Magnitude of bond move with Dollar decline. Anyone smarter than me care to explain?..

Discussion in 'Trading' started by gangof4, Dec 17, 2008.

  1. gangof4


    yes, i know the fed said they could buy the long end of the treasury curve. given the amount of money going everywhere else, and the fact that buying Mortgage Backed Securities is what will work towards their housing goals (buying the long bond won't do this and NOBODY could argue that there has been a lack of bids in the 10 and 30!). so... seems like bullshit to me.

    now, given the inflationary backlash that will eventually follow this tsunami of money, coupled with the historically low yield on the 30 year, coupled with the PROPER reaction to The Fed move in both gold and the dollar....

    wtf is going on with the bond?

    do people really think that, given all the other priorities with $ we don't have in the first place, that the fed is going to shoot it's wad buying anything more than a token amount of T bonds (if any at all)? seems awfully implausible and, frankly, equally implausible that the collective is buying into this nonsense and buying bonds hand over fist in response to that sentence in the announcement.

    i realize the other argument would be that the bond market is going, 'oh shit, the fed has panicked, we're heading for a depression'. but, if that's teh case, then the bond traders sure are singing from a different hymn book than the currency traders- cause the euro, for instance, sure as fuck wouldn't be a safe haven in a depression.

    so... that's my analysis and resultant confusion. my inclination is to scale into shorting the fuck out of the 30 year. i've got the same feeling i had with oil at 128. was early then, may be again, but the end result seems equally likely over time.

    those with a better understanding of the interplay between the dollar and the bond- PLEASE enlighten me...
  2. the dollar is weakening up because the fed came out and said it was going to do quantitative easing along with lowering all the way to 0. i think trichet may have said something about the euro seeing no reason to lower interest below 2%. hence the move to euro's. this is just stage two of the reflation trade that started last spring/summer following the first batch of free checks to everyone. the markets are simply slightly forward looking to that 1000$ nobama will send everyone in a few weeks here. it will be the catalyst to our bear market rally just as it was 8 months ago- and the crash come st patricks day will be worse than anything we've seen before. but since the fed said it'd keep rates low for an extended period we may not see the bond market crash for another 12-18 months potentially, and the crash of the bond market will be the true bottom, and then the question is if we'll recover or if we'll have to adapt to a new system entirely.

  3. gangof4


    i don't disagree with your argument. that said, there are countless examples of spreads between the long and short end widening substantially. further, the US govt is so in debt that it's a ticking time bomb- not news to foreign bond holders. add in that the magnitude of FOREIGN stimulus packages (esp. if things get worse and they are expanded) are going to necessitate repatriation of their $/lowered demand for future auctions. China has already telegraphed this reality.

    so, again, given all this, the dollar move is logical, the bond move is twilight zone level stupid.

    to furtehr my oil corollary: though bonds and oil are very different, i see one thing that i was preaching in june that i foresee in bonds: demand destruction. in the auction orgy coming in 2009, with all the points i've made, i cannot see demand meeting supply at these levels of return. hard to imagine anyone planning to buy and hold a 30 year at 2.64% in US dollars!
  4. Yea people have been bitching about rates being too low for ten years. People have been waiting for the dollar to collapse and yields to rise for the last five years.

    Instead the banking system totally collapsed.
  5. To a certain extent, we have all been conditioned to expect and factor in inflation in our mindset. That doesn't mean it has to happen.

    Looking at this move, when we see the long bond yielding 2.63%, its pretty hard not to immediately want to short it. But you can't fight the fed, particularly when it is this determined. There will be a time that rates will rise, but why now? If you could find a Tier 1 30 year bond yielding 5% at par, how quick would you lift that offer?

    I sold out a portion of my 20 year treasuries in my IRA this morning for somewhere around a 25% gain. I'm not sure that I didn't sell too soon.
  6. gangof4


    after 27+ years of investing, it is my experience that when things become that self evident, the market price is already there, or well on its way. seems you've already voted with your feet- nice bird in the hand, btw.

    to the initial premise of starting this thread, my confusion lies in the divergence of the dollar and long bond. THAT much strength in the bond in tandem with THAT much weakness in the dollar seems very odd to me, especially given the circumstances. nothing anyone has written thus far addresses the divergence.

    as i asked in the OP: do any of you really think, given the 'to do' list the Fed has for deploying printing press money, that Ben's really going to dedicate enough $ to teh long bond to make a dent (it's a pretty big and liquid market!)?!?!?

    seems more likely that the world's biggest hedge fund (US Govt) is more likely to ISSUE treasuries and then BUY MBS's (seems i read something about this interplay a month ago). buying 30 year T bonds in this environment seems an awfully poor use of ammunition. hence, i am having a hard time believing that THAT is why the bond is this ballistic...
  7. TKU for the complement.

    1. FED intervening directly in markets has the psychological effect of inciting terror into the hearts of traders (particularly market makers). Many moons ago on the floor when the chief trader would scream out "feds in the market" you got ready for big moves. For all we knew, they would sell a small amount, watch everyone else repeat the trade (other dealers using their 'inside information') crushing the market, and they would be down there somewhere on the bid. The joke was that the best job for a trader was to work for the fed - it wasn't possible to lose money.

    2. Treasury is issuing more treasuries, I believe. Particularly on the short end. At near zero percent interest rates. Makes it easier to pay for things, I presume.

    3. There is no question in my mind (without direct knowledge, mind you, so its all speculation on my part) that there is intervention on the long end of the curve. We have been told there would be intervention on the long end of the curve. See post #1 above. Just because there is buying doesn't mean there can't be selling. Net effect is long rates are lower. Because this is a new strategy, it is very effective. Longer term, it might not be.

    4. If printing presses are run and artifically used to monetize the debt, the currency must suffer. And frankly, I'm not sure that's a terrible thing as we are going into another round of beggar-thy-neighbor. Trick is to ride that wave and look at things relative to the new reference point - which hasn't been established, but does look to be gold (until I decide otherwise - thought it was oil).