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Old Aug 13th, 2010, 06:17 PM   #13
tradingjournals
 
 
Join Date: May 2010
Posts: 4,495
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Quote from The Big D:


I'd say the most reasonable analysis is that buying any 1-5 year T-bond right now is a bet on the parlay of two things:

1) a deflationary recession
2) the US remains credit-worthy

Personally, I don't see how 1) and 2) can both be true.
Yes, they can be true, because in a deflation people save more than they borrow. To resist the fall in GDP, the banking system needs a borrower of last resort, and the US is a borrower of last resort. The US will become more credit-worthy not because of budget/etc but because it is needed by the system.
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Old Aug 13th, 2010, 06:21 PM   #14
gov
 
 
Join Date: Nov 2006
Location: Sunny Cali
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Quote from The Big D:

No it doesn't - you may be able to borrow money for the next 90 days at 1/2% or whatever, but you can't do it guaranteed for 1-5 years. So you're assuming huge interest rate risks by doing so. It's not a no-brainer by any means.

I'd say the most reasonable analysis is that buying any 1-5 year T-bond right now is a bet on the parlay of two things:

1) a deflationary recession
2) the US remains credit-worthy

Personally, I don't see how 1) and 2) can both be true. So eventually I think it makes sense to short the 5-year. But we may not be at the right spot yet.

The counter-argument would be that as more US and world financial institutions take on more interest rate risk in the form of very low yield long bond positions, it becomes effectively impossible for the government to raise rates without destroying those institutions. Thus it may paradoxically be necessary to CREATE a deflationary recession to avoid a banking crisis.
2 points. It isn't the yeild that is being sought; the spread simply gives the trade the freedom to work.
The money does not need to come from the us fed. Given the options currently available, I would not look for a short in the market anytime soon; rather, I think a buyer of dips will work here. I believe your counter argument that raising rates is impossible at this juncture is correct. Welcome to the lost decade. Should be a blast, if played correctly.
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Old Aug 13th, 2010, 06:26 PM   #15
tradingjournals
 
 
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The counter-argument would be that as more US and world financial institutions take on more interest rate risk in the form of very low yield long bond positions, it becomes effectively impossible for the government to raise rates without destroying those institutions. Thus it may paradoxically be necessary to CREATE a deflationary recession to avoid a banking crisis. [/B]
I think your first sentence is correct, but in your second sentence your thinking seems to be mixed up. Read my previous post.
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Old Aug 13th, 2010, 06:31 PM   #16
tradingjournals
 
 
Join Date: May 2010
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Quote from gov:


The money does not need to come from the us fed....
What are you talking about? The money does not comes from the Fed. It comes from the US Government (Treasury), which is ultimately the tax payers. The Fed does not pay interest, it receives interest.
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Old Aug 13th, 2010, 06:33 PM   #17
The Big D
 
 
Join Date: Nov 2009
Posts: 487
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Quote from tradingjournals:

I think your first sentence is correct, but in your second sentence your thinking seems to be mixed up. Read my previous post.
I don't fully grasp your argument. But it's beer:30 and my birthday, so I'll have to ponder it tomorrow.
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Old Aug 13th, 2010, 06:35 PM   #18
gov
 
 
Join Date: Nov 2006
Location: Sunny Cali
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What are you talking about? The money does not comes from the Fed. It comes from the US Government (Treasury), which is ultimately the tax payers. The Fed does not pay interest, it receives interest.
Yeah, thx for catching that. It has been a long week of trading the us plus the asian markets and I am a little tired, so try not to get your panties too bunched. I think you could catch my meaning, couldn't you? Or do you just need to show the world how smart you are. I am surely impressed!
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