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Bonds..the penultimate bubble

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Thought I'd like to start a thread on this...

 

http://online.wsj.com/article/SB1227824289...=googlenews_wsj

 

Investors Buy $17.25 Billion in Banks' Bonds

 

A fresh asset class is quickly carving a new niche for itself on Wall Street.

 

In just two days, Goldman Sachs Group Inc., Morgan Stanley and J.P. Morgan Chase & Co. sold a cumulative $17.25 billion of government-guaranteed bank bonds as part of the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program.

 

The program has opened the financing door for banks that were otherwise shut out from repaying or refinancing debt as a result of the credit crisis. The government guarantee allows banks and firms that have been approved to participate, such as General Electric Co., to take advantage of ...

 

Also from bloomberg:

 

http://www.reuters.com/article/marketsNews...W00313820081127

 

JGB 10-yr yield hits 7-wk low after US bonds rally

 

and on another tack...

 

Buy U.K. Inflation Bonds as Deflation Scare Overdone, Says HSBC

Email | Print | A A A

 

By Anchalee Worrachate

 

Nov. 28 (Bloomberg) -- Investors should buy U.K. inflation- protected bonds because the “unprecedented” policy response to the looming recession will revive the economy by 2010, rekindling consumer-price increases, HSBC Holdings Plc analysts said.

 

The breakeven rate, a gauge of inflation expectations as measured by the difference in yield between five-year regular bonds and index-linked debt, has been negative for more than a month, suggesting investors are betting the economic slump will lead to deflation. Steve Major, HSBC’s head of fixed-income strategy in London, said the pessimism is “overdone,” leaving index-linked gilts at “attractive levels.”

 

“At some stage, the market will look beyond the deflation discounted for 2009 and to the risks of rising inflation by 2010- 11,” Major wrote in a note to clients e-mailed yesterday.

 

The Bank of England cut its main interest rate by 150 basis points to 3 percent on Nov. 6 to limit the fallout from the financial crisis. HSBC forecast that policy makers will keep reducing borrowing costs to 1 percent by the end of the first quarter of next year, according to a Bloomberg survey.

 

Prime Minister Gordon Brown’s government this week pledged a 20 billion-pound ($30.7 billion) package of tax cuts and spending to revive the economy, on top of as much as 50 billion pounds it said it would spend buying stakes in the country’s ailing flagship banks.

 

Yields on five-year inflation bonds were higher than those on regular bonds every day since Oct. 24. Index-linked bond yields are usually lower than those on nominal debt as the government has to make inflation payouts on top of the so-called real yields to compensate for increases in consumer prices, which erode value of fixed-income securities.

 

Rising gold prices may suggest inflation will accelerate, Major said. Gold traded near a five-week high in London yesterday as the dollar’s decline boosted bullion’s appeal as an alternative investment to the U.S. currency.

 

As a store of value, gold understandably performs well in times of uncertainty and fear of higher inflation,” Major said. “So, it is strange that gold prices should be rising during a deflation scare.

 

When will the blind-faith in the dollar come to an end? And when will the UST loose its AAA rating? When will there be rush for exits and into hard assets? ;)

 

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When will the blind-faith in the dollar come to an end? And when will the UST loose its AAA rating? When will there be rush for exits and into hard assets? ;)

4 trillion of the debt owned by foreigners. 2 trillion owned by the Chinese Gov. I dont think they will be leaving just yet. The reasons are probably geopolitical and not economic.

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4 trillion of the debt owned by foreigners. 2 trillion owned by the Chinese Gov. I dont think they will be leaving just yet. The reasons are probably geopolitical and not economic.

 

Large US corps can now borrow huge sums thanks to the TLGP. This money must find its way into the markets soon and so could be the trigger for a slide in the US dollar.

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Large US corps can now borrow huge sums thanks to the TLGP. This money must find its way into the markets soon and so could be the trigger for a slide in the US dollar.

But isnt that just to cover deposit liabilites by providing liquidity. Not money for lending around?

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deflation scare overdone?

 

jeez HSBC really are the new Barclays.

Deflation scare?

what deflation scare, most people havn't even realised inflation has stopped yet.

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But isnt that just to cover deposit liabilites by providing liquidity. Not money for lending around?

 

http://www.fdic.gov/regulations/resources/tlgp/index.html

 

The FDIC has created this program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies

 

So GM surely get access via GMAC?

 

Edit: See also: http://www.mibankers.com/downloads/FDIC%20...As%20101608.pdf

 

"FDIC Guarantee of Newly Issued Senior Unsecured Debt

What Debt Instruments are Covered?

FDIC would guarantee all newly issued senior unsecured debt by eligible entities issued on or before June 30, 2009, including promissory notes, commercial paper, inter-bank funding (including Fed Funds), and any unsecured portion of secured debt. FDIC estimates that roughly $1.4 trillion in senior unsecured debt will mature before June 30, 2009. Subordinated debt is not covered.

What Institutions are Covered?

Eligible institutions would include: (1) FDIC-insured depository institutions, (2) U.S. bank holding companies, (3) U.S. financial holding companies, and (4) U.S. savings and loan holding companies that engage only in activities that are permissible for financial holding companies to conduct under section 4(k) of the Bank Holding Company Act ("Eligible Entities").

FDIC will not provide protection to “troubled” institutions. FDIC will issue guidance to banks on this in the next several weeks which will specify the process for utilizing the program. Important Clarification It is ABA’s understanding that investment banks that have recently been approved to become bank holding companies, such as Goldman-Sachs and Morgan Stanley, ARE eligible to participate in the FDIC’s guarantee program. The program is, however, not open to U.S. savings and loan holding companies that engage in activities that are not permissible for financial holding companies to conduct under section 4(k) of the Bank Holding Company Act."

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So that part of the TLGP is just guaranteeing debt issuance by banks, thrifts and certain holding companies.

 

But holding companies wouldnt be corporations as such but normal banks

 

http://en.wikipedia.org/wiki/Bank_holding_company

 

http://www.fdic.gov/news/board/08BODtlgp.pdf

 

 

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http://online.barrons.com/article/SB122633310980913759.html

 

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

 

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

 

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending -- positive in math terms -- because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

 

If they expect yields to rise in the future, they'll want a bigger premium to commit to longer maturities. Otherwise, they'd rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today's yields for a longer period.

 

The Treasury yield curve -- from two to 10 years, which is how the bond market tracks it -- has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

 

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors' anticipation of economic recovery. Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

 

As with so much other things, something else is happening this year.

 

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

 

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My current thoughts:

 

1. US will never lose it's AAA rating, because the rating agencies are pretty much US and live/die by US

 

2. Creditor nations have currently not much more choice than keep recycling the consumption dollars back in to US treasury debt. Just like with petrodollars in the 70s

 

3. UK is going down the drain and I can't see anything on the horizon saving it: peak credit, peak oil, peak gas, peak exports, peak tourism, peak immigration, peak almost everything. In 20 years it'll be in shambles, unless a a black swan event occurs. Can anybody give a a single reason to buy gilts? The yields are fairly low, inflation expectations way too high and even if the yields were high and inflation expectations low, I'd expect UK to default on it's loans sooner than later. I'm just too simple to understand this.

 

4. The bailouts are big because the deleveraging is big. Bonds are an instrument of finance in this and in the normal six phase Bonds, Stocks & Commodities UP/Down cycle, it is now time for bonds. But only for those who can enforce their sales through balance of fear or can actually back up their bonds with real collateral (like a growing economy and no deficits).

 

5. Deleveraging has only just begun, it'll be painful and long and bonds may have a long run, although some bonds not so. Fixed income market trading will be even more sought after skill amongst those economists not getting sacked. Can't wait for the synthetic CDO made out of CDO bond portfolios and then turned into a bond default CDS. Then again, maybe it exists already :)

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AIG's Bold Move and Why I'm Shorting the Long Bond - http://seekingalpha.com/article/108495-aig...g-the-long-bond

 

The guy in the above article has shorted via Rydex Inverse Gov Long Bond Strategy Inv Fund (MUTF:RYJUX) - I assume it's not possible to invest in this non-UK fund via a British broker?

 

Is TBT (ProShares UltraShort Lehman 20+ Yr ETF) on the NYSE about the only (simple) way to do this from the UK?

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. . . 5. Deleveraging has only just begun, it'll be painful and long and bonds may have a long run, although some bonds not so. Fixed income market trading will be even more sought after skill amongst those economists not getting sacked. Can't wait for the synthetic CDO made out of CDO bond portfolios and then turned into a bond default CDS. Then again, maybe it exists already :)

 

I don't see how it's only just begun. The first round took place against a backdrop of complete and utter panic. Investors sold pretty much everything they could after Lehman, Wachovia, WaMu and the Icelandic banks went down. Evidence, including the fact that Federal Reserve credit to the banking system declining by $85bn for the w/e 28th November, appears to be pointing to a slowdown in the rate of the deleveraging.

 

I'm not saying that there isn't another landmine waiting for the markets to stumble upon but most of what could be sold has been sold.

 

 

 

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