Here is an article I got from CNBC on the state of the bond market. It says the bonds rallied because of two factors. Weak economic news and the expectation that the Fed is going to buy Treasuries to "spur" growth. That is complete and utter nonsense. The Fed and the banks are loaded up to their eyeballs with treasuries and mortgages and are looking to sell treasuries to raise cash pump money into the money supply.
I believe what is happening is that money is getting scared and it is running into treasuries because the economy is sinking like a rock. The Fed and the banks will have a great opportunity here to blow out their treasuries and raise cash to fund the next cycle. The last time I heard they were going to buy treasuries was late 2008. The bond market topped with the news. The economic news at that time was extremely negative and stocks were making new lows. The experts were telling us to sell. sell, sell stocks and be safe. This time they are not worried but the story is one of temporary softness.
Normally, when the FED and the banks are trying to get out of their bond positions the stock market is getting blown out on the downside. That gives the Fed and their buddies, the banks, time to sell their bonds and get into cash. They want to raise cash so they can buy stocks that have crashed because of the bad economy. The public is being told to sell their stocks and buy bonds. The last time that happened was between the Winter of 2008 and into the Spring of 2009.
The reason they need panic is because the bond positions are so large and they need a negative cover story to get it done. The crossover is made out of bonds and into cash and from cash and into stocks as the bad news is being made public on TV and in the newspapers. The public is going the other way from stocks and corporate bonds into cash and government bonds. The Fed and banks will sell their bonds and are loaded to the hilt with cash. That gives them the ability to loan money for the next expansion. It also gives them time to take a nice profit when they sell their treasuries.
What we don't have yet is the Oh My God! in the market yet.
Here is the story as it stands today:
From CNBC:
U.S. Treasuries prices rallied on Friday, sending two-year yields to record lows again as dismal jobs data rekindled speculation the Federal Reserve could consider new stimulus measures as early as next week. Private-sector job growth stagnated at anemic levels last month. The overall situation was made worse by losses in government employment as temporary census workers were laid off while state and local governments also made cuts.
The news gave a lift to bonds, which investors usually favor in weak economic times and which could get an additional boost if the Fed were to revive its recent quantitative easing campaign of buying assets such as Treasuries to spur growth. Traders said it was not yet a foregone conclusion the Fed would take such measures, especially at next Tuesday's policy meeting, but the risk was that it would consider some kind of bond-positive measures if economic indicators didn't improve soon.
"I think the discussion will be had. I question the timing. I don't know that the timing of such a move will be announced as soon as the statement to this Fed meeting," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore. "The thing that set the tone and the catalyst for the move in bonds was the employment report and the propensity for that to really fuel the discussion about whether or not the Fed resumes their quantitative easing measures when they have their discussion next week at their meeting."
The two-year note, which is particularly sensitive to changing perceptions on Fed policy, was last up 1/32 in price, yielding 0.51 percent versus Thursday's close of 0.54 percent. The two-year yield hit a record low of 0.50 percent earlier in the session. Based on the drop in yield, two-year notes had their best week since the end of June, as traders priced in the possibility the Federal Reserve will drive short-term rates lower this year and keep them there for some time.
The benchmark 10-year note was last up 23/32 in price, yielding 2.82 percent versus Thursday's close of 2.91 percent. During the session, 10-year yields fell as far as 2.81 percent, their lowest since April 2009.
The 30-year long bond rallied a point in price at the session's highs. It was last up 30/32, yielding just under 4.0 percent versus Thursday's close of 4.05 percent. The upcoming Fed meeting could complicate the market's usual positioning ahead of government bond auctions.
Treasury will sell a total of $74 billion worth of bonds and most dealers would probably like to see prices cheapen before taking down the supply, which is how they usually approach auctions. The sales include three-, 10- and 30-year bonds.
Some investors also have concluded that the more distant the threat of inflation becomes amid economic weakness, the more it hurts 30-year bonds in relation to other maturities. Investors' apparent renewed love of Treasuries on Friday drove swap spreads wider as government bonds outperformed other fixed income sectors.
If you were the Fed and wanted to sell your bonds what kind of story would you make up? I think I would run the bad news story about the economy and say that the Fed is going to being buying treasuries. How about you?
Mikey
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