Is The Bond Crisis Imminent?

For quite some time now people have been worrying about the quantitive easing strategy and its affects on the Bond markets, personally I have been very critical of this strategy as I think it is bound to fail in the long-term. The only question is when as far as I can see and the chatter in the financial forums is getting louder as I suspect that day of reckoning is approaching.

Karl Denninger : CBs And Other “Real Money” Had Enough?
 
From the forum, wire from Reuters claimed original source:
 
21. There apparently is a new wrinkle to the intermediation trade between buying from Treasury to sell to the Fed with real money, including central banks, now in on the act. Indeed, several Street sources relay central banks were aggressive offers into this morning’s coupon pass, with one letting go of a large block of old 5-years. Other offers too are coming in from embedded Asian real money longs — in the higher coupons — also looking to sell size without unduly upsetting the market, and especially considering the illiquidity in off- the-run bids from the Street.
 
Whether influenced or not by the much higher tenders coming in on the Fed Passes ($45 bln tendered for $7.4 bln bought in today’s pass for a 16.2% hit rate), fast money has been tattooing the bid and especially so in the belly with the 10-year most leaned on. Note as well, earlier this week the Bank of England (BoE) gilt pass too saw a need to offer paper at or below the market’s bid side in order to get sales off.
 
So now what Ben?
 
If Foreign Central Banks are selling into Ben’s bid then the game is literally weeks or even days away from being over.
 
I have written for over a year about the potential for a bond-market implosion and subsequent economic collapse.
 
Bernanke, if he continues to play his “QE” games into this, assuming it is real, must be immediately forced from office by President Obama and/or Congress.
 
In short we must choose the (much) higher interest rate path and choose it now, because that is now an assured outcome.
 
We can choose between significantly higher interest rates and an economic collapse along with significantly higher interest rates.
 
Avoiding the higher interest rate outcome no longer appears to be possible exactly as I have been talking about for more than a year.
 
And exactly as in the 1930s, we will wind up in the same place with “The Fed” being blamed for the “loss of liquidity” when in fact the truth is that it was the government attempting to spend more than it made, and finding the market unwilling to support insane deficit spending, that led to the bond market dislocation, much higher interest rates, and the second phase of the economic collapse.
 
We are following the precise same path we went down in the 1930s.
 
Hope you’re ready, and say thanks to Ben, Hank, Geithner and of course Obama, all of whom think they can ignore the realities of the market.
 
Disclosure: The time to short the phone book is approaching.

Its been ugly in the U.S. Treasuries market. What Denninger is saying is that most or the recent activity in the Treasuries Market has been simple dealer arbitrage. The Primary dealer buys public debt from the U.S. Treasury and then sells to the Fed under QE and pockets the difference.

The rumour yesterday was that real money was now in play, such as Asian central banks who were selling to the Fed along with the dealers and this was swelling the market and driving yields up. This is the opposite of what the Fed wants.

This is exactly what many of us in finance predicted when Bernanke confidently outlined his theory for holding down longer-term yields. So where now? Does he increase QE treasury purchases or does he capitulate and accept that the Fed cannot take on the whole Bond market? Its all a bit 1931 and I fear we are in serious danger of an instantaneous flight from government debt and a collapse of the bond market.