Thursday, October 8, 2009

California Bond Issuance = FAIL

When demand for debt is not high enough, then interest rates must rise to attract bidders. That happened today in California for their 20 year bond issue as reported by MarketWatch (ht Joe):

California ups yield in bond sale to draw demand

By Deborah Levine

NEW YORK (MarketWatch) -- California had to raise the yield on Thursday offered to investors to entice enough people to buy its tax-exempt and taxable bonds, an originally intended $4.5 billion sale that analysts had expected to go smoothly. Bond traders said the state offered 20-year tax-exempt debt on Thursday at 5%, up from 4.63% on Tuesday. After two days of orders from retail buyers, the state treasurer's office said it took orders from retail buyers for 33% of the tax-exempt portion and 31% of the taxable debt, less than half the demand seen at the state's short-term note sale last month. On Thursday, the amount of tax-exempt debt remained at $1.3 billion, while the state told investors that $2.9 billion in taxable debt would be sold.
As investors look at the destruction of our own currency by our own government, they realize that 4.63% just isn’t going to cut it over the next 20 years, especially for a state in such dire straits as California. With the Fed artificially holding rates at zero, there is but one way left for interest rates to move.

Of course California is not as privileged as the Fed and Treasury who work in concert with the Primary Dealers to backstop their debt issuance with phony bids and money from nothing. This same situation will catch up the Federal Government, it’s just a matter of time.

Those holding municipal and State bonds had better be paying attention. When rates rise, the PRICE of bonds fall. To obtain PRICE appreciation, one should buy bonds when rates are high and sell when rates are low.

Many of you are probably wondering why stocks would be up strongly on a day with an event like this. Well, think about the flow of capital… higher interest rates drives money from bonds and if the dollar is going to be devalued, then owning equities makes more sense. Be careful, though, as timing is everything and once everyone believes that to be true the exact opposite will happen in the short term and that’s why it usually takes longer for the obvious to play out.

Once a debt saturated society has pulled ALL of their future income into the here and now, they is no more income to support even more debt. Thus investors demand higher interest rates. That equals FAIL in the bond world. EPIC FAIL is the next step, that’s when there are no bidders at any price! Hey, money’s for nothing get your chicks for free!

Dire Straits