Here's the argument: T-Bill yields are lowest in 50 years. Yields have gone into parabolic sell-off. Prices can't go much higher. FED has debased by an enormous sum (~8 Trillion Dollars). Once Banks recover and lend, inflation returns. Bernacke's promise of "sanitized debt" and restricted credit - once inflation hits - means way higher interest rates. Can't go much lower than 1%!! If the FED proves itself useless, once again, we go into 70's-era inflation - some 20%+ - and bonds undergo a wicked sell-off. If the 2nd scenario plays out, the ultimate remedy is jacked rates - and Volker just got appointed! Timing couldn't be better. Some interesting asides: US Budget Deficit is largest ever - 1 to 2 TRILLION Dollars for 2009. http://www.bloomberg.com/apps/news?pid=20601109&sid=anUDEEEP1_M0&refer=home The Federal Reserve is the largest US Debt Holder/Buyer - owns some 52% of all US Debt! (inflationary). China and Japan - two largest US Debt buyers (own some 10% of US Debt) - are undergoing recession. (weaker T-Bill Demand) Further, global Dollar appreciation and falling US consumption has made forced Chinese buying of US Debt, less necessary. Balance sheets of Oil Exporters are collapsing. And most foreign public and private debt buyers are undergoing recession and $$$ loss. The implication of a Global Recession and unprecedented US Deficit - less foreign cash to buy more US T-Bills, that ultimately get monetized by the FED = long term inflationary, that only gets arrested by higher interest rates once banks clear. Further: US Banks selling T-Bills and going short is the canary in the coal mine. FED intends to buy US T-Bills from Banks. Could be ploy to take worthless bonds off Banks under the guise of "saving the whales". Notable successful investors short US Debt - Jimmy Rogers, Peter Schiff, Marc Faber, Hugh Hendry? Moral of the Story: Once Banks lend again and deflation slows - assuming we don't flounder around like Japan did for 10+ years (and we won't) - inflation returns, and Bernacke then fucks the Common Man with jacked rates to contain (after the Banks are saved). When that happens, Bonds sell-off, big-time. This is a long-term play. Deflation could last well into 2010. Probably end with 12 to 24 months, then inflation, then bond sell-off. My 3 cents
I agree with most of your post. One point of contention is regarding Hugh Hendry - he has made a lot of money buying government bonds in 2008. He could very well continue to be right in the coming months ... until he isn't. Eventually buyers will start to reduce their purchases of US government debt .... and this will end the multi-decade bull market in US Govt debt.
I wasn't sure if Hugh was now short bonds, which is why I put a question mark after his name. Seems he's astute enough to figure it out.
Because the FED doesn't have any real wealth to exchange for Bonds. They just print the money = more money chasing static goods = inflation. Treasury auctions borrow actual money from Governments and Funds who forfeit their spending power (money) to us, for the right to have it back at a later date + interest. When we borrow money, net money supply does not change. For ex, the US gains 200 Billion, but the Chinese are short 200 Billion = a wash. That means inflation remains small or nonresistant because money supply remains static. When the FED creates money by purchasing T-Bills, the money supply is increased = debased = eventual inflation. High inflation destroys real wealth and results in major GDP contraction. If the FED bought all Treasury debt, inflation would go apeshit, dollar would crash, real incomes trashed, GDP trashed = Depression.
Good analysis achilles28! I agree with you %100. I am going to wait until summer or fall of next year before I start piling up on ZB shorts. That sucker is way overbought.
Ok thanks but the 50% of US debt the Fed owns today seems like this high number already in comparison to the Asian Credit nations. Any idea on the upside left in percentage points for the Fed to take on new debt before the scenario as you describe could play out? Thanks.
Hendry remains wildly bullish on gov't debt. Best way to play rebound in yields is a 10 year put swaption struck at a yield 300 points higher than today's yield. This product can be bought for pennies on the dollar and will explode in price should yields bounce a couple of hundred points in the next 2-5 years. Sadly, its only available to institutional buyers or very high net worth individuals.
This is a no brainer long term trade. Short term it may not be profitable but long term one should do great imo. If you wanna play it you can get long TBT(2xinverse 20yr+ long bond) & PST(2xInverse 7-10 bond).
I thought bonds were a bubble about to implode well over a year ago. Boy was I wrong. Perceived (!) irrationality can persist longer than we can imagine. Who says 30y can't goto 2.5%, 2%, 1.5%? Don't mistake "No brainer trades" for "risk free money".