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Is The US Bond Market Collapse Around The Corner?

Discussion in 'The Economy' started by Chris C, 9th May, 2009.

  1. Chris C

    Chris C Well-Known Member

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    So the declining value of the USD and the fear of a US Bond market collapse was suppressed in recent month due to a flight back into USD, in what many called a "flight to safety" however with news of "green shoots" and a recovery being within sight it would appear that many are once again assessing the value of investing in the US over the longer term and it would appear that the world is beginning to once again question if the US is once the safe haven it was...

    Against the AUD the USD is already trading at $0.76, and if the US continues to struggle to sell its long term bonds it should begin preparing itself for hard times ahead as interests rise in already tough economic conditions, along with further depreciation of the USD just as commodity and energy prices begin to claw back from their lows.

    All in all, these are VERY ominous signs that this "recovery" that many are talking about may not be forthcoming from the US and a deeper recession may still be on the cards given higher interest rates and import prices.

    Alternatively, in the event the FED resumes its quantitative easing policy, hyperinflation may become the likely outcome.

    The really scary thing is just how quickly it seem 30 year US treasury prices are unravelling...

    http://au.finance.yahoo.com/q/bc?s=^TYX&t=1y&l=on&z=m&q=l&c=
     
  2. bigbuddha

    bigbuddha Well-Known Member

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    Chris C,

    Indeed, the rise and rise of Treasury Bond yields must be a huge concern, especially for long term mortgage rates and this next round of commercial mortgage resets, could spell a world of hurt.
     
  3. Chris C

    Chris C Well-Known Member

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    Well it looks like the USD is continuing to fall around the world, and unfortunately for the US despite the fact there haven't been anymore bond auctions in the last two weeks, bond prices have continued to fall quite substantially!

    So with $101B worth of short-medium term bonds going up for auction next week on the back of already falling bond prices. In addition to that, the recent focus of ratings agencies potential to downgrade the UK's rating (which has prompted many to reassess the US as well), it makes next week (particularly Wednesday & Thursday) very interesting.
     
  4. Chris C

    Chris C Well-Known Member

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    Sorry for the double post, but I was just curious to see if many others on these forums have been tracking the bond market progression, or are people generally not interested?

    It's just that I'm sort of intrigued why most posters on here don't have much to say on this topic.
     
  5. ashwright

    ashwright Well-Known Member

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    Australia does not have a very developed Bond market. I would be suprised if most people understand Bonds and what they really mean (for debt and interest rates). I know I have trouble making the connections.
     
  6. AsxBroker

    AsxBroker Well-Known Member

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    Hi Chris,

    A few reasons, as Ashwright said people don't understand them, they aren't seen as sexy investments to hold and also with interest rates rising in the future (well within the next 5 years) the capital price will drop (ie, risking capital for small interest gains over cash and term deposits).

    Cheers,

    Dan
     
  7. Chris C

    Chris C Well-Known Member

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    I just thought I'd copy my email to a friend this morning who I wanted to know what I thought of the US bond market events last night:

    Is anyone else following the events with any interest?
     
  8. bigbuddha

    bigbuddha Well-Known Member

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    I'm following the 10 and 30 year US Treasury bond markets, i'm watching to see volumes bought and sold, and who is buying them or not buying them as maybe the case.
     
  9. Chris C

    Chris C Well-Known Member

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    I have been reading that that has actually been a bit of pick up in foreign purchases which I found unusual... what's your take on that?
     
  10. shasta

    shasta Member

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    Hey Guys - Interesting. Where's the best place to monitor these sales?

    If there is a step down in the severity of the Us recession (and the world) then Aussie cash rates will definately fall, but, as you say, longer-term bond prices will rise - what does this mean for mid-long term fixed rates in Aus?

    shasta
     
  11. bigbuddha

    bigbuddha Well-Known Member

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    From what I can tell, places like China, the biggest purchaser of US treasuries, is in somewhat of a "dollar trap".

    They are so heavily invested in US treasuries that they must continue purchasing this potentially disastrous things because they cannot afford their current holdings to fall in value to quickly.

    However, how long this can continue before they just go "screw it" and just let the whole thing go is hard to tell. But their recent moves to trade with brazil by not using US dollars is certainly an under-reported issue i think.
     
  12. Chris C

    Chris C Well-Known Member

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    On the flip side they have definitely been diversifying over the last few years. They seem to have been moving out of the longer term treasuries into short notes and bills. They have also definitely built up their gold reserves and their lust for commodities isn't abating despite the global slowdown. I think they are continuing to position themselves for worldwide inflation.

    Whilst letting the USD fall against their own currency would definitely erode a large amount of their reserve's value, at the same time unpegging their currency and allowing it to appreciate, would undoubtedly destroy a large part of their export advantage in exporting to the west, but would also see the nations to wealth emerge and China becoming the biggest economy in the world might be a lot closer than previously thought.

    I think they have been playing a game of deception with the world for quite some time already, saying they will continue to support the USD whilst secretly positioning themselves for the fall out. I just can't accept that the srewd Chinese didn't have a contingency plan in place in the event of the USD collapsing. That's the beautiful thing about the secrecy of their centralized government, they often reserve their right to not show their hand...

    ...and I have a funny feeling they will come out of this holding all the aces...

    ;)

    I just check up on them on bloomberg when I'm doing my general reading. I also watch the live charts on yahoo finance, and often just type the word "bond" into Google news to get all the latest summaries.

    It really is quite amazing how little coverage the bond market gets in the media given its size and influence. So sometimes getting good insightful info is quite tough.


    Without being an expert on the issue, my understanding is that much of Australia fixed rate mortgages hinge on international money market rates. So my expectations given the current trend is expect fix rates to continue to move up. If things keep going like they are I won't be surprised with we have banks start pushing up their fixed rates in the next couple of weeks.
     
  13. Chris C

    Chris C Well-Known Member

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    Well another week has passed and it looks like the 10 and 30 year US T's yields have continued to spike which should make for a really interesting week with $65B of 3, 10 and 30 year T's going up for auction.

    I'll be very eagerly watching the results on the 10 year auction and its progression through the week. If it manages to creep above the 4% mark I think we can all well and truly put to rest the notion of any US "green shoots" being forthcoming any time soon.

    It also should be very interesting to see what the FED does in response to all this. Already the US mortgage rate is blowing out, it has risen 0.6% in the last few weeks which is going to do nothing to help the falling real estate prices, US banks or economy in general. So the hope that rates would stay low until a genuine recovery was under way have been dashed, leaving a lot of people to wonder whether the FED will ramp up their quantitative easing.

    So does anyone have any predictions or interpretations of how the week in the bond market is going to play out?
     
  14. bigbuddha

    bigbuddha Well-Known Member

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    Yes the bond auctions will be interesting. I believe china is more interested in 3 and 7 year treasuries. This may be enough to push 10 year above 4% as demand dwindles, so more attractive rates will be needed.
     
  15. Chris C

    Chris C Well-Known Member

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    So far, not so good...

    With another $10B of 30 year T's up for sale tonight we could see the long end of the yield curve continue move higher with the 10 years potentially taking out the 4% mark!

    Already the 30 year yields are at their highest level since June last year! So it looks like unless the FED is going to step in and up their purchases of mortgage securities that mortgage rates are set to continue rising, having already risen to 5.55%, nearly a 60bps rise in a month. Couple this with the oil price surge in the last couple of months and you have yourself the makings of cloud that are about to rain all over this US recovery parade.
     
  16. Chris C

    Chris C Well-Known Member

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    The last week has been reasonably good for bond yields, until tonight when the uS just announced they are going to sell another $104B in 3, 5, 7 year US T's next week!

    At the moment 10 Year T's are back over 3.80% and 30 Year T's are back at 4.60%. If they end the week close to their highs you'd think that would make for a very interesting next week...

    Australian bonds haven't been doing that well either of late. You'd have to hope that yields don't move too much higher or we could see mortgage rates (particularly fixed) continue to climb in the coming weeks and months.
     
  17. Tropo

    Tropo Well-Known Member

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    How to Profit From Front-Running the Government Bond Auctions

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  18. Chris C

    Chris C Well-Known Member

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    So then is it a good thing or bad thing that bonds are being sold off well before next weeks auction... according to this article the short selling should only start next week in preparation for the auction, particularly on Tuesday.
     
  19. Tropo

    Tropo Well-Known Member

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    It depends on your view on the bond market I guess.
    My view is neutral.
     
  20. Chris C

    Chris C Well-Known Member

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    Looks like yields are ballooning on Australina bons as well... according to bloomberg they are up to 5.81% from 5.40 odd two or three days ago.

    Opinions? Inflation fears? Or green shoots of recovery?