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Bond Market Tremors Get Louder

UPDATE: Is the bond bubble ready to burst? This will make the real estate bubble look like child's play. 10-year Treasuries hit 2.50%.

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If you want to get a clearer picture of the pain

that’s being felt in the bond market, check this out. If you bought the 10 yr at its peak price(low yield) of 1.4% as of today at 2.5% you have lost almost 10%.That would be 1500 Dow points, 160 S&P points and 350 NASDAQ points. CNBC would be running around with their hair on fire.

The repricing of the cost of capital

is happening around the world. First on the peripheral and leading to the core, the US. When they realize that this is a change that is here to stay and only gets worse they will have no other choice but to pay the higher rates.


Thanks Goldspan!

Ten year note: 2.405.
Hey Goldspan, what is the best way to place a little bit a money against the long bond? Puts? I only have between $1-2K to play. I have it in a silver miner right now, obviously I'm way down. What would you do?

Do you think the party is over?

I don’t like giving specific investment

advice without knowing the whole picture, but if it was me I would not put any more money in the miners….and sell it at breakeven. This is a personal preference……..lots of unknown risk in mining. I would buy the physical right here. Silver is on sale here……you know they are not going to stop printing money, there’s your (hedge)……and even if they do here….Japan not’s going to. Demand will probably not be waning anytime soon because silver is in every electronic device made under the sun. Buy while no one else wants it…..have the conviction to be a contrarian…..because you know you are right…….you just need to refine your timing…..meaning don’t do what everyone else is doing……..do the opposite and hold on……that’s what Warren Buffet does, he buys while there in blood in the streets……look at the sweet deal he got with Goldman in 2008……when Solomon Brothers was involved in bid rigging scandal in 1991……I was buying LEAPs (long term options) using this philosophy ( and WB took a huge long position in the stock) and made a killing within a few weeks when the case was settled. If you chase the hot trade you are usually the sucker….because you don’t even know it a hot trade until after the real money has been made……now don’t get me wrong…..if you are a trader……..be a trader…….. but if you are an investor be a smart investor. AND NEVER EVER BUY ANYTHING IF A STOCK BROKER CALLS YOU UNSOLOCITED OVER THE PHONE OR IN PERSON.

Let it burn, who cares at

Let it burn, who cares at this point.

Southern Agrarian


What we have now is a just one big complete rip-off. Hard work gets you nowhere. Cheating gets you everywhere. If you are connected cheating is not only rewarded, it is never punished.

Bernanke On Soaring Interest Rates:

Bernanke On Soaring Interest Rates: "We Were A Little Puzzled By That"


Very odd response from Bernanke. Why would he say that?

Honesty accidentally slipped out of Ben''s mouth.

Honesty accidentally slipped out of his mouth. He was probably just off the phone with Abe in Japan, who's super-inflationary scheme caused bond yields to rise as well. I don't know what "motherF---er" is in Japanese, but its the same thing Milton Friedman was saying in Britain in the 70s when the inflation rate soared faster and faster no matter how high the Bank of England pressed that interest rate button.

Central planners get flustered when their big plans don't work out.

"Cowards & idiots can come along for the ride but they gotta sit in the back seat!"

Have you ever lived through a

Have you ever lived through a complete and total worldwide bond market collapse?

Has anyone?

I don't think there ever has been one to live through - yet.

It's bound to be interesting, though.

When the panic out of bonds erupts, where will the money go?

I think it will come out of bonds and go into the stock market. And at the same time it will come out of gold and silver, as it already has been doing, and also go into the stock market.

Could the 10 year Treasury yield approach 15% by 2014? Could the stock market double or even triple in the same time frame? Could gold and silver collapse during this interesting time frame? You bet all three could happen, and I say more likely than not.

"Bend over and grab your ankles" should be etched in stone at the entrance to every government building and every government office.

Doesn't work that way

When assets reprice (it just takes one trade to reprice a market), the money doesn't "go anywhere", the value is just reduced.

Say 1 million people own an asset "valued" at $100 (meaning the latest open market transactions are at $100 per unit), the total "value" is $100 million. If something changes and now the trades are at $50 per unit, the total "value" is now $50 million. The prior $100 million value was reduced to $50 million - and the $50 million that was there, did not go anywhere, it essentially vanished. It was in the mind of people trading the assets.

So if the bond market takes a big hit, yeah some traders will get out, but mainly PERCEIVED VALUE is what will decline, and that just means there will be less perceived value, not a bunch of money rushing anywhere.

I hope this makes sense.

It is why asset booms, bubbles, and busts are so dangerous and is a KEY argument against all these monetary shenanigans by the Fed and global fiat pushers. They are disruptive to real economic activity.


Freedom - Peace - Prosperity

Ok I don’t know if you were directing this to me

with my comment about the cost of capital being repriced. Your point is not a bad one it’s just off the point I was making. I think and don’t let me put words in your mouth but you are talking of market price. And the point you make is really in every market that is made, it’s the essence of “how a market is made” through the bid/ask spread. But in the example you stated a 50% spread which would be a highly illiquid market. A very liquid market would have a tight spread.

Before you look at this video I need to make a point…….when he explains bid/ask you have to not think like a retail investor…….a retail investor buys at the ask and sells at the bid. An institutional investor offers the stock its customer want to sell at the ask and places a bid for the stock the customer want to buy. You have to think opposite of a retail investor……nothing nefarious just the way it works.


When I said repricing the cost of capital I was speaking about the capital structure as a whole. With all the QE’s what the Fed has been doing is driving down the opportunity cost of capital and mispricing risk. When you misprice risk you misprice the expected return, direction of investment capital ( malinvestment) and the whole capital structure.


All investments and companies have components of risk that are quantified.

“In quantitative risk analysis, an attempt is made to numerically determine the probabilities of various adverse events and the likely extent of the losses if a particular event takes place.”

So let’s just mention a few.

Expropriation of assets, this is something that is a large component of risk in third world countries. New leaders come to power and “nationalize” the oil fields……all the sudden an American oil company has to pay graft to some smuck they never heard of and their earning take a hit. You have to calculate the risk of this before you drill in foreign countries and you as an investor had better calculate this risk before you buy the stock. You didn’t have to worry about this in this country…..well not until 2008 but ask all those Chrysler dealerships if they calculated for this…..so now you have to at least think about it.

Interest cost……Is the base factor to determining the cost of how you structure a company. The cost of debt is determined by prevailing market rates given certain level of risk. For instants the cost of debt capital starts with the cost of risk free rate of return, usually shorter than 90 days plus a risk premium given similar risk for a project or company. So let’s say the (and please this is just an example) cost of risk free rate is .25% and the ten yr. is 1.40% then the cost of debt capital is 1.65% and the return on investment is discounted by this rate and the project or investment is worth making. Your return is greater than your investment. But now the 10 year has gone up to 2.5% and the discount rates is 2.75 % then the once good investment could not look so good in these conditions. Therefore the rise in the capital structure makes all investment less attractive on a quantitative basis. The cost of debt capital is actually the easiest to calculate and is the base at which all quantitative risk analysis starts……it is very important. It is the foundation. So with a normalization of market rates someday soon( maybe) of 4%, 6%, 8%.....the capital structure of all investment returns will make a shift and risk will be repriced.

i wouldn't make that bet

Because the margin on bonds is only 10% so there might not be as much capital as you think to flow into equities. You stated 15% interest rates.....if that happened the losses on bonds would be so great and 10% margin would create such massive margin calls and the liquidity crisis would erupt. The only asset that could be liquidated to met such massive margin call would be stocks, not to mention the economy would come to a complete stand still and there would be no earning growth at all....as a matter of fact earnings would contract quite a bit. You can buy stock here if you want.....i will sell them to you....i am net short at these prices.

Did anyone see the yield in the 10 yr today

shot up to 2.37% that is a huge move for bonds! More the one percent price decline......doesn't sound like much until you realize that it wiped out most all you profit for the year....esp after taxes. This could get ugly!

Good choice of the word Tremor.


How the Fed will crash the Bond Market

It would be hard to imagine bond rates going much lower than the 1.4% on 10 year treasuries that we saw a few months ago.


Author of Shades of Thomas Paine, a common sense blog with a Libertarian slant.


Also author of Stick it to the Man!


Why Screw With Bonds - Put Your Money In Physical Gold & Silver

Why screw With Bonds - Put Your Money In Physical Gold & Silver until you can find something better -Ha!

Good luck with that!

I believe in real money, not government debt..

I have all my money in silver and gold mining shares and physical gold and silver..

No worries..

Cash maybe a good place too

If interest rates skyrocket, you may be able to do well with keeping money in a saving acct. As a result of high interest rates:
-Stock market will tank
-Spot gold & silver will tank
-Even gold/silver mining stocks will tank

Would you say cash sitting around to be placed in a savings acct would also be another place to diversify if interest rates skyrocket?

cash is

an asset that does not provide you with a return, so I don’t keep too much in cash …….5% or so to take advantage of any opportunities that might come along, if you were liquidating stock a little at a time on the way up to capture capital gains you tend to build up cash until it time to short stocks again. But it all depends on your situation……cash to a 65 year old person looks different than cash to a 25 year old person.

But to answer your question....... in time of disinflation or deflation cash does increase in purchasing power, but loses purchasing power in time of inflation.

Let me be clear and make a point.......we are not in a period of......oh well…… we will call it hyperinflation.... yet ( I choose those words only because we are always in a perpetuate state of inflation)......the creation of inflation has already occurred......that’s what the bubble in mortgage and housing market was.....that was the blow off. After the 2008 crash the only reason we haven't see the hyperinflation so many predicted is because the only people that can borrow don't need or want to borrow. The only people that want to borrow can't borrow because of tighten credit qualifications.

Since then we entered a period of bank balance sheet repair, which was implemented by the Fed when they started paying interest for reserves kept at the Fed. The Fed takes 2 trillion dollars of non-performing loans off the balance sheets of the banks (which also save them from insolvency) and then pays them interest of .0025%. Doesn’t sound like much until you realize its freaking 2 trillion dollars at .0025% equals $5 billion in risk free earnings. This is the part of the inflation drug that everyone likes. Banks with freed up capital then started chasing returns because they are in the business of making money. They chased up financial assets and that is what is reflected in monetary assets like stocks and bonds, which will make everyone feel like they are getting richer. That is why the stock and bond markets are soaring…..but like I said….. once they get back into the business of making loans and they will because of the law of diminishing returns ( as financial prices rise it’s harder to find a greater fool) so they will slow their investment flow into financial assets and return to the business of making loans. You can see this with the pickup in velocity in M3…… velocity is now back up to a 5% growth and if you follow the M3 money supply on shadowstats.com you can see how much it has raisen from the bottom.


This chart reflects all credit creation in the system, look at it's peak of 18% in 2008……the fall off afterward was the destruction of the credit crisis…..pretty cool to actually see it huh!

Then the so called bad effects occur…..and the spill over will occur into consumer goods…..first in housing and then cars and then food, gas and everything else….and unless the Fed unwinds all this stimulus (sell the bond they took off the banks which will only further exacerbate the already selling frenzy that was discussed earlier) the inflation will be in the system and the USG will be stuck……the genie is out of the bottle. This time they really will be stuck because they will want to raise short term rates to crush demand( consumer price inflation) but they will have to print money like the fools they are because someone has to buy all of all of the bonds or we will default…..and as a side note because new USG debt is issued to retire old USG debt……we never pay back any principle, they only keep going further in debt. That is why we always raise the debt ceiling. And of course the USG won’t be helping because with the selloff in financial assets and too many dollars chasing a limited supply of consumer goods the CPI inflation will soar and market interest rates will soar and the economy will tank. But this time the USG will be so far in the hole that they won’t be able to deficit spend the Keynesian way of so called “priming the pump” and they will be up to their necks in issuing debt that only the Fed will be able to buy and then we will have a flood of foreign governments (even more bonds hitting the market) demanding something for the worthless paper (do they speak Chinese in Alaska?) and then it’s all over. We are Argentina with an arsenal of the badest weapons in town……what do you think will happen……my experience tells me this is not going to end well.

Let's not abuse terms: Hyperinflation is still waaaay off.

Let's not abuse terms: Hyperinflation is still waaaay off. we have creeping inflation in certain produce sectors, which is a worrying sign for shoppers. There is rising inflation in luxury sectors, as the easy profits of the last five years are sunk into a narrow class of goods, not to mention stocks. There is rampant inflation in government-manipulted sectors such as health care and tuition.

But there is no hyperinflation. That is a period of completely out of control inflation, where no action by the central bank can manipulate or slow rising prices.

It is a rare occasion (Zimbabwe 2008, Jugoslavia 1994, China 1948, Hungary 1946, Germany 1923, Russia 1921) and has never approached the United States.

There was rampant inflation in the Confederate States from 1863, and in the revolutionary war from 1777, but again, out of the necessities of war and not totally out of control.

"Cowards & idiots can come along for the ride but they gotta sit in the back seat!"

i thought i made that clear with this statement

Let me be clear and make a point.......we are not in a period of......oh well…… we will call it hyperinflation.... yet ( I choose those words only because we are always in a perpetuate state of inflation)......the creation of inflation has already occurred......that’s what the bubble in mortgage and housing market was.....that was the blow off.

Nnnope, the ellipses made things fuzzy but I get it now. Thanks.

Nnnnope. The ellipses made things fuzzy: I thought you changed your mind to say we ARE experiencing a hyperinflationary blowout.

But I get it now. Thanks.

"Cowards & idiots can come along for the ride but they gotta sit in the back seat!"



thanks for the explanation!

I agree with you on all points.

So you also believe that high interest rates are inevitable. So wouldn't it be a good idea to have money available to put in a savings account when the interest rates go up?

Or do you believe that the USG will default on the debt and at that point the banking system won't even be functional? As a result, there won't even be an opportunity to put cash into a high interest savings account?


When the bubble bursts that would mean high steep inflation and the raise of interest rates? I am asking cause I am buying a house in the UK and I think of going for long term fixed rate mortgage. I hope in 7 years time my mortgage will represent much less value. Is this a good thinking?

To the buyer of your mortgage yes

but it will have no bearing on you because you still owe the amount you borrowed. But with inflation you will be paying back with cheaper dollars. Inflation benefit debtors and who is the biggest debtor in the history of the world......of all time....the USG.

darn, I just got out of

darn, I just got out of equities in favor of gov't treasures, I'm guessing this wasn't a good idea :)

any investment depends

On your needs, situation and rick tolerance to determine if it’s a good or bad investment, but buying at the right price is essential. But the one thing I would never buy is a bond mutual fund. I would rather do the homework myself and buy a bond because if it doesn’t default it will return my principle. In a bond fund they are always trading the bonds and you could lose principle.

Think of investing as a three legged stool. Depending on your needs which leg would you want to be the strongest? Return of capital (risk of loss), return on capital (risk of yield) and return time frame (which is opportunity loss.... what could I have invested differently while my capital was tied up……and am I willing to take that risk).
Me personally I like investing in short term revenue muni zero coupon notes. The reason is, I buy the notes at a discount that mature at par (safety of return on capital) then I take the difference between what I would have paid for any other coupon bond and trade stock index options (return is determine by my ability to make more than I would have if I bought coupon bonds, if i loss all of this i still have the original invested amount when my bond mature.....all i am risking is yield (I have a better track record of outperforming the return on capital in the options market then holding for yield). And the third leg is with short term paper the liquidity for trading options I don’t feel like I miss out on opportunities.
Oh yeah I also am short the stock market…..i am not an advocate of any particular fund but I do recommend using a fund because these guys are professionals at shorting…..but if you want to know which short stock market fund I used e-mail me. But also you need some precious metals too…..for when it all breaks down...... buy that along the way with the returns on your investment.

Hold on to you Butts


Ron brought the Liberty movement together, Rand is expanding the crap out of it! :)