US Treasury Bond Tantrum Boys Are Out in Full Force

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/us-markets/us-treasury-bond-tantrum-boys-are-out-in-full-force?post=106098&uid=4798

After Larry Summers and Jamie Dimon stated that there is a shortage of long bonds (for use as collateral in derivatives and other markets), hedge fund managers and finance writers say you have to get rid of your bonds. The tantrum boys are back in force. The list includes the ever present king of tantrums, Alan Greenspan, as well as Paul Singer, Jonathan Garber from Business Insider, and a few others.

Many of the bond tantrum boys, (BTB's), know not enough bonds are being generated, as there is not enough deficit spending being added, causing yields to decline over the past 30 years. You don't need to see the 10 year bond chart again. You know what it looks like. Clearly the BTB's want to buy treasury bonds, UST's, at the most favorable price, meaning when yields have spiked. This is why tantrumming has been so popular since 2013.

While it is possible that slowing GDP is a way to get more bonds into circulation, surely that would be a very desperate way to produce the bonds. After all, the Fed is torn, give more IOR by raising rates, or get the counterparties their bonds by keeping rates, and hence, the economy, slow. The Fed is decidedly leaning toward neo-Fisherism, so you would think a slowing economy and low rates would be destructive to the plans of the Fed. You would think. But I digress. 

So, you wonder why Greenspan does it. Like the song says, nobody does it better. He, after all, created the atmosphere of structured finance for bond hoarding. Maybe it is his conscience. Or, if he doesn't have one, maybe he has investors willing to pay for tantrum behavior. There could be a third, more benign reason for why he wants to tantrum, but I certainly don't know what it is. Perhaps he would share his reasons someday.

So, let's look at 3 of the BTB's, Greenspan, Garber and Singer, and their recent fear tactics:

1. Greenspan on Yields, Slow Growth, and Hyperinflation

From the article:
One could say that Greenspan's efforts to undermine that bond collateral by seeking higher yields is a conundrum in itself. It seems out of character for one so concerned about bank risk. Why would he want to destroy the collateral for the derivatives market he fostered? It makes no sense that he would want to saddle the big banks with even more risk and threat of margin calls...

...Does Alan Greenspan have no faith in the system he created? Is he getting nervous? Yes, he says he is. If he is opposed the very system he created, you wonder why he created it in the first place!
2.  Here's Why Bond Yields Could Go Even Higher From Here

Jonathan Garber, Markets editor for Business Insider say foreign buyers have left the UST market. He says also there will be a glut of corporate bonds hitting in September. I suppose if you are a day trader this could be helpful info, but it is still tantrumming to me, in my opinion.

Then Garber makes this astonishing announcement, showing that the long bond would likely go up in yield by less than the Fed Funds increase:
While the team says a September hike is unlikely, it believes such an event would cause the front end of the curve to rally another 15 to 20 basis points with the long end "rising by a similar amount to be less than or equal to the front-end sell-off."
Wow, that is reassuring to the tantrum followers, not! And on top of that, Garber says in an article published on September 9th, that UST's were getting crushed. That lasted a day.

By World Economic Forum - Flickr: The Global Financial Context: Paul Singer, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=24113654

 3.  Billionaire Paul Singer Warns of the Biggest Bubble in the World.

Paul Singer has warbled with the other BTB's that we are in the biggest bubble in the world, the bond bubble. I am not sure he is the guy to trust on this as he is a counterparty to banks, being a hedge fund manager. He is likely hoarding bonds like other counterparties do. That is what they do. Paul warbled this:

I think owning medium to long-term G-7 fixed income is a really bad idea. By removing these things that are bad ideas, that’s a helpful think. Sell your 30-year bonds.
Valuewalk had a fascinating article regarding Singer. Singer does not like the system, or maybe it should be said that he fears the implosion of a system that seems to be working for him, or maybe it is a combination of both, along with a need to tantrum:

Singer starts by noting that uncleared derivatives “effectively represent borrowing and lending with much lower margin requirements than those applied to the underlying assets, thereby allowing players to hold much bigger positions (and risks) in financial assets than was ever permitted in the past.” The margin benefits that uncleared derivatives receive relative to cleared derivatives appears to be a recent focus of the FDIC and Fed, who are both addressing the national security issue, but the nature of the risk is in part based on uncertainty. “Since the real exposures of derivatives are largely obscure (if not opaque), the real levels of leverage and risk  outstanding in the world are not discernible under current regulations and accounting standards.”
That article was published in 2015, but surely, he would welcome collateral being used in the clearing houses. After all, he worries about uncleared derivatives. One would think he would be hoarding bonds to play in the cleared derivatives markets, established mainly by clearinghouses that monitor collateral fairness. 

It doesn't add up that Singer thinks bonds are overpriced, with yields too low, unless he wants more of them at a bargain. That appears to be tantrumming. Any other explanation is not apparent to me based on his desire to see more derivatives trading backed by collateral!

So, there are more BTB's, mostly from hedge funds. Watch for them in the news. When you see them come out with more articles and warnings, know that the process at work is just Wall Street trying to gain an advantage in a bond starved world. It is the bond world's version of pump and dump, made famous to the average investor by Jim Cramer. It is more like dump now and dump later, but you get the idea.

I hope everyone would take the time to read this amazing article from John Mauldin, entitled Monetary Mountain Madness. 


 


 

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