So it looks like that's it for treasuries. Affter QE2's formal announcement, TBT is now rocketing upwards and I'm ever so pissed about forgetting to fund my Optionshouse account sooner. Even if treasuries recover temporarily, volatility is going to be pretty high for the short-term and otm options accordingly rich.
Anybody on the right side of this trade?
TBweeeeee... er, I mean TBT. I was long ahead of the announcement and have been in it for a while. I agree that treasuries are done.
I'm on the right side in the sense that I did all my grocery shopping YESTERDAY.
R.I.P. greenback.
I am kicking myself for not trading on this - talk about seeing the writing on the wall. Bernanke's been telegraphing his intent to put a bullet in the dollar for a few weeks now.
Also - very well put Eddie, heh.
It's the end of the world as we know it...
This has been expected for the last few months. Anyone here who'se worth his wait in salt that read Bill Gross's Mea Culpa should know that this was going to happen on November 3rd.
I think I'm going to sit back and watch from the sidelines... I'm quite certain that this is going to get very very interesting very very quickly.
I've been looking at this thing for so long, I was just paralyzed at the notion of dropping some duckets on this. If things don't move too fast, I'm still buying TBT 40s for Jan 11/Mar 11.
TBT = Too Bad, Treasuries
You know, we really should have a moment of silence for SOMA. Without it, we'd have seen this happen alot earlier.
Thank you SOMA, for keeping the treasury from killking the dollar off for as long as you could.
Now, back to your regularly schedualed raping and pillaging of the USD by The Fed.
Watch these twisted fuckers get applauded for their efforts. Now when we get deflation, they'll argue that it's not so bad by comparison. What's worse the public will buy it.
I'm with you here brother. Deflation is on deck in my book.
Can I ask what you guys think will bring deflation about? I think we've been facing deflationary pressures for the last two years but we're now headed towards inflation at warp speed thanks to QE2 and some greener than expected shoots in the economy.
The problem with a government run economy is that you can't predict every potential outcome. It is possible to have inflation and deflation at the same time across different sectors of the economy. For example, we can have gas prices rise to $5/gallon at the pump while we have our wonder bread drop to $.50/loaf. I think we will see artificial inflation (caused by Bernanke) and real deflation (which IMHO has been happening for several months if not the whole year) holding hands for a while. Since there won't be one clear cut determining factor, the merry-go-round will continue. This is a shell game, boys...I know it's hard to accept and I don't expect you to buy what I am selling.
Again IMHO, sometimes working in or studying finance gets you too macro-minded and general in your POV. The indicators and market figures we look at rarely tell the whole story. This is increasingly true today. Even a recovery (which is not out of the question) doesn't solve this problem.
Our CURRENT economy is much more of a breathing living habitat than it is one single organism that can be analyzed uniformly, as in the past. Since we have an economy which is DE FACTO government controlled, the wholesale manipulations of (take your pick) currency, stocks, bonds, commodities, etc...can produce results which were in the past in direct conflict with logic and sanity. Attempt to control something and it slips through your fingers, making results unpredictable and often unfathomable.
This is why I rant off the cliff about this stuff sometimes. Once markets are no longer free, free market logic no longer applies.
Deflation, disinflation and inflation...possible we'll see all three walking hand-in-hand.
This is a knee jerk reaction. Another $600 billion pumped into treasuries raises demand (temporarily) not lowers it. The Feds ultimate goal is to bring long term rates down. Which is exactly what will happen with this bond buying. However, once the Fed is done buying and the artificial demand has been scrapped off, thats when bonds will really start to tumble as inflationary pressure starts to set in.
I hope you're right Nikhiln25. I held off buying TBT calls because this seems too premature to be the actual inflection point. I think the moment the Fed announces they're stopping, bonds will fall. But the market moved pretty spectacularly today (which is odd considering 600B is par for the course) and I'm a little worried I missed my chance.
Lets not forget, the total amount is $850 billion...$600 billion in new money and $250 billion that will be forwarded into treasuries from maturing mbs..so it will still take a while for rates to rise..and that wont be until inflation has actualyl set in
A higher money supply leads to higher EXPECTED inflation. Higher expected inflation leads to higher nominal interest rates. Interest rates were so low because of deflationary expectations. There will be no inflation right off the bat, because remember the feds method of adding money to the economy is by purchasing bonds, so it will take time for that money to circulate around. Eventually increasing the money supply leads to higher inflation, and the hope is that the extensive money supply create demand as that money starts circulating to consumers and investors.
Key word here is "hope that extensive money supply create demand." Hope is not a strategy. I understand a higher money supply leads to higher expected inflation, but I don't see how that inflation will actually materialize in the form of higher prices for the consumer. If QE 1 worked so well why did The Fed announce QE 2 today?
tlt you have forsaken me
I'm just a college kid so my opinion means jack shit. However, my take is that record low interest rates didn't work to slow down deflation. Neither did QE 1. So why will QE 2 work to stop it? Not to mention, QE failed in Japan, and this is looking an awful like that situation.
On the demand side, consumers don't want to borrow, and banks are reluctant to lend anyway. People want cash, and companies with cash want to keep it. Sure, QE 2 might affect supply-side prices (commodities in particular), and it might keep assets like stocks and bonds afloat, but I don't see how it will prop up demand which contributes directly to GDP and thus to prices of finished goods.
http://voices.washingtonpost.com/ezra-klein/2010/10/the_output_gap_in_t…
The large output gap will put downward pressure on prices, and the ranks of the unemployed will put downward pressure on wages (which will also put downward pressure on prices since workers will demand less goods: its a vicious circle). The only way that QE 2 helps the consumer is that it keeps asset prices such as homes and equity prices inflated, thus giving the perception of greater wealth (for those that own those assets - http://seekingalpha.com/article/199135-housing-and-the-end-of-upward-mo… - the stats at the bottom are from 2007 so they are a little outdated but the bottom 80% hold 15% of the net worth of the US; how will QE 2 affect them really?)
Perhaps I'm still a bit bearish but I'm not convinced that everything is in recovery. 2011 should make for an interesting year.
appleheadz true the theory is the more bonds they buy the more money will go in circulation the problem is about 98% of americans don't know how many usds are in circulation nor will that encourage them to spend as they have no idea who the fuck that santa clause looking mfer is
Date Debt Held by the Public Intragovernmental Holdings Total Public Debt Outstanding 11/02/2010 9,133,584,590,439.72 4,590,389,470,419.50 13,723,974,060,859.22
Off the bat 1/3 of treasuries are held by our own government.
Then of the Debt Held by Public, about half is owned by foreign governments.
So in theory they could end up sending a lot of money abroad which would go into commodities or emerging market equities. I don't see how QE really influences circulation on the consumer level (as measured by core CPI since I probably agree with above that food and energy prices are about to skyrocket).
libor can you link me to that source data?
Source of foreign holdings: http://www.ustreas.gov/tic/mfh.txt
Source of all treasury debt outstanding:
http://www.treasurydirect.gov/NP/BPDLogin?application=np
I also think the bond market is vulnerable here...Fed is doing a nice slug of QE and quietly the economic data is improving pretty rapidly...today alone we got ISM NonManufacturing, Factory Orders, ADP Employment #'s, and Auto Sales all printing above consensous. I think the Fed is on the verge of a policy error a la 2003.
However, with the Fed buying over 100% of issuance in the 7-10 yr sector, you've got to be short he back-end only. I have 7s/30s steepeners and some out of the money puts on the bond contract.
Bondarb what was the feds policy error in 2003?
They kept rates low and started raising them in June 2004 I believe. A lot of people would say that helped create the housing bubble with rates low. Its almost like the fed in itself is creating its own business cycles. Academics would argue that their function should be to smooth out cycles but I think they keeps rates down for too long and keep them too high for too long also.
I like the 7/30 steepener trade with puts but my question is why a steepener opposed to a more outright position of short the 30 with the puts is it primarily as a hedge?
the policy error was keeping rates at emergency levels for way to long and then easing even further into what turned out to be just a very quick mid-cycle slowdown as opposed to another recession. Ultra-low rates were a contributing factor to the housing bubble and the huge unemployment we see today.
I like the steepener better then an outright short because the Fed is buying so many bonds in the belly of the curve that it is hard to see it selling off much. As I said the Fed is buying 125% of new issuance in the 7-10y sector.
The state of the economy was much more severe than today when QE1 was announced, and QE1 did a good job at saving the economy from going into depression. QE2 is announced to lower long term interest rates( which they will due to higher bond demand ) and lower interest rates will persuade more investment and more consumption...and nothing is given in economics, everything pretty much has hope behind it.
Wouldn't higher inflation be a good thing? People often get worked up when they hear they word inflation and believe the Fed is going to lead us to hyper inflation.
Quick question: can someone please explain why the fed announcement of QE2 caused such a large rally in TBT? From what I understand, with the Fed buying large amounts of treasuries, shouldnt that push the price of treasuries upwards instead of down?
tbt is short 20 year treasuries, aka long term, the fed said they were only buying short term treasuries 1 - 7 year i think
QE2 expectations were already priced in TBT. Apparently they were overdone.
interesting theory. Would at least explain why US equities has such a hard time giving a concerted response to the Fed announcement. But that int'l money should have little boundaries on where it can go.
So did anyone believe Goldman Research in their claim last week that the Fed would buy some 30s? Even with an extra $100B they still stayed with 7-10 yrs. I know some poor souls got badly injured on GS's misdirection.
Alot of people bought goldman story which is why the curve pancaked flatter into the meeting...they all got crushed however after the FOMC and now the curve is going parabolic.
I assume you all know that TBT exhibits large tracking error and that you can actually lose hundreds of bps of performance as a result of that error. It has to do with the daily rebalancing of the fund (ie when it is done and at what levels). For Yield curve plays i would suggest looking at FLAT and other ishares yield curve products, they are newer and less followed at the moment but use quarterly rebalancing actually accomplish what they set out to accomplish.
^^^ I was actually wondering about this earlier Rain_Maker. Which ETFs are the best plays on this? I wasn't sure so I just shorted the 30 year.
I just read Paul Tudor Jones's latest letter to investors. Pretty interesting insight on QE. Basically he says QEII will do very little to stimulate the US economy in comparison to what adjusting the RMB above artificially low levels would do. He also says a balanced budget is basically impossible to achieve with an artificially low RMB.
http://dealbreaker.com/2010/10/paul-tudor-jones-latest-letter-to-invest…
Why are we not using more fiscal stimulus? Say what you want about big government, but borrowing to fix our crumbling infrastructure will never be this cheap. High enough consumption will inflate the dollar, and the level of consumption won't be high enough with nearly 10% unemployment.
I've traded TBT calls 3 times over the past 2 months. This isn't the last time to get into this trade believe me. When rates start to move is when the real move happens.
Way to put it Eddie. Eventually instead of getting paid every 2 weeks, we'll get paid every 2 days like people in Zimbabwe so we can buy a loaf of bread for 1 billion dollars before inflation makes it 2 billion the next day.
What are your thoughts on the 100 year bond being issued by Mexico?
Here is a link to the Reuters article explaining the details.
I think it's a sure sign we're in a bond bubble. Our systems at work had to be updated just so we could accommodate maturities in the next century. When you look at what's going on in Mexico today, I don't think there's anyway I would feel good lending them money for 100 years when I could be investing in equities in a healthier emerging market for instance.
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