Thursday, July 30, 2009

Treasuries in Trouble…

Let’s face it, financing $235 billion in one week is a tall order – too tall it turns out as yesterday we had a 5 year auction that essentially FAILED but was largely ignored by the mainstream… again.

Karl Denninger covered this event well, so I’ll send you over to read up on what happened at his Market Ticker: US 5yr Bond Auction Effectively FAILS . Make sure you read and understand that!

But here’s the real deal… the money to purchase all those Treasuries DOES NOT EXIST. It particularly does not exist if we are simultaneously going to push equities higher. It is my contention that we are on the edge and that there is a game being played by the Fed, the Treasury, and by the Primary Dealers to mask over reality.

As I’ve said, foreigners are not buying, so the money has to come from somewhere and the math is NOT adding up. The latest Bloomberg article on the subject this morning seems to confirm the fact that foreigners are still not buying as reflected in the TIC data, “Interest from an investor class that includes foreign central banks declined at each of the auctions from last month.”

Treasuries Decline Before $28 Billion Seven-Year Note Auction

By Daniel Kruger and Gavin Finch

July 30 (Bloomberg) -- Treasuries fell, pushing the yield on seven-year notes to near the highest level in more than a month, as the U.S. prepares a $28 billion offering of the debt amid concern the deluge of supply will overwhelm demand.

Ten- and 30-year debt fell for the first time in three days before the auction, the last of four this week totaling a record $115 billion. Sales in the past two days drew higher-than- expected yields. The Treasury will announce on Aug. 5 the amount of money it intends to raise at its quarterly refunding. Continuing claims for unemployment benefits fell in the week ended July 18 to the lowest level since April.

“The auctions certainly haven’t helped sentiment any,” said Ira Jersey, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade directly with the Federal Reserve. “We’re going to get the refunding announcement next week, and I think some people are a little nervous about that at these levels.”
The yield on the seven-year note rose four basis points, or 0.04 percentage point, to 3.34 percent at 8:45 a.m. in New York, according to BGCantor Market Data. The 3.25 percent security due in June 2016 fell 1/4, or $2.50 per $1,000 face amount, to 99 14/32.

The 10-year note yield rose four basis points to 3.70 percent. The 30-year bond yield increased five basis points to 4.55 percent.

The MSCI World Index of shares gained 0.7 percent. Standard & Poor’s 500 Index futures advanced 0.7 percent.

‘Knocked Violently’

The number of Americans filing claims for unemployment rose 25,000 last week, higher than forecast, to 584,000. The level of continuing claims decreased by 54,000 to 6.197 million in the week ended July 18.

The Treasury sold $39 billion of five-year securities yesterday, $42 billion of two-year debt on July 28 and $6 billion of 20-year Treasury Inflation Protected Securities on July 27.

Interest from an investor class that includes foreign central banks declined at each of the auctions from last month. Indirect bidders bought 36.7 percent of the five-year notes sold yesterday, down from 62.8 percent at the June sale, which was the highest since December 2004. The same class of investors purchased 33 percent of the two-year notes offered this week, compared with 68.7 percent in the previous auction in June.

“For the second successive session, the Treasury market was knocked violently out of its stride by a weak auction, with low indirect bids,”
said John Wraith, head of sterling-rate product development at RBC Capital Markets in London.

The seven-year securities scheduled for sale today yielded 3.38 percent in pre-auction trading, compared with 3.33 percent at the previous sale of the maturity on June 25.

Quarterly Refunding

The Treasury’s Aug. 5 announcement will detail the amount it plans to raise at its quarterly refunding through the sale of debt maturing in 3-, 10- and 30 years. Sales of those maturities have become monthly, raising $65 billion in July, as the U.S. tries to fund a record budget deficit. The next sales will be held on three consecutive days beginning Aug. 11.

The U.S. raised $1.02 trillion this year selling Treasuries, government data show. The budget deficit is projected to reach $1.85 trillion in 2009, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Goldman Sachs Group Inc., a primary dealer, predicts the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010 after it cut its estimate for Treasury auctions by 28 percent on the nation’s economic prospects.

Treasuries pared losses as the Federal Reserve prepared to buy notes maturing from May 2012 to November 2013 today.

‘Extremely Attractive’

Longer-maturity debt gained yesterday as the Fed purchased $2.999 billion of Treasuries maturing between February 2021 and February 2026 as part of its plan to cap borrowing costs. The central bank bought $222.719 billion in Treasuries since its purchases began March 25.

Treasury two-year notes may rise because policy makers are likely to leave interest rates unchanged for a prolonged period, according to Daiwa Securities SMBC Co., a unit of Japan’s second-largest brokerage.

“Two-year yields are extremely attractive as we cannot expect a rate hike,” said Yasutoshi Nagai, Tokyo-based chief economist at Daiwa Securities. “The yield is too high.”

Two-year note yields are 94 basis points above the upper range of the Fed interest rate, the widest spread in more than a month, according to data compiled by Bloomberg. That spread may narrow to 65 basis points, Nagai said.

BlackRock Favors TIPS

BlackRock Inc., the biggest publicly traded U.S. money manager, favors U.S. TIPS with maturities of 10 years or more and U.K. index-linked gilts due between 5 and 10 years, said Brian Weinstein, a fund manager based in New York.

Federal-funds futures contracts on the Chicago Board of Trade show a 57 percent chance policy makers will leave borrowing costs unchanged by year-end. The odds were 50 percent a month earlier.

Investors should favor debt and stocks of “strong” companies because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, said Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.

“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote in his August investment outlook on Pimco’s Web site.

U.S. corporate bonds rated A to AAA by S&P returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co., as the economy improved and investors sought higher yields than those offered by government debt. Merrill’s U.S. Treasury Master Index posted a 4.9 percent loss.

LOL, I love watching the games Bill Gross plays. He’s a seller, no, he’s a buyer. You should own bonds… no, bonds are destined to go down. Clown. Here’s a tip – whatever Bill Gross says, just do the opposite, that’s what he’s doing.

And I love that quote from Nagai… “The yield is too high.” Ha, ha, too high! That’s a good one. Listen, those who read my bond article back in January and taken action would have done quite well (Bond Market Hide & Seek – A Domed House & 3 Peaks...).

Interest rates hit ZERO.



While they can technically go slightly lower than zero, we are at the end of an era. Sure, interest rates can stay low for quite some time, but NOT when you can’t pay your debts. And trust me, we cannot possibly pay $235 billion per week forever. We are bankrupt, and interest rates are going to rise at some point, that’s why TLT is down over 24% from its peak. Rates are being held artificially low, and that simply cannot be sustained.

What I don’t like is that the numbers are not adding up and there is no transparency as to where the money is coming from. This is no joke, this is a very, very serious issue, one with criminal and traitorous implications. The Fed, the Treasury, and the Primary Dealers need to be audited, and it needs to happen NOW.

The pumpers and pundits see such massive debt auctions go off "successfully" and without bothering to add up the math mistakenly conclude that all will be well with the world and that equities will rise on the back of such money pumping. Sure they will, just like a drunk or a drug addict will get really high just before they hit the floor.

The Animals - The House of the Rising Sun (1964):


Now the only thing a gambler needs
Is a suitcase and trunk
And the only time he's satisfied
Is when he's on a drunk

Oh mother tell your children
Not to do what I have done
Spend your lives in sin and misery
In the House of the Rising Sun