Larry Doyle on May 27, 2009 5:56 PM |

Despite what market analysts, media mavens, and government officials may assert, from an investment standpoint, the price action in the bond market can only be defined as “THEY’VE LOST CONTROL!!”

Who’s they? Bernanke, Geithner, Summers, Obama, and team. How so? The weight of the massive deficit spending along with the embedded costs of the Fed’s quantitative easing program are pressuring the bond market and driving interest rates dramatically higher. (10yr U.S. Treasury moved higher by almost 20 basis points today to 3.75%, a full 55 basis points higher over the last week. This is an ENORMOUS move.)

The knock on effect is increased anxiety in the equity markets (down 2% today) and a highly likely further slowing in the economy. I am not surprised. Given the programs and approach put forth by Obama, along with the economic turmoil, there was little doubt we would experience very high levels of deficit spending. Prior to the inauguration (January 4th to be precise), I surmised:

I also believe that despite the Fed and Treasury purchasing government and mortgage debt, these rates will end up much higher at the end of this year than they are now simply due to the growing deficit. A move higher in these rates will potentially cause further anguish within the equity markets.

I have tried to proactively highlight why I thought the government bond bubble was bursting (Is The Government Bond Bubble Getting Ready To Burst?) and just yesterday broached the negative impact on interest rates of all the mortgage refinancing activity (Mortgage Refi Activity Is Driving Rates Higher).

For those involved in trading or investing, successful calls are measured by direction, magnitude, and time. This call on rates has been a fairly patient development, but given the dramatic shift higher in rates over the last week, the implications of this move can now be embraced. Those implications include a revaluation of the equity markets (lower) and the economy (forestalled recovery). Beware of people who discount this move in interest rates. The fact is it has more to run. In my opinion, the move higher in rates is not only a reflection of the supply of bonds (both government and mortgage) but also an indication of further deterioration in our currency precipitating inflation.

Can the Federal Reserve do anything to defend the currency? Increase short term interest rates. Does anybody think our economy can afford an increase in short term rates at this juncture? NO WAY! There truly is very little the Fed or Treasury can do at this juncture. Thus, in my opinion, they’ve truly lost control as “the wheels have come off the bus.” Welcome to the Brave New World of the Uncle Sam economy 2009.


  • Larry –

    Do we need to start moving our cash immediately into other currencies and/or Gold & Silver? Am I panicking too much in thinking that? Is that too drastic or risky a move right now? I know these are very difficult questions to answer. What is your best estimate on how far we are (timeline) from mass inflation? Your analysis and blog is just fantastic Larry – keep up the good work.


    • Matt,

      The first and most important component in trading and investing is not to get overly emotional (panic).

      No, I do not think you need to “immediately” move your assets into other currencies or gold/silver. I do think that people would be wise to gradually increase the percentage of your holdings/portfolio to well managed funds that have exposures in those areas.

      In regards to inflation. In my opinion, we will experience an inching higher in prices. We will then begin to expect higher prices. The “expectation” of inflation is one of the biggest factors in overall inflation.

      Thanks for the plug!!

  • Renter

    If mass inflation is expected, is it time get rid of cash and buy assets?

    • Renter,

      Welcome to Sense on Cents. Please see my comment to Matt (above) about inflation “creeping” into our economy to the point where we begin to expect it.

      How does one combat inflation? TIPS (Treasury Inflation Protected Securities), hard assets (metals, oils, commodities), real estate.

      Do not panic and think this will happen immediately but it is a VERY REAL concern and as such the biggest adjustment can be merely being aware of it so you can plan accordingly.

  • Oldperson

    Does that mean I will be eating tins of affordable, high protein, low ash, cat food? I’ve got my life savings wrapped up in dollars.

    • Oldperson,

      Welcome!! On one hand, if your expenses are in dollars and assets are in dollars you do not have what is known as “basis” risk.

      I hope my comments to the readers above address your concerns. If not, please let me know.

  • Sushee


    Have you ever read David Goldman’s blog on Asia Times called Inner Workings? If you haven’t, I’m just passing this on to you.

    Also, I just finished listening to your conversation with Mike Offet(sp?). He said something that I’m still unclear about. He said something to the effect that if we have assets with a brokerage and a margin account, we don’t own the assets — we just have an IOU. I assumed he meant that if we borrow to purchase securities, we don’t own them. That I understand. However, did he mean something else? If I bought securities without borrowing, are my securities
    “safe”, or are brokerages lending them out like repos or doing other things with them that put them at risk?

    • Sushee,

      I hope you like the site and find it helpful/informative.

      Mr Offit was referring to the necessity for people to have their securities held in separate accounts rather than held in the bank or brokerage name. If people with Madoff were aware of this issue they would have avoided that nightmare. Madoff held all the assets at his firm.

      You want to make sure there is a separate “custodial” account holding your assets so you are not a creditor of the bank or broker, meaning if they go down, then you go down with them.

      Great question!!

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