Treasuries cracking now: "financial Krakatoa"

[charliebrown]

Re: Treasuries cracking now: "financial Krakatoa"

Time to reopen this thread.
What the heck is going on in the t market. I thought pomo was going to hold down rates.
30yr 4.38 - 2yr 1.04 = 3.34. Close to this spread a few years ago.

[ThePythonicCow]

Re: Treasuries cracking now: "financial Krakatoa"

Time to reopen this thread.
What the heck is going on in the t market. I thought pomo was going to hold down rates.
30yr 4.38 - 2yr 1.04 = 3.34. Close to this spread a few years ago.

The 30 yr yield got below 3.6% in late August 2010. Except for the slam down below 2.6% in late 2008/early 2009, the 30 yr had not been that low in decades at least.

I'd guess that 3.6% of late August will be the low for a long, long time to come.

Now we enter the phase of increased volatility, as a big portion of the world's liquid capital reserves slosh back and forth between Treasuries and commodities.

POMO may be trying to hold down the shorter end still, but my impression was it was more about continuing to convert junk paper into Treasury paper, to the considerable benefit of a few large holders of junk paper. I'd bet that JPMorgan and Goldman Sachs no longer maintain a large net position in interest rate swaps that is long the long bond (that would continue to prefer low Treasury bond yields.)

(Beware: my track record in predicting this stuff is limited and lousy.)

[Chomsky]

Re: Treasuries cracking now: "financial Krakatoa"

Time to reopen this thread.
What the heck is going on in the t market. I thought pomo was going to hold down rates.
30yr 4.38 - 2yr 1.04 = 3.34. Close to this spread a few years ago.

Karl Denninger has been all over this. When QE1 started, treasury yields went up then, too.

[Chomsky]

Re: Treasuries cracking now: "financial Krakatoa"

Karl Denninger has been all over this. When QE1 started, treasury yields went up then, too.

Speaking of which, here is a post from today:


http://market-ticker.org/akcs-www?post=172303

[metalman]

Re: Treasuries cracking now: "financial Krakatoa"

Speaking of which, here is a post from today:


http://market-ticker.org/akcs-www?post=172303

karl's lost his 'deflation is here & anyone who says otherwise is tin foil hat stupid dope get off my site... grrrrr...' conviction?

[Chomsky]

Re: Treasuries cracking now: "financial Krakatoa"

karl's lost his 'deflation is here & anyone who says otherwise is tin foil hat stupid dope get off my site... grrrrr...' conviction?

Hey MM,

I agree for the most part, but KD isn't stupid, just blustery, and he is a useful bulldog on some topics. (And he is no bullhorn, thankfully.) He's been on a roll of late, and worthy of attention IMO.

[ThePythonicCow]

Re: Treasuries cracking now: "financial Krakatoa"

I thought pomo was going to hold down rates.

Perhaps not.

The following quote, taken from Antal Fekete at Deflation or Runaway Inflation, may be what Bernanke is keen to avoid.

Perhaps "The Ben Bernank" really is a student of the Great Depression, and knows that he must kill the Treasury bond market bubble to avoid the deflationary collapse that would result from ever more valuable Treasuries sucking up whatever money he might try to inject into the economy. Certainly this is consistent with what (I understand) EJ has been telling us all along, that while there remains a small risk that Fed can't avoid hyper-inflation, there is essentially zero risk that they will get caught in a great deflation.

The debt incubus

Milton Friedman insists that the 1930 Great Depression in America was caused by the 'collapse of the stock of money'. He says that it could have been prevented by a more adept monetary policy: the Federal Reserve banks should have put more money into circulation through open market purchases of government bonds. Our position is diametrically opposed to that of the monetarists. The long-wave inflation/deflation cycle is not a monetary phenomenon. It is an interest-rate phenomenon. The Great Depression was an instance of debt-explosion, caused by the vanishing of the rate of interest.

Several authors have pointed out that, as a matter of record, the Federal Reserve banks did in fact create money through open market operations in the 1930's. However, the money so created was not used in a way consistent with monetarist precepts. It was not used in commodity speculation that would have met with the approval of the monetarists. Instead, it was used in bond speculation. Businessmen were lethargic and did not see any profit potential in building up inventory. They refused to take the loans offered by the banks. By contrast, bond speculators were frenetic. They were full of exuberance (which in retrospect was not so irrational after all). They saw enormous profit opportunities in what amounted to risk-free, government-subsidized bull market in bonds. Speculators correctly diagnosed the meaning of Roosevelt's monetary tinkering: the policeman on duty to keep the rate of interest away from zero has been fired. Now the sky is the limit for bond prices!

You can take the proverbial horse to water, but you cannot make him drink.

Likewise, the Federal Reserve banks can put all the money in the world into circulation, but still have no control over the direction in which the new money will flow. In the 1930's newly created money flowed to the bond market. This deepened the crisis in pushing bond prices ever higher and the rate of interest - together with the price level - ever lower.

What Friedman calls a 'collapsing stock of money' was, in fact, the irresistible whirlpool of the bond market sucking up money from the remotest corners of the economy. The bond market acted like a giant vacuum cleaner running amok. The more money the Federal Reserve banks created, the more destructive the sucking-effect became in draining money away from the real economy. Interest rates kept declining throughout the 1930's. The consequences were devastating.

Every time the rate of interest falls, the present value of the outstanding debt rises (because a larger capital sum can now be amortized by the same stream of money payments, as shown by the increase in bond values). Even though the outstanding debt in the 1930's may look to us paltry by today's standards, as the rate of interest goes to zero, its present value will still go to infinity (because there is 0 discount on the stream of interest payments).. And as it did, debt and inventory liquidation swept through the country. The pressure on business to liquidate debt and inventory became unbearable. Those firms that could not reduce debt and inventory fast enough were mercilessly forced into bankruptcy. The same was true of households and mortgages on homes. The deflationary spiral, acting like a giant twister, uprooted fortunes, farms, firms, and families.

The dangers facing the world economy in the opening decade of the new century and millennium are even greater than those of the 1930's. Indebtedness in the world is greater and more widespread. The rate of interest started its descent from a much higher level, making the bull market in bonds that much more ferocious. Government leaders and captains of the economy see no great danger in the decline of the rate of interest. They congratulate themselves on their success in 'having licked inflation'. But the prolonged decline in the rate of interest has its own dangers, very different from the dangers of inflation. The debt burden on the world economy is very great already, but it could still grow if the decline in the rate of interest resumed its previous course. Should this modern Tower of Babel, the debt-structure of the world, crash, it would bury the prosperity of the world under the rubble.