25 votes

The Slaughter Of The Bonds Has Begun

What does it look like when a 30 year bull market ends abruptly? What happens when bond yields start doing things that they haven’t done in 50 years? If your answer to those questions involves the word “slaughter”, you are probably on the right track. Right now, bonds are being absolutely slaughtered, and this is only just the beginning.

So why should the average American care about this?
►If the era of “cheap money” is over and businesses have to pay more to borrow, that is going to cause economic activity to slow down.
►There won’t be as many jobs, part-time workers will get less hours, and raises will become more infrequent.

Municipal bonds are being absolutely crushed right now too. You see, when yields on U.S. government debt rise, they also rise on state and local government debt.

In fact, things have been so bad that hundreds of millions of dollars of municipal bond sales have been postponed in recent days.

If borrowing costs for state and local governments rise, they won’t be able to spend as much money, they won’t be able to hire as many workers, they will need to find more revenue (tax increases), and more of them will go bankrupt.

And what we are witnessing right now is just the beginning. Things are going to get MUCH worse. The following is what Robert Wenzel recently had to say about the municipal bond market:

Thus, there is only one direction for rates: UP, with muni bonds leading the decline, given that the financial structures of many municipalities are teetering. There is absolutely no good reason to be in municipal bonds now. And muni ETFs will be a worse place to be, given this is relatively HOT money that will try to get out of the exit door all at once.

The worst part of the slaughter is going to be when the 441 trillion dollar interest rate derivatives time bomb starts exploding. If bond yields continue to soar, eventually it will take down some very large financial institutions. The following is from a recent article by Bill Holter:

Please understand how many of these interest rate derivatives work. When the rates go against you, “margin” must be posted. By “margin” I mean collateral. Collateral must be shifted from the losing institution to the one on the winning side. When the loser “runs out” of collateral…that is when you get a situation similar to MF Global or Lehman Bros., they are forced to shut down and the vultures then come in and pick the bones clean…normally. Now it is no longer “normal,” now a Lehman Bros will take the whole tent down.

More:
http://investmentwatchblog.com/the-trigger-has-been-pulled-a...

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It what I've been counting

It what I've been counting on.

Been thinking about this alot lately

Don't get caught in the echo chamber...I listen to the business news on NPR in the morning. Believe it or not you get some pretty sharp analysts on there daily and I have been amazed at how austrian some of them sound. They understand what the FED is doing...to a point.

I read EPJ everyday and lots of the economic stuff at LRC, So I get exposed to Schiff quite a lot and of course Ron Paul.

Timing is everything! Just listen to Thornton on Scott Horton...he said "markets don't act as fast a people think they will"

My prediction for what it is worth is...the dollar gets stronger in the short term (I see someone below made this observation quite well). The Bond market isn't going to blow up over night. The FED is still buying 85 billion a month for crying out loud!

As Wenzel points out the money supply growth has slowed way down (stronger dollar). Just means the banks aren't leveraging more. So as Japan and others continue to print the dollar looks stronger. Every Time an EU country has a crisis the europeans run for the dollar.

Until we get more intervention from the FED the dollar stays strong.

The Bond market is trying to figure out what the price of debt would be with out the FED QE. It has feed back loops. If US Tbills get higher rates of return then more people holding riskier debt are going to sell the high risk stuff and get the lower (perceived)risk Tbill. That will tend to make junk bonds, muni bonds, and EU bonds rise in interest rates and put downward pressure on Tbills.

The rates will shift back and forth based on what the market feels like paying for risk. People who want absolute safety right now should be holding ben franklin's portraits(not an awful play). People who are saving and looking to stay with the (phony) inflation rate should be buying T bills (I think this is a terrible idea...stay out of bonds). The pros and the cronies are playing the higher risk stuff (junk, EU, and muni). What if the state of illinois drops a payment or two? What if another EU country needs a bail out/in? The deck gets reshuffled and we play another hand.

But I agree the long term trend over the next few years is continued upward trend on TBill rates and bond rates in general. There are just going to be many times when it chaotic and a few boring times. ups and downs just a few more ups than downs.

The rest is a confidence game...nobody is gonna put a run on the FED just yet. When the FED has to intervene more then that is when things start to get real interesting.

Indeed, All Paper Assets Will Be Destroyed As a Result

Gold & Silver will go to infinity... and we shall descent into the dark ages..

Yes, it does look like the bond bubble is about over.

The US Treasury does not have the same heavy need to borrow for the rest of the year, and the FED will likely pick up some of the supply that gets dumped on the market by whomever is selling out. This will put a lot of money out there to flow into something, and I think it will be the stock market.

I am looking for the 10 year Treasury to hit near 15% by this time next year, and the stock market to at least double if not triple.

Gold and silver during the same time frame will continue their bear phase, with silver reaching under $5.

Just my take.

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

lol... 15% 10 yr and 30k market

That is a good one.

Think this through brother. Would you put your money in the markt if you could get 15% on a 10 treasury?

High yields make the bond market more attractive relative stocks, drive borrowing costs up for business, cities and the feds... depresses employment all around.

My take is that the Fed is bluffing and will not let rates rise beyond a certain point. They will inflate before they let rates go to high.

But if, as you suspect, rates reach 15%, the market is at 5000, and not 45,000.

Curious about your prediction of 15%

interest rates next year? I am very interested in your analysis of how you obtain this prediction? If you would please, can share the details of you analysis for discussion purposes.

And I was wondering about your closing salutations regarding liberty. I prefer Thomas Jefferson stance: We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights that among these are Life, Liberty and the pursuit of Happiness.
So liberty is granted (given) to us but should be protected from man from being taken…..just saying.

Statistical analysis of cycles.

Back in the 1980's I read, "The Profit Magic of Stock Transaction Timing" by J M Hurst. His idea was that the price of a stock today is determined 75% by trend, 22% by cycles, and 2% by randoms. I also picked the minds of people at the Foundation for the Study of Cycles while they still operated in PA.

Determining trend can easily be done by using some formula for a line and deriving the values for that formula by analyzing the data. For interest rates I use a simple straight line formula, but for data denominated in dollars I use a 3rd degree polynomial because that fits compound growth curves better. I use at least a data series of weekly data going back 50 years.

Cycles can be found using various statistical techniques after detrending the data. There are hundreds of cycles oscillating simultaneously and it is just a matter of identifying and testing each one to determine the probably that it is not random, and retesting as each new data point is added to the data series.

Randoms because they are random are small and have a tendency to cancel one another, so I ignore them.

The trend and cycles can be projected mathematically into the future once they are identified and measured. It never works out as projected because there is averaging involved in measuring each oscillation, and the next oscillation won't necessarily be average. Like a heart, they can occasionally even skip a beat. But for a buy and hold strategy it is sufficient to produce profits.

This technique worked well enough to get me into silver in late 2001, early 2002, and get me out just one month too early in 2011. But my silver projection showed a much quicker drop than actually has developed so far, but the direction has been downward since April, 2011 and my current projections still show we will go under $5 in 2014 and after a long trough won't be back above $20 until 2021.

For interest, up until 2007 my projections were closer than on any other market I follow, but the huge FED intervention in 2008 drove the rates down further than my method predicted and kept them from going up as the historic cycles would have done. So now my calculations show that we will go much higher in 2014 than we would have, had the FED not intervened. Had the FED not intervened my 2014 target for the 10 year treasury would have been 7.5%. When you push the pendulum artificially too far one way, it upsets the system and it must swing back too far the other to balance.

As for the stock market, I have been predicting a major move up since this time last year, but it has been slow to develop. I still show it exploding upward over the next 12 months.

My strategy over the last year has been to be short silver, short bonds, and long the stock market, which is what I am staying with. I have made money on the short silver position and the long stock market position, but have gone nowhere with the short bond positions.

I have overall done very well with this technique, but I have had a couple of > $1 million losses too, so it is not for the faint of heart. To me it is a great game to play, much more addicting than gambling which I don't do, and drugs which I don't do either.

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

Thanks for sharing

your research style.....i don't doubt the conviction of your projections and that was a perfect answer. i really just wanted to know that your reasoning was at least thought out and it is. I don't like ramdon projection in a public form without research and reason but you provided both.....once again thanks for sharing.

fireant's picture

I agree, except...

a lot of that money flow out of treasuries will find it's way into metals as well as stocks. Could be wrong of course, but I think we are near a bottom in gold. The herd is running to cash at present, but it won't take much for them to realize that's not safe either; esp if the Fed tries to stem the panic out of bonds.

Undo what Wilson did

yeah, sure...whatever. And

yeah, sure...whatever. And all the miners with near $30 in production costs for silver are going to keep producing for $5? Where is all this supply going to come from?

“Let it not be said that no one cared, that no one objected once it’s realized that our liberties and wealth are in jeopardy.”
― Ron Paul

Where is the demand going to come from?

I don't know where the supply or demand will come from, and I don't need to. Some miners will operate even if they have $30 production cost because not all that cost is cash cost, and they will incur less of a loss by continuing to operate rather than shut down. Plus some will high grade for a short while.

But, I don't look at fundamentals because they are not as important as cyclical movements in the price.

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

Demand will be from the 7+

Demand will be from the 7+ billion people on this planet who realize paper money and digits on a computer screen are worthless.

“Let it not be said that no one cared, that no one objected once it’s realized that our liberties and wealth are in jeopardy.”
― Ron Paul

If true

The dollar will continue to strengthen in the short to mid term. Precious metals will continue to drop, until the feds panic that is.

Michael Nystrom's picture

Contrary to what a lot of people around here tell you

Correct.

The only way to make sense out of change is to plunge into it, move with it, and join the dance. - Alan Watts
ecorob's picture

If the last sentence of the story is true...

its just a never ending cycle of "nothing will change".

But...if the people eventually disapprove of this type of usury, as a whole, things would be different.
Its a big leap, being responsible for your country. All we, the people need to do to DO AWAY with the federal reserve is to have a willingness to disregard their assertions that we, the people "owe" them anything.
Corruption is NOT defensible.
We demand our money back. Every dollar, ruple, yuan, etc., in their possession is stolen money. Stolen through usury. Hijacked, undemocratically represented usury.
And also, to be free and independent, we must have the responsibility to stand up for who we are as global Americans. Global, by our definition. Global, with a heavy emphasis on compassion and caring and so much less emphasis on murder, destruction, and theft.
To be free, we, as Americans must back our product and our product must be true.
We are "made in the USA" and we will be again. We will buy and sell our own product. We will be innovative and inventive.
We will throw off the chains of federal tyranny and of spying, blackmailing and lying, wasting and murdering, overreaching and intrusive, strangling governmental restrictions.

It will be sooner than you think. Peace.

its 'cos I owe ya, my young friend...
Rockin' the FREE world in Tennessee since 1957!
9/11 Truth.

The advent of free energy is key.

Very inspiring post. The biggest chain around everyone's neck is energy that costs, when there are so many ways to get energy freely. E-Cat and LENR, Tesla applications, and other forms, so long depressed into secrecy are via the internet becoming common knowledge. It will not be long before these forms start proliferating, and then my friend, Peace will come sooner than you think!

TwelveOhOne's picture

Free energy effect on crypto-currencies

Just imagine the effect free energy will have on crypto-currencies!

No longer will a GPU farm be limited by the electrical panel! Each miner could be hooked up to its own free energy source. Currently powering on the AC means I have to power off one miner. So I'm looking forward to this, both on a local and global level! :)

I love you. I'm sorry. Please forgive me. Thank you.
http://fija.org - Fully Informed Jury Association
http://jsjinc.net - Jin Shin Jyutsu (energy healing)

Ain't seen nuthin yet..

just wait till the FED cuts off the 85 billion a month in QE next year. The SHTF big time.

Michael Nystrom's picture

a.k.a. Deflation

Also known as assets disappearing back into the thin air from whence they sprang.

The only way to make sense out of change is to plunge into it, move with it, and join the dance. - Alan Watts

Inflation

Yes there will be plenty of deflationary events but don't forget that the money supply has more than tripled since 2008. In fact, the idea of Keynesian economics is to "replace lost demand" with the artificial demand from government spending newly printed money.

Michael Nystrom's picture

As interest rates rise, and bond values fall...

...trillions - Trillions - of dollars - not just with a t, but a capital T - will be wiped off of balance sheets, cleared out of investment accounts and wiped out of retirement accounts. This will ripple through and affect asset values across the entire economy.

Meanwhile everyrone is having a hissy fit over the Fed buying a mere $85 billion in bonds a month.

There is no possible way the Fed, through its Keynesian machinations, nor the Federal Government through its "stimulus" or "bail outs" will be able to "replace lost demand." The Fed simply can't print enough. The Fed is done. They're rolling out the mop up crew.

Nor is there the political will - thanks to the pressure of the Tea Party types (like us) - for the government to pass any more stimulus. Or bailouts. This time, Congress and the American people will say - let them fail! And they will.

A tidal wave is approaching that will drag everything we have come to consider "normal" in this insanely abnormal world far out to sea.

It'll be painful. Painful but necessary.

You can manipulate a market for a while, but not forever. Eventually equilibrium comes roaring back.

The only way to make sense out of change is to plunge into it, move with it, and join the dance. - Alan Watts

This is getting complicated :(

Any recommendations for books in explaining all this!

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

Here's A Link

which summarizes the deflation case. I would also recommend chapter 9 of "Conquer the Crash" by Prechter.

http://www.deflation.com/the-dollar-gold-scrip-and-the-infla...

Cheers

Thanks for the link. :)

Lord Acton, Lord Chief Justice of England, 1875 - "The issue which has swept down the centuries and which will have to be fought sooner or later is the People v. The Banks."

The "Money Supply"

...in its narrowest sense (M0 or physical cash) has not tripled, nor even doubled. Digital, or electronic debt based money though, can easily evaporate back into thin air along with the value of the collateral which backs it. That's the money multiplier phenomenon in reverse. That's deflationary.

M2 has grown at 6% since 2008. It is excess reserves that

have grown exponentially, not the money supply.

Um where are you getting your data and what do you think QE is?

From 2007 the Fed had a monetary base of around $800 billion. We now have $3.1 trillion for the monetary base and the feds are increasing it by $85 billion a month.

http://research.stlouisfed.org/fred2/series/AMBNS?cid=124

That looks more like close to 4x in the past 5 years and we are headed toward $4 trillion in a year. The broad M3/M2 debt contraction will occur temporarily, but any losses in bad debt can be covered by helicopter Bernanke. We may have short term deflationary debt/broad money contraction, but we'll continue to see base money printing and probably an eventual hyperinflation.

9-11 Media Fakery: Did anyone die on 9-11?
http://www.cluesforum.info/

http://www.septemberclues.info/

9-11 Actors:
http://www.youtube.com/watch?v=6aPvJSQtmoE

Pysops.. media.. actors.. propagandists... disinfo agents.. fake videos.. fake photos

Excess reserves are include in the Money Base figure,

but not in the money supply.

The base has grown at about 35% Per anum. M2 at 6%.