Saturday, February 9, 2008

The next bubble to burst

US Treasury Bond Market - The Mother of all Bubbles

"Just like dot coms or real estate, today's bond prices reflect a fantasy world. In this "Bizarro" reality, the dollar will remain strong, inflation will stay low, economic strength will persist uninterrupted, and Fed policy will be predominantly hawkish for the foreseeable future. But when the fog finally lifts, and investors come to grips with a sagging dollar, recession, gaping budget and current account deficits, and the most accommodative Fed imaginable, bond prices will collapse, sending long-term interest rates skyrocketing higher"

Posted by sold 2 rent 1 @ 09:26 AM (571 views)
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5 thoughts on “The next bubble to burst

  • It doesn’t seem right to compare the risks of US treasury bonds with sub-prime mortgage debt. The former has virtually no risk of default, the latter has defaulted. The yield on the bonds may seem poor but the holders are being rational if they believe that the alternatives, such as equities are actually going down. If bonds are held to maturity, the changing prices don’t matter, the problem is that the redemption yield you are locked into is not competitive if inflation rises. If we are to have high inflation, due to commodity price inflation, then this means rich miners, farmers, oil companies and land owners; and the shareholders of these. Add in governments, from the windfall taxes. And what will they buy? houses, consumer goods and eventually recycling their money into all aspects of the economy. So high inflation may imply economic recovery. Many of the bondholders will have other investments to capitalise on this eventuality, and would justify their bond holdings as diversification.

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  • Simplistic analysis of the impact of inflation, whose effects are much more pernicious than you suggest and in particular impact on many groups (workers who arent/cant organise to fight for inflation-equivalent pay rises, pensioners on fixed incomes). Inflation is good for people with debt as it eats away at the ‘real value’ of that debt), but only if they pay fixed interest rates, if interest rates rise too then they are no better off.z

    There is also the issue that in today’s globalised economy, the rich miners, farmers and oil producers may be a long way from the US (or UK) and therefore their increased profits have no impact.

    The risks relating to US bonds are indeed significant, as this article points out.

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  • mark wadsworth says:

    “Skyrocketing higher” as opposed to “Skyrocketing lower” I presume.

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  • Cristiano Barbaro says:

    to Paolo888

    Considering the financial oligarchies’ tendencies to offload their debt and bad bets onto the governments of the world as guarantors of last resort (the US stimulus package does just that by including a provision that Fannie Mae and Freddie Mac are now allowed to virtually double the size of distressed mortgages they can take over, from 400K to now over 700K – with taxpayers’ money), well considering this and Northern Rock’s effective swindle to the detriment of the UK taxpayer. Considering the recent trend, and that in all probability the same financial oligarchies, in the West will also try to offload all bad derivatives bets on Joe public, with the complicity of politicians. Where does that leave government bonds you have so much faith in, when the governments themselves will be flat broke once this transfer of debt has taken place? Note that the same oligarchies which are right now themselves flat broke, but have the power of the media behind them and the printing presses of the central banks to fund them at our expense (in terms of lost purchasing power), are the same ones pushing for the privatizations of state highways, bridges, other utilities, all in the name of better running them and so on. While experience tells us that rail privatizations in the UK were a flop, and road privatizations in the US as well as electricity de-regulation there, has led to far higher prices for wattage than the previous state owned companies, with a corresponding deterioration in infrastructure quality. But then shareholders’ boards exist for maximising profts for the shareholders, not quality.
    Watch for the next episodes in the ongoing financial collapse of the West: 1. debt offloading onto the populations, leading to horrendously criminal cuts in sevices such as hospitals etc… (Swartznegger is already doing this in California); 2. the same financier interests will then offer the governments a “way out” i.e.: sell the hard infrastructure to them, this by the way also tells a lot about where the same financier interests think the real worth and store of value lies, i.e.: not in the paper!
    Yes I have a feeling that US treasury bonds are going to be worthless in the near future, so my guess is their yields should skyrocket.

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