Fed termites to infest bond market - Eric Janszen

[EJ]

Fed termites to infest long end of bond market

Many years ago I stayed at the Hotel Pan America in San Jose, Costa Rica. My room was on the second floor. The hotel was the first built in San Jose, at the turn of last century. Termites had eaten the floorboards and they were spongy. Worse, bugs had been working on the support beams, made of a tropical hard wood that's irresistible to termites. When I walked across the room the floor bowed like a giant trampoline. Being young, I found this amusing. The dresser danced, the mirror swayed, and the stand alone clothes cabinet banged against the wall. I jumped up and down. The guest in the next room cursed in Spanish.

Fed Keeps Rate Near Zero, Is Ready to Buy Treasuries

Jan. 28 (Bloomberg) -- The Federal Reserve left the benchmark interest rate as low as zero, said it’s prepared to purchase Treasury securities to resuscitate lending and warned inflation may recede too quickly.

The Fed is ready to buy “longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement today in Washington. Any purchases before the FOMC’s next meeting in March would still need a vote to authorize the action.

The Fed termites do what they do, they eat and eat, starting with the short end -- the floor boards of the financial system -- and, unable to resist the structure, they move on to the long end -- the support beams of the system -- as they are destined to by their programming, their own internal logic, and their natural aversion -- to a deflation spiral. The Fed has for years said that if necessary it stood read in to buy "across the yield curve." Today the future is fast arriving. The termites are getting ready to start in on the very structure of the financial system. Unlike termites, they think they are helping. Like termites, they are destroying the very structure on which they depend.

Years later I heard that the Pan America collapsed. Too bad. It was a great old place.

(Hat tip to Sharky for catching the long awaited Fed buying long bonds story.)

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[BadJuju]

Thank you, iTulip crew.

What kind of inflation numbers should we expect for 2009?

[agrawalp1]

For Fed it is good strategy to manipulate the long term treasury bond market (20+ yrs) which is very small size compared to total treasury bond market. Long end of yield curve has huge consequence on loans such as 30 yr fixed mortgage or long term corp bonds. It is shrewd for Fed to manipulate big market using smaller one.

Question is whether they can continue to keep the long term rates low? When is the good time to short long term treasury bonds using ticker such as TBT?

[lpk]

Thanks EJ,
I'm sitting in a predominately cash position which has served well, but do not want to be too conservative in getting back into the market. My sense is that the lows of Nov. 20th will hold (at least for the foreseeable future) based on the Feds aggressive actions.

I understand your point that the Feds actions are not healthy for the structure of the system, and that we won't have a truly healthy market until the debt has been deflated one way or another. But since all logical paths lead to inflation and the speed of the collapse subsequent response is so dramatic and fast, it seems we could be in for a prolonged bouce (measured in years) which may or may not turn out to be a dead cat bounce.

Curious if you and others feel Nov. 20th is a solid bottom or are you sticking with your target range of 5000 or 6000 for the DOW? And if you are sticking with your target range, any revised thoughts on timing and trajectory? I recognize the current environment is riddled with variables that make predictions very difficult, but I'm still interested in people’s thoughts.

Thanks!!

[babbittd]

This feels like the prelude to, "It is time to short U.S. Treasuries."

[*T*]

This feels like the prelude to, "It is time to short U.S. Treasuries."

As I have said before, if the fed is supporting nominal Treasury prices, the adjustment must come through the currency.

[ax]

For Fed it is good strategy to manipulate the long term treasury bond market (20+ yrs) which is very small size compared to total treasury bond market. Long end of yield curve has huge consequence on loans such as 30 yr fixed mortgage or long term corp bonds. It is shrewd for Fed to manipulate big market using smaller one.

Question is whether they can continue to keep the long term rates low? When is the good time to short long term treasury bonds using ticker such as TBT?

I'm curious to hear this answer as well. Agrawalp1, if it helps/hurts your decision at all, Jim Rogers recommended buying TBT in October.

[GRG55]

For Fed it is good strategy to manipulate the long term treasury bond market (20+ yrs) which is very small size compared to total treasury bond market. Long end of yield curve has huge consequence on loans such as 30 yr fixed mortgage or long term corp bonds. It is shrewd for Fed to manipulate big market using smaller one.

Question is whether they can continue to keep the long term rates low? When is the good time to short long term treasury bonds using ticker such as TBT?

This feels like the prelude to, "It is time to short U.S. Treasuries."

Sure seems a few folks can't wait to "fight the Fed".

The Fed has just re-affirmed they won't hesitate to manipulate the Treasury market [prop asset values]. This would seem the usual "jawboning" in response to something they don't like; in this case rising T-bond yields. But this is only the usual step one. If they can't jawbone yields down, what makes anyone think they won't follow up with their threat? After all they are now buying Agencies that are being dumped by foreign holders.

Unless one is convinced the Fed will [ultimately] fail at this effort and, further, one believes their staying power is greater than the Fed's [who apparently can print money], shorting Treasuries seems akin to juggling dynamite with a lit fuse.

[goadam1]

Wait, isn't monetizaiton what you expected and said would be necessary? Don't you advocate for a certain amount of inflation and say hyperinflation won't happen?

[Chris Coles]

Fed termites to infest long end of bond market

Fed Keeps Rate Near Zero, Is Ready to Buy Treasuries

Jan. 28 (Bloomberg) -- The Federal Reserve left the benchmark interest rate as low as zero, said it’s prepared to purchase Treasury securities to resuscitate lending and warned inflation may recede too quickly.

The Fed is ready to buy “longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets,” the Federal Open Market Committee said in a statement today in Washington. Any purchases before the FOMC’s next meeting in March would still need a vote to authorize the action. Full Disclaimer

Surely these are the first signs of their intent to ignore any early inflationary aspects of their combined strategy? And, once they pass this point, they are from that moment onwards, under the influence of "events"?

[phirang]

I've a new investment thesis for gold: it's the asset that outperforms when everyone else keeps fking up.

I'm not joking.

[babbittd]

Sure seems a few folks can't wait to "fight the Fed".

The Fed has just re-affirmed they won't hesitate to manipulate the Treasury market [prop asset values]. This would seem the usual "jawboning" in response to something they don't like; in this case rising T-bond yields. But this is only the usual step one. If they can't jawbone yields down, what makes anyone think they won't follow up with their threat? After all they are now buying Agencies that are being dumped by foreign holders.

Unless one is convinced the Fed will [ultimately] fail at this effort and, further, one believes their staying power is greater than the Fed's [who apparently can print money], shorting Treasuries seems akin to juggling dynamite with a lit fuse.

No, I don't want to fight the fed. Not at all. Unlike for instance, Mega Mike, I'm not outright rooting for a currency event. If one of two non-related (to currency) events occur over the next six months, than Poom will ruin me for good. That was just an expression of a gut feeling about EJ's writing style, not the product of analysis on my part.

[ProdigyOfZen8]

we are already shorting it at 40.... the TBT, the time is nigh!

[ProdigyOfZen8]

Mr. Jansen, this is for you. New article by George Soros on FT times, what do you think????? He is in direct contradiction to Itulip I would say...

http://www.ft.com/cms/s/0/49b1654a-e...0779fd2ac.html

[FRED]

Mr. Jansen, this is for you. New article by George Soros on FT times, what do you think????? He is in direct contradiction to Itulip I would say...

http://www.ft.com/cms/s/0/49b1654a-e...0779fd2ac.html

EJ answers subscribers' questions on the Ask EJ forum.

[ProdigyOfZen8]

Not looking for an answer directly to me, but I believe this article is of grave importance to the future. A man as powerful as Soros is advocating import tariffs and the complete overhaul of financial markets worldwide to give "periphery" countries a better advantage as he states. An article needs to be written on this.

[c1ue]

I think some of the eager TBT buyers are missing a fundamental point:

If the Fed is buying long term Treasuries, the objective of this action is to drive yiels on these securities DOWN.

That means your double short is being attacked by Fed money.

This is why I believe it is MUCH too early to buy TBT or any Treasury short fund.

The time to do it is either when the Fed stops buying because inflation is rearing its ugly head, or the Fed is prevented from buying by some other political reason.

[FRED]

Thanks EJ,
I'm sitting in a predominately cash position which has served well, but do not want to be too conservative in getting back into the market. My sense is that the lows of Nov. 20th will hold (at least for the foreseeable future) based on the Feds aggressive actions.

I understand your point that the Feds actions are not healthy for the structure of the system, and that we won't have a truly healthy market until the debt has been deflated one way or another. But since all logical paths lead to inflation and the speed of the collapse subsequent response is so dramatic and fast, it seems we could be in for a prolonged bouce (measured in years) which may or may not turn out to be a dead cat bounce.

Curious if you and others feel Nov. 20th is a solid bottom or are you sticking with your target range of 5000 or 6000 for the DOW? And if you are sticking with your target range, any revised thoughts on timing and trajectory? I recognize the current environment is riddled with variables that make predictions very difficult, but I'm still interested in people’s thoughts.

Thanks!!

Great question! Can you post it to Ask EJ for his roundup of Ask EJ's tomorrow? Thanks.

[FRED]

I think some of the eager TBT buyers are missing a fundamental point:

If the Fed is buying long term Treasuries, the objective of this action is to drive yiels on these securities DOWN.

That means your double short is being attacked by Fed money.

This is why I believe it is MUCH too early to buy TBT or any Treasury short fund.

The time to do it is either when the Fed stops buying because inflation is rearing its ugly head, or the Fed is prevented from buying by some other political reason.

We have had a "Time to Short Treasuries" article drafted and ready to go for over a year. Still waiting. Seems to us that only US creditors can spoil the Fed's "buy across the yield curve" plan. But first a catastrophe has to befall US creditors that makes the outcome of the choice to allow the dollar fall less additionally disastrous than the choice to continue to support it. That scenario is difficult to see.

[babbittd]

We have had a "Time to Short Treasuries" article drafted and ready to go for over a year. Still waiting. Seems to us that only US creditors can spoil the Fed's "buy across the yield curve" plan. But first a catastrophe has to befall US creditors that makes the outcome of the choice to allow the dollar fall less additionally disastrous than the choice to continue to support it. That scenario is difficult to see.

Thanks Fred!